Baker Tilly UK Audit LLP & Ors v Financial Reporting Council & Ors [2017] EWCA Civ 406

Case No C1/2015/1819

[2017] EWCA Civ 406

IN THE COURT OF APPEAL (CIVIL DIVISION)

[2015] EWHC 1398 (Admin)

ON APPEAL FROM

Queen’s Bench Division Administrative Court

The Honourable Mr Justice Singh

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 07/06/2017

Before

THE RIGHT HONOURABLE LADY JUSTICE ARDEN

THE RIGHT HONOURABLE LADY JUSTICE KING

THE RIGHT HONOURABLE LORD JUSTICE SALES

Between

Baker Tilly UK Audit LLP and OrsAppellants

Financial Reporting Council and OrsRespondents

Richard Drabble QC and Tim Buley (instructed by Taylor Wessing) for Appellants

Michael Fordham QC and Iain Steele (instructed by Herbert Smith Freehills) for Respondents

Hearing Hearing dates : 21 March 2017

Judgment

LADY JUSTICE ARDEN :

Principal ground of appeal: interpretation of paragraph 12(1)(f) of the Guidance issued by the FRC on the delivery of formal complaints

Key concept in dispute – “non-trivial” failure to act competently

[1]The ultimate question on this appeal from the order of Singh J dated 19 May 2015 has been refined by oral argument. It is a question as to the meaning of the guidance laid down by a disciplinary body for the conduct of disciplinary proceedings. The disciplinary body in question is the respondent to this appeal, the Financial Reporting Council (“the FRC”), whose functions include acting as the enforcement and disciplinary body for accountants, accountancy firms and actuaries under various statutory and other arrangements. The guidance is Guidance on the delivery of Formal Complaints (“the Guidance”). I explain the function of this Guidance below.

[2]In the matter involving the appellants which gives rise to this appeal, the Committee is concerned with misconduct for the purposes of the Accountancy Scheme. This Scheme sets out the disciplinary arrangements administered by the FRC in relation to accountants. It defines misconduct as follows: An act or omission or series of acts or omissions, by a Member or Member Firm in the course of his or its professional activities (including as a partner, member, director, consultant, agent, or employee in or of any organisation or as an individual) or otherwise, which falls significantly short of the standards reasonably to be expected of a Member or Member Firm or has brought, or is likely to bring, discredit to the Member or the Member Firm or to the accountancy profession. (italics added)

[3]The applicable disciplinary function of the FRC is carried out through its Conduct Committee. The Executive Counsel and a Disciplinary Tribunal made up of independently appointed tribunal members. The Conduct Committee is empowered to decide if allegations of misconduct should be investigated by the Executive Counsel and prosecuted before the Disciplinary Tribunal. The Conduct Committee can accept a referral from a professional body or it can refer a matter of its own accord to the Executive Counsel for investigation under the Accountancy Scheme. In either case, the matter must satisfy two tests: an Evidential Test and a Public Interest Test. So, under paragraph 5(4) of the Accountancy Scheme, disciplinary proceedings can only proceed if the Executive Counsel considers:(i) that there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member of Member Firm; and

(ii) that a hearing is desirable in the public interest.

[4]The requirements of the Conduct Committee are set out in the Guidance. I have set out extracts from the Guidance in Annex 1 to this judgment.

[5]The issue on this appeal is whether the reference in paragraph 12(1)(f) of the Guidance, in the context of the Public Interest Test, to a “non-trivial failure” to act with professional competence, refers to “misconduct” as defined by the relevant disciplinary scheme (as the FRC contends) or to conduct which is more serious, or alternatively less serious, than such misconduct (as the appellants contend). If the latter meaning is correct, then, submit the appellants, the Guidance is either flawed or has not been properly followed in this case.

Context in which the issue on this appeal arises

[6]The appellants are Baker Tilly UK Audit LLP (“Baker Tilly”) and two individuals. Baker Tilly were the auditors of Tanfield Group plc (“Tanfield”) and signed an unqualified report on its 2007 group accounts. Doubts have since arisen as to the value of goodwill as shown in those financial statements arising on the acquisition of a company called Snorkel in the relevant period, and as to the adequacy of the audit work done in relation to that asset.

[7]Ultimately, on 29 May 2014, the Executive Counsel of the FRC, Gareth Rees QC, signed Reasons to Deliver a Formal Complaint against the appellants. I shall refer to Mr Rees QC as “Executive Counsel”, without the definite article, when I refer only to him alone and not the office holder for the time being. I have set out the relevant extracts from his Reasons in Annex 2 to this judgment.

