Honesty and integrity form part of the core duties of chartered accountants as reflected in the codes of conduct of each of the accountancy regulators. The vast majority of accountants act in accordance with these fundamental concepts; however, for those who do not, the consequences can be severe.
This message came through loud and clear in the recent Financial Reporting Council (FRC) case relating to Diane Jarvis, the former chief financial officer (CFO) of Healthcare Locums plc. Last week Jarvis was excluded from membership of the ICAEW for a recommended period of 10 years, and was required to pay £25,000 towards the FRC’s costs in investigating the matter. The sanctions imposed were significant, at the most serious end of the spectrum of the FRC's range of possible punishments. They are arguably career ending.
Jarvis was suspended from her role as CFO of Healthcare Locums in 2011, after the discovery of financial irregularities within the company's accounts for which she was responsible. After an investigation by the FRC, a charge of misconduct was levelled against Jarvis, alleging that she had deliberately, inappropriately and misleadingly manipulated Healthcare Locums’ management accounts for 2010, overstating revenues, understating costs and overstating EBITDA by up to nearly £10m for that year. In so doing the FRC alleged that she fell significantly short of the standards to be expected of a member of the accountancy profession.
Jarvis accepted that the accounts were manipulated and did not demonstrate a true picture of the financial position of the company. Yet, despite this, she had presented the accounts to external third parties, including banks and potential investors.
Given Jarvis' admissions that her conduct was dishonest, the FRC then had to consider what sanction would be appropriate. In doing so, the FRC took into account the fact she had complied with the FRC's investigation, had a good compliance history, and apologised for the misconduct. The FRC’s sanctions guidance allows for a range of outcomes, from a reprimand and/ or various financial penalties to, most severely, expulsion as a member of the regulatory body and exclusion for a recommended period of time. The FRC emphasises that any sanction is not intended to be punitive, but is imposed to protect the public and the wider public interest; to maintain and promote public and market confidence in the accountancy profession and to declare and uphold proper standards of conduct amongst members.
Of all the factors taken into account by the FRC, one notable aggravating factor was that Jarvis did not inform the FRC of the misconduct at an earlier opportunity. In other words, the fact she had failed to comply with her regulatory responsibilities played an important role in the outcome of her case.
As a consequence Jarvis received one of the most severe sanctions ever imposed by the FRC against an individual member, matched only by the FRC’s finding against Torex accountant Mark Woodbridge who was excluded for 10 years for obtaining a criminal conviction for false accounting and conspiracy to defraud. Jarvis' sanction represents an increasing trend of a lack of tolerance towards lapses in honesty and integrity by professionals. For regulators, the default position is now that striking off is appropriate where dishonesty is present, unless there are some very compelling reasons for a lesser sanction to be considered. In the field of accountancy, where financial integrity and honesty are sacrosanct, this outcome demonstrates that prolonged acts falling below the expected standards of honesty and integrity are deemed to be incompatible with belonging to the profession.
In cases of alleged dishonesty, professionals can seek to demonstrate that lapses are isolated, were not intentional or were due to external pressures. Being able to do so successfully may lead to a more favourable outcome than a definite expulsion and exclusion. However, as the Jarvis case demonstrates, where lapses of integrity or honesty are sustained and deliberate, accountants will struggle to persuade their regulatory body that their remaining a regulated accountant would maintain public and market confidence in the profession.
This article first appeared on Economia in July 2015.