As stated elsewhere, important questions remain as to how professional discipline is applied in practice. Past decisions can (Update 20 Feb 2012 typo corrected, from “cannot not”!) only rarely be overturned, but it is very important that the test to be applied to future decisions be a) made absolutely clear, and b) is fit for purpose.
Here are some examples where questions arise from two cases brought by the UK accountancy profession.
Did the AIDB apply too low a test in their case v PwC?
The precursor to the UK Accountancy & Actuarial Discipline Board, which deals with the most serious complaints of professional misconduct against actuaries and accountants, was the AIDB (The Accountancy Investigation and Discipline Board). Before 2006, I understand that even serious professional complaints against accountants were not held in public, but in 2006/2007 the AIDB held its first public investigation against big 4 audit firm PwC and two former employees of Mayflower Corporation plc after the collapse of that company.
I understand that the Disciplinary Tribunal met in public. Its findings (and the reasoning behind them) are certainly public and can be found at the FRC (Financial Reporting Council)’s website (see links to various documents at http://www.frc.org.uk/aadb/present/past/pub0601.html and http://www.frc.org.uk/aidb/tribunal/pub1248.html) and make very interesting reading.
I should make clear that the Tribunal dismissed the charges against PwC and against one of the defendants (Mr David Donnelly FCCA, Mayflower’s former Finance Director) and found the other individual defendant (Mr Ian John Shelton) guilty on only one of two charges against him. The charge found proven (and which Mr Shelton had admitted, the evidence being undisputed, see http://www.frc.org.uk/documents/pagemanager/aidb/Shelton%20Judgment.pdf) was that Mr Shelton’s conduct had “fallen short of the standards reasonably to be expected of a member of the ACCA” because he had been “complicit from April 2001 to March 2004 in TransBus maintaining spreadsheets which contained false and misleading information as to the dates upon which payments were received by TransBus from customers and thus the dates upon which payouts became due to HSBC in order to disguise the fact that funds were being withheld from HSBC”.
The reasons given by the Tribunal for dismissing (by a majority, one member disagreed and published a Dissenting View) the complaints against PwC were essentially that its judgements were “within the range of reasonable judgments [sic] which would be open to an auditor to make”. (See paragraph 10 on page 236 of http://www.frc.org.uk/documents/pagemanager/aidb/PwC%20&%20Donnelly%20Judgment.pdf).
The case against Mr Donnelly was dismissed unanimously, in particular because “it was not unreasonable for Mr Donnelly to have held the belief that the Falkirk work in progress issue would be dealt with as a prior year adjustment”. (See paragraph 14 on page 241 of http://www.frc.org.uk/documents/pagemanager/aidb/PwC%20&%20Donnelly%20Judgment.pdf).
Apart from the Dissenting Opinion, in which one Tribunal member found that PwC had failed to act in accordance with a particular accounting standard (Statement of Auditing Standards 130: “I find that there were several instances where PwC did not comply with SAS 130″, see http://www.frc.org.uk/documents/pagemanager/aidb/Dissenting%20Opinion.pdf), the AIDB did however criticise PwC in several regards (see pages 232 and 233 of the above “judgment” document, the bold emphasis is mine):
PwC’s case was not helped by Ms Dowling’s misuse of “assurances” and “undertakings” as discussed at length earlier in these Findings.
In addition, the Tribunal was concerned at what seemed to it to be the failure at times of the PwC factual witnesses other than Mr Cook to do justice to their case. This was particularly noticeable in the rather glib answers sometimes given in cross-examination, and the witnesses’ repeated failures to answer the question put. Mr Harvey told the Tribunal, in answer to a question from the Chairman about whether he had been trained in any way in giving evidence: “We had a one-day training session…yes, in terms of how to address a tribunal, but not obviously in relation to this matter.” The Tribunal can only say that, if the purpose of the training session was to assist the Tribunal in assessing the factual witnesses from PwC, it did not always serve that purpose.
But, at the end of the day, the Tribunal considers that there was no question of any of the PwC witnesses being anything other than honest witnesses, whatever the deficiencies in the way in which they gave their evidence.
Note in the above that the Tribunal’s view was that PwC was not required to act in accordance with “high”, let alone “the highest” standards of competence (which it seems clear from the Tribunal’s comments that they failed to have done), but only in a way that was “not unreasonable” for an auditor to act.
But were the Tribunal correct in applying the lower test of actions which were “not unreasonable” rather than actions which met “high” or “the highest standards”? I submit that this is highly debatable.
Chartered Accountants in England and Wales at the moment claim (on this page on their website) to adopt “the highest ethical and technical standards” (again the bold emphasis is mine):
We provide our members with knowledge and guidance based on the highest ethical and technical standards.
I can’t readily find the exact document which defined misconduct applying at the time that the matters complained about (in 2003 and 2004) occurred, but from the “judgment” documents, the definition seems to have been conduct or actions “falling short of the standards reasonably to be expected” of a member of the profession.
I submit that it is highly likely that the ICAEW website and other publicity material contained similar claims in 2003 and 2004 that their members upheld “high” or “the highest” standards to the claims that they make now. The same is also likely to be true of PwC which holds itself out to be a leading international firm of accountants.
As mentioned elsewhere, the more precise wording for professional conduct standards seems to be that misconduct consists of actions which “fall short of the standards of behaviour and competence which members or the public are reasonably entitled to expect”.
If the precise wording of the misconduct test applying in 2004 also included the reference to reasonable expectations of members of the profession and/or the public, then it seems to me that the publicity material used by the professional organisation (in this case the ICAEW) and the firm (here PwC) are material in assessing whether what is “not unreasonable” (the test applied by the Tribunal) is merely “outside the range of reasonable actions” (the view taken by the Tribunal) or “outside the range of high, or indeed the highest, standard of actions” (the standards likely to have been implied in 2003/2004 by the ICAEW and PwC’s publicity).
Why were cases brought merely against PwC, and not also against the PwC partner(s) responsible for the engagements?
It is also interesting to note the following, from the top of page 232:
The Tribunal notes with a little surprise that the complaint is brought against the firm as a whole, and not against any individual.
This echoes a more recent case (in December 2011, involving client money for JP Morgan Securities Limited), in which PwC was found guilty by the AADB (see paragraph 50 on page 17 of http://www.frc.org.uk/documents/pagemanager/aadb/Tribunal_Reports/Decision.pdf, the bold emphasis is mine):
We wish to comment that we have been surprised and concerned that no partner of PwC has been named in relation to this matter, or proceeded against by the Executive Counsel. … we must simply trust that there has been no bargaining of PwC’s admission against an agreement on anonymity of individuals in the firm, among whom the engagement partner must be numbered, who are responsible for this serious state of affairs.
In that case PwC was given a Severe Reprimand by the AADB and fined £1.4 million. In their deliberations as to the amount of the fine which they should impose, the Tribunal considered (despite the fact that, due to good luck, no financial loss had occurred in this case) that the seriousness of the offence was similar to that committed by the auditors of the late Robert Maxwell’s companies which collapsed in the 1990s. (For completeness I should point out that the Tribunal recognised as important mitigating factors that PwC had fully cooperated with the investigation and had taken prompt steps to correct the failings in their audit process.)
Wouldn’t it be better if disciplinary cases were brought not just against the professional firm, but also against the professionals directly responsible for the matters complained about? If not, doesn’t it weaken the incentive for members of that firm to act in accordance with professional standards?