[8]Executive Counsel considered that the Evidential Test was satisfied. He based his conclusion on an expert report of Mr John Leech of KPMG LLP and the advice of Joanna Smith QC. (We are not concerned with the substance of the allegations.)

[9]As to the Public Interest Test, Executive Counsel considered that the alleged misconduct fell within the category of conduct described in the Guidance as a “non-trivial failure …to act with professional competence or due care” (Guidance, paragraph 12(1)(f)). He considered that the consequences of the alleged misconduct were serious, in that there was a real risk that the financial statements of Tanfield contained material misstatements. However, by virtue of paragraph 13(4) of the Guidance, the fact that there had been a long delay in bringing the matter before the Conduct Committee was an indication that a Formal Complaint should not be delivered, but Executive Counsel did not consider that this was determinative because the appellants had not made any positive case why the Public Interest Test was not met. Executive Counsel, therefore, concluded that the instant case was one in which a hearing was desirable in the public interest. Accordingly the Public Interest Test was also met.

Appellants apply for Judicial Review and Singh J dismisses their claim

[10]The appellants sought judicial review of Executive Counsel’s decision to bring a complaint against them. They contended that the Guidance was unlawful. The principal ground for challenging the Guidance was that paragraph 12(1)(f), with its reference simply to a “non-trivial failure” to act with professional competence, did not match the definition of “misconduct” in the Accountancy Scheme. As Mr Richard Drabble QC, for the appellants, submits, the courts generally impose a high threshold for professional conduct for disciplinary purposes and have often held that the word “misconduct” in other professional schemes requires more than mere negligence (see, for example, Re a Solicitor

[1972] 1 WLR 869

[11]The judge rejected Mr Drabble’s argument. In brief, the judge held that his interpretation took no account of the fact that paragraph 12 of the Guidance was under the heading “The Public Interest Test”. Although the Guidance did not define “misconduct”, it would be clear to those affected by the Accountancy Scheme that the definition in that Scheme applied. The Guidance did not state that the Executive Counsel had to file a complaint whenever there was a non-trivial failure and so the Guidance was not in itself unlawful.

Why the appellants contend that the Guidance is flawed and the FRC’s response

[12]On this appeal Mr Drabble submits that the judge did not address the gravamen of his argument. He seeks to establish that paragraph 12(1)(f) of the Guidance is flawed and therefore unlawful. He submits that, on its true construction, paragraph 12(1) creates a list of aggravating factors which would therefore refine the cases of misconduct that were to be the subject of disciplinary proceedings. “Misconduct” must bear the meaning of serious misconduct as defined in the Accountancy Scheme, but, if it does, paragraph 12(1)(f) makes no sense because it is specifying a class of case which is not misconduct at all by including or meaning failures (or breaches of obligations) which are all but trivial. Alternatively aggravated factors have to be identified. This means that the Guidance and/or Executive Counsel’s application of them cannot be lawful.

[13]Both parties sought to refer to proposals and decisions made in the course of drafting the Guidance but we indicated that this material, which was not publicly available, was not an aid to interpretation and so I say no more about it.

[14]Mr Michael Fordham QC, for the FRC, seeks to uphold the judgment of the judge. He relies on the proposition that, where possible, a lawful interpretation should be preferred to one which is unlawful. He submits that “misconduct” in paragraph 12(1) of the Guidance is “misconduct” as defined in the Accountancy Scheme. All these documents came into existence together and they were dated 23 May 2014. He submits that the judge was correct to observe that there was no suggestion in the Guidance that a non-trivial failure was to be equated with misconduct.

[15]He further submits that Executive Counsel had advice from Queen’s Counsel (Joanna Smith QC), Mr John Leech and one other person. Executive Counsel concluded that the Evidential Test was met. The judge rejected the argument that the conclusion was irrational. There is no appeal on this point.

[16]Mr Fordham recognises that trivial shortcomings are not misconduct for the purpose of the Scheme. He submits that in other cases the Conduct Committee has adopted the approach that misconduct needs to be significant, and that trivial misconduct will not suffice.

[17]Mr Fordham submits that paragraph 12(1) does not set out a list of aggravating factors. The Executive Counsel is required to weigh up the gravity of the case. Any failure of professional care could discredit the profession so that it is likely that a hearing will be desirable, but the Executive Counsel must still weigh the gravity of the case. Paragraph 12 is non-exhaustive guidance as to the prima facie position. Each factor represents the starting position which he has to displace if he comes to the conclusion that the Public Interest Test is not satisfied.

