In this case the High Court considered a judicial review application in respect of an FRC investigation. It appears that the courts will be unwilling to extend much sympathy where firms seek to speed up FRC investigations by means of judicial review.
In this case the High Court rejected an attempt by Baker Tilly (and two of its audit partners) to judicially review an FRC decision to deliver a Formal Complaint relating to Baker Tilly’s audit work in respect of Tanfield Group Plc and two of its subsidiaries.
Tanfield Group was significantly affected by exposure to the US residential construction market following the economic downturn in 2008. The FRC considered whether impairment provisions made in 2008 should have been put in place one year earlier.
Baker Tilly had first been notified of an investigation into its conduct in September 2009, yet a Formal Complaint was not served on them until 3 June 2014 – so it is therefore easy to sympathise with its frustration at the delay. It faced the unenviable decision of defending disciplinary proceedings which it considered to be ill-founded (and possibly not recovering costs even if the defence was successful) – or seeking judicial review of the regulator’s decision to raise a Formal Complaint (with the associated difficult test premised on illegality or irrationality).
The process of raising a Formal Complaint is a precursor to a hearing by the independent Disciplinary Tribunal of the FRC. The Formal Complaint raised in June 2014 included allegations that in signing off Tanfield Group’s financial statements: (i) insufficient evidence was obtained to support the conclusions that no material errors existed; and (ii) there was a failure to adequately review and discuss audit evidence.
Baker Tilly sought to judicially review the Formal Complaint on the grounds that:
- guidance on the delivery of Formal Complaints issued by the FRC in July 2013 was unlawful, in that it supports a legally erroneous approach to “misconduct” and contains a misdirection as to what is capable of being “serious misconduct”
- the decision to deliver the Formal Complaint was flawed by a “fundamentally erroneous approach” to the legal meaning of “misconduct” within the FRC’s disciplinary scheme relating to accountants
- the public interest test which had to be satisfied before a Formal Complaint could be delivered was flawed by errors of law, in particular because of the long delay before it was raised.
Mr Justice Singh, in handing down judgment on 19 May 2015, rejected all three grounds of complaint. The Court determined that there had been no demonstration that the Guidance was “inherently and necessarily unlawful” and that this aspect of the challenge was premised on ignoring them context of certain paragraphs of the Guidance (trying to infer that issues concerning the public interest test were relevant to the evidential test).
The judgment went on to state that:
“Having regard to all relevant matters, including the Guidance, the Executive Counsel came to the view that the alleged misconduct was “serious”. The Claimants disagree with that view. However, I am unable to regard it as being irrational or otherwise unlawful … public interest considerations are par excellence matters for the evaluation by the relevant decision makers”.
Finally, the Court concluded that it was wrong as a matter of principle that the judicial review had been instigated in the first place. Five factors were set out in support of this conclusion:
- such cases should be determined by the Disciplinary Tribunal, which is the expert in the field (and if necessary and appropriate its decisions can be appealed)
- it is undesirable in principle that the public interest should be impeded by delaying proceedings before the Tribunal in such cases
- the Tribunal would have the opportunity to consider evidence in full and hear live evidence – something the Court in judicial review proceedings was not equipped to do
- if there was an abuse of process, the Tribunal has jurisdiction to stay proceedings
- although the Claimants sought to argue that there was no alternative remedy other than judicial review proceedings, because costs were not available to the successful Defendant who was subject to Disciplinary Tribunal proceedings, it was noted that the Tribunal does in fact have the power to order costs (even though costs will not necessarily follow the event).
This case demonstrates the difficulty that can be encountered in attempting to short cut (or even just speed up) disciplinary proceedings. Whilst the process of a regulatory investigation can be extremely frustrating, the courts are unlikely to look favourably on a challenge outside the parameters of the relevant disciplinary scheme.