[18]Mr Fordham alternatively submits that paragraph 12(1)(f) merely requires that there is significant misconduct. As to that, the decision of the Executive Counsel must stand unless it is irrational.

[19]I observe that the relevant parts of the Guidance provide that matters may be settled by agreement. No submissions were made about the role of those parts, which I place on one side. my analysis My general approach

my analysis

[20]In my judgment, Mr Fordham is correct on his primary submission.

[21]The arguments on interpretation have in my judgment become over-elaborate and attenuated. They have to a large extent proceeded on a premise which I would reject, namely that there is a single exercise mandated by paragraph 11(2), 12 and 13 so that misconduct once used for the purposes of establishing the general position that a Formal Complaint must be filed cannot also be used in satisfying the weighing exercise required by paragraphs 12 and 13.

[22]In my judgment, this is not the natural interpretation of paragraphs 11, 12 and 13 for the following reasons.

[23]Under the Guidance, two tests must be met: the Evidential Test and the Public Interest Test. The Guidance makes it clear that the Public Interest Test is not relevant unless the Evidential Test is first satisfied. But it was satisfied in this case. The “bottom line” in this case is whether Executive Counsel could lawfully conclude that the Public Interest Test, too, was satisfied. Mr Drabble’s primary argument is essentially that paragraph 12(1)(f) of the Guidance cannot stand or be operated lawfully.

[24]As to the Public Interest Test, paragraph 11 contains some important points. It specifies that a case which passes the Evidential Test should usually be the subject of a formal complaint to the Committee. But paragraph 11(1) makes it clear that the role of the Executive Counsel is not to decide whether a matter raises issues which affect the public interest but the wider question whether a hearing is desirable in the public interest. This is consistent with paragraph 5(4) of the Accountancy Scheme, quoted in paragraph 3 above.

[25]The effect of paragraph 11(2) of the Guidance, therefore, is that any matter sufficiently serious to constitute misconduct for the purposes of the Accountancy Scheme will meet the Public Interest Test unless fact-sensitive, case-specific contraindications are present (e.g. the individual defendant has suffered some life-changing illness or accident) which outweigh the need to bring disciplinary proceedings, and thus relieve the Executive Counsel of his usual responsibility in those circumstances to prosecute such proceedings in the public interest.

[26]Pausing there, it is clear that paragraph 11(2) sets out the usual rule: once the Evidential Test is met, a Formal Complaint should usually follow “unless contrary public interest factors clearly outweigh those favouring delivery” (“the ‘unless’ clause”). The ‘unless’ clause makes it clear that factors which favour the conclusion that a Formal Complaint is not filed must not just show, but show clearly, that such a Complaint should not be filed. The ‘unless’ clause also makes it clear that there is to be a weighing exercise conducted and that this will consist of (on the one hand) the factors for and (on the other hand) against the filing of a Formal Complaint. That is apparent from the use of the word “outweigh”. There is a subtle change of language between paragraph 11(2), which is concerned with the delivery of a Formal Complaint, and paragraphs 12 and 13 which also focus on the desirability of a hearing. Paragraphs 12 and 13 deal with the factors for and against. Paragraph 11 recognises that every case will turn on its own facts and that its individual circumstances must be carefully weighed. In addition, paragraph 11(4) specifically says that the weighing exercise is not simply a matter of counting up factors either way. What paragraphs 12 and 13 therefore require is a new qualitative assessment of those factors. There has been no earlier requirement in the Guidance to do this. The further conclusion that follows from this analysis is that the main clause of paragraph 11(2) is the governing rule. It tells the reader what to do once the weighing exercise has been conducted.

[27]The weighing exercise itself is performed by following paragraphs 12 and 13. The natural reading of paragraph 11 is in my judgment that this weighing exercise is a stand-alone exercise, by which I mean that it is to be carried out independently of the governing rule in paragraph 11(2) and without reference to it. The governing rule will only apply if the ‘unless’ clause is not satisfied. The statement of the usual position in paragraph 11 has nothing to do with the carrying out of the weighing exercise.

[28]To perform that weighing exercise, the Executive Counsel must in the words of paragraph 12(1) assess the “gravity” of the misconduct. This is a qualitative assessment.

The weighing process

[29]For centuries, justice has been associated with a set of scales (often held by a blindfolded goddess to emphasise impartiality) to measure the strengths and weaknesses of a case or argument. It may be helpful to have that image in mind when considering the Executive Counsel’s task in relation to the Public Interest Test. Paragraph 11(4) makes it clear that what the Executive Counsel has to do is a weighing exercise. He has of course to observe complete impartiality. He has to put the factors which favour a hearing on one side of the scales and the factors which indicate the contrary on the other side of the balance. The scale which is heaviest will then demonstrate whether the matter should be referred to the Conduct Committee.

[30]Thus the function of the Executive Counsel is to identify the factors that go into each side of the balance. Importantly, using his professional skill but where appropriate on advice, he has to attach a weight to them. He might (depending on the circumstances) have to ask: how serious is this misconduct? What are the real implications of delay in this case? And how far does the delay mean that it is no longer possible for there to be a satisfactory hearing of the disciplinary proceedings? Or has the prospective defendant been led in some way to believe that no disciplinary action would be taken? There are case-specific factors but they have to be carefully identified and weighed in order that, on one hand, the disciplinary proceedings are fair to the defendant, and, on the other hand, the FRC can justify to the public any decision not to proceed with a matter where the Evidential Test was met. The Public Interest Test recognises that there may be cases where, however strong the case, it would not be right to hear disciplinary proceedings.

[31]Paragraphs 12 and 13 are clearly intended to assist the Executive Counsel in this task by giving examples, in the case of paragraph 12, of factors which tend to favour a delivery of a formal complaint to the Committee, and, in the case of paragraph 13, of factors which by contrast indicate that a hearing may not be desirable in the public interest. Examples of factors within paragraph 13 include the fact that a member is very elderly or ill and the fact that there has been a long delay between the alleged misconduct and the likely date of a hearing. As paragraph 11 indicates, there are factors to be considered, in deciding whether a hearing is desirable in the public interest, which may go over and beyond the characteristics of the issues involved in the underlying allegations which connect them to the public interest. Paragraph 12(1)(f) serves a coherent and rational purpose. If the examples had stopped at paragraph 12(1)(e), paragraph 12(1) would not include significantly substandard professional negligence.

[32]Paragraph 12(1) refers not just to the misconduct but its gravity: this is consistent with the responsibility of the Executive Counsel to attach the appropriate weight to the misconduct and put that weight into the scales. Does paragraph 12(1)(f) describe conduct which may not be “misconduct” for the purposes of the Accountancy Scheme?

[33]In my judgment, the judge was right about the meaning of “misconduct” in the opening words of paragraph 12(1) of the Guidance. When the Guidance is being used in conjunction with the Accountancy Scheme, those documents form part of a suite of documents and must be interpreted together. In addition, Mr Fordham is clearly right to submit that, in interpretation, all other things being equal, the court will prefer a lawful interpretation to one which produces an unlawful provision.

[34]Therefore, misconduct giving rise to disciplinary proceedings must satisfy the definition in the Accountancy Scheme. As Mr Drabble submits, in common with a number of other professional schemes, “misconduct” need not be dishonest or dishonourable. It can consist of a failure to act with professional competence. I am content in responding to Mr Drabble’s submissions to adopt Mr Drabble’s term gross negligence for this. The definition of misconduct in the Accountancy Scheme tells us that it must represent a significant departure from professional standards.

Paragraph 12(1)(f) similarly refers to misconduct as defined by the Accountancy Scheme

[35]The true interpretation of “misconduct” in the opening words of paragraph 12(1) in turn informs the true interpretation of paragraph 12(1)(f). The second sentence of paragraph 12(1) is setting out a series of practical examples of types of misconduct which should be evaluated as meriting the filing of a Formal Complaint. Paragraph 12(1)(f) is gross negligence. Paragraph 12(1)(f) is there because gross negligence is not covered by any other previous sub-paragraphs of paragraph 12(1).

[36]I am not troubled by the use of the words “non-trivial”in paragraph12(1)(f) because it is clear that the meaning of “non-trivial” is not confined to that which is only just not trivial. As I said in argument, it can also mean “significant”, which is the meaning to be preferred because it chimes with the meaning of “misconduct” in the Accountancy Scheme.

[37]Accordingly I reject Mr Drabble’s submission that paragraph 12(1)(f) is to be given a meaning of anything but trivial i.e. as including the not quite trivial. Such a meaning would be out of context and therefore inconsistent with the principles of interpretation which courts apply. The word “non-trivial” must be given a contextual meaning consistent with the term “misconduct” which sub-paragraph (f) explicates.

Evaluation first - then paragraph 11(2) if the ‘unless’ clause is not satisfied

[38]There must still be an evaluation.The act of gross negligence may not be serious. It might have been spotted by the finance director before the financial statements were approved by the board. The same is true of an act of dishonesty. Suppose that in the course of the grossly negligent conduct the auditor also steals a free sample from the client company. The Executive Counsel is likely to attach much weight to that. But because the exercise is one of comparing the factors favouring the filing of a Formal Complaint with those which do not favour the filing of a Formal Complaint, the Executive Counsel must evaluate the misconduct even if it would also be taken into account under the usual rule in paragraph 11(2). There is no double-counting because the weighing exercise is carried out as a separate stand-alone exercise.

[39]The result of the weighing exercise will tell the Executive Counsel whether or not the ‘unless’ clause is satisfied. If it is not, he will then apply the usual rule in paragraph 11(2).

[40]In my judgment, there is no doubt that this is what Executive Counsel did. It follows that I reject Mr Drabble’s powerful submissions that paragraph 12(1)(f) was flawed because it required either more or less than misconduct. It is also clear that Executive Counsel performed the qualitative assessment that paragraph 12(1) requires, and that there is no basis on which his decision-making or reasoning can be challenged.

Whether Paragraph 12(1)(f) is confined to matters of special weight

(f) is confined to matters of special weight

[41]I have had the privilege of reading the judgments of Lord Justice Sales and Lady Justice King. While we reach the same outcome, we have reached materially different conclusions to the meaning of paragraph 12(1). Lord Justice Sales holds that not every allegation of misconduct, which is misconduct for the purpose of the Accountancy Scheme and satisfies the Evidential Test, constitutes a matter of particular weight in favour of satisfying the Public Interest Test. It must be a degree of misconduct which is significantly more than something which would merely satisfy the basic test of misconduct. Lady Justice King in paragraph 57 below reaches the same conclusion.

[42]As I have explained, as I see it, the purpose of paragraph 12(1) is that the Executive Counsel should place in the balance any element of misconduct which satisfies the Evidential Test, but he has first to allocate a weight to it.

[43]In my judgment, the misconduct in issue need only be misconduct. It need not also have some special weight: it is difficult to avoid the conclusion that that requirement is only suggested because of the unstated premise which I have discussed earlier and for my own part rejected. The misconduct does not as I see it have to be “super gross-negligence”. The definition of “misconduct” in paragraph 5(4) of the Accountancy Scheme already requires a significant departure from professional standards (paragraph 3 above). So the sub-paragraphs of paragraph 12(1) are not aggravating factors but a list of examples of misconduct. I cannot think of any good reason why, the Accountancy Scheme having provided a definition of misconduct, the Guidance should require the Executive Counsel to find items of special weight in the scales.

[44]For the reasons I have given, I respectfully do not consider that the wording imposes a threshold test of “significance”. The presence of such a threshold test is, in my judgment, inconsistent with the direction in paragraph 11(2) of the Guidance that “A Formal Complaint satisfying the Evidential Test should usually be delivered to the Committee unless contrary public interest factors clearly outweigh those favouring delivery.” I stress the word “contrary”.

[45]Although there is no difference in outcome between our respective views in this case, I cannot altogether exclude the possibility that this will always be so. If the Executive Counsel cannot identify any aggravating features in the misconduct, but there are factors favouring the course that no Formal Complaint is delivered, then it is conceivable that the ‘unless’ clause would be satisfied and the usual rule in paragraph 11(2) displaced. I do not consider that the purpose of the Guidance is to achieve that end. After all the sanctions which the Committee can apply include a mere reprimand. Such a sanction clearly indicates that the misconduct may not be serious (relative to other misconduct). Moreover, paragraph 12(1)(f) gives no guidance as to what is an aggravating feature. I do not need to resolve this matter, and leave it open, as it does not arise in this case.

[46]Accordingly I return to my own interpretation, described above. For what it is worth it appears to accord with the effect of the CPS Code for Prosecutors, to which I next turn.

CPS Code for Prosecutors is to the same effect as my interpretation

[47]Sales LJ refers to the fact that the Executive Counsel fulfils the role of investigator and prosecutor. This leads me to consider the practice adopted in England and Wales by prosecutors when they must make decisions as to whether to prosecute criminal offences (which is not of course this case). Prosecutors’ decisions to prosecute are governed in England and Wales by the Crown Prosecution Service’s Code for Prosecutors January 2013. There is an interesting parallel between the Code and the Guidance, which I will mention, not as a determinative factor in my reasoning, but merely to note the comparison. Under this Code, as in the Guidance, there are two stages: as here, an evidential stage and a public interest stage. At the evidential stage, a prosecutor must be satisfied that there is sufficient evidence to provide a realistic prospect of conviction. The public interest stage only falls for consideration if the evidential stage is met. At the public interest stage, the prosecutor must be satisfied that the public interest factors in favour of a prosecution outweigh those against. As part of this weighing process, the prosecutor must consider how serious the offence in question is. But I see no suggestion in the Code that offences which are not serious will not be prosecuted. The gravity of the offence is simply one of the factors to be considered.

Remaining grounds of appeal

[48]As his second ground of appeal, Mr Drabble contends that Executive Counsel’s statement of reasons for his decision to deliver a formal complaint was flawed because he had relied on paragraph 12(1)(f) of the Guidance. As already explained, in the light of my interpretation of paragraph 12(1)(f) of the Guidance, this ground must fail. There is no challenge to the fact that Executive Counsel relied on an allegation of misconduct as defined by the Accountancy Scheme.

[49]Mr Drabble further submits under this ground of appeal that Executive Counsel’s statement that there was a risk that Tanfield’s financial statements materially misstated its financial position did not mean that there was a serious error by the appellants because that statement was referring merely to the test of materiality for the purposes of financial statements, which is low (for present purposes, one might say 5%). In any event, submits Mr Drabble, the statement was only about risk and audit work was not designed or required to eliminate all risk: the financial statements were those of the company and the most the auditor could do was to provide reasonable assurance on them. This argument does not in my judgment avail the appellants on my interpretation of paragraph 12(1)(f). If materiality was relevant at this stage, my answer would be that, if there had actually been a material misstatement of this order, the matter would at least have had to be disclosed to investors and creditors in Tanfield and the absence of appropriate disclosure would have affected the auditor’s report. In any event one of the aims of competent audit work must surely be to have systems, such as a system of competent partner review, to reduce risk of misstatement occurring.

[50]As his third ground of appeal, Mr Drabble wished to argue that the judge’s conclusion that the claim should be dismissed on the basis that there was an alternative remedy was wrong in law. As we made clear at the hearing, in the light of our conclusions on the first ground, this issue does not arise.

Overall conclusion

[51]In summary, the judge’s interpretation of paragraph 12(1) of the Guidance was correct: misconduct is misconduct as defined by the Accountancy Scheme. That informs paragraph 12(1)(f), which is needed to provide an example of misconduct of a kind not previously mentioned in paragraph 12(1). This misconduct must be weighed in the balance by the Executive Counsel when deciding whether the Public Interest Test is met. In my judgment, this is the natural interpretation of paragraphs 11 to 13 of the Guidance. Misconduct is not taken into account twice by the Guidance because the weighing exercise is a stand-alone exercise for the purpose of determining whether the ‘unless’ clause in paragraph 11(2) applies. If it does not, the governing rule will be applied. The Guidance is not therefore flawed in the ways Mr Drabble submits. I would dismiss this appeal.

Lady Justice King:

[52]Having had the advantage of reading in draft the judgments of both Lady Justice Arden and Lord Justice Sales, I too agree that the appeal should be dismissed.

[53]More specifically, I agree with Arden LJ and Sales LJ that so far as the challenge to the reasoned decision is concerned there is nothing to indicate that the Executive Counsel has misdirected himself or applied the wrong test of “Misconduct” or under para.12(1)(f) of the Guidance. I would therefore dismiss the appeal in relation to the challenge to the reasoned decision.

[54]As indicated by Arden LJ at para.[41] I have reached a materially different conclusion as to the meaning of paragraph 12(1) from that set out in her judgment. For my part I would adopt the reasons for dismissing the appeal in relation to Ground 1 given by Lord Justice Sales and endorse his construction of para.12 (1)(f) of the Guidance.

[55]The Evidential Test is not satisfied unless there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member (para. 3 Guidance). The definition of Adverse Finding set out in para. 3 is lifted from para. 2(1) of the Scheme which the Guidance supports, which definition depends upon a finding of Misconduct (or non-co-operation paras 14(1) & 14(2) which is itself defined at para.2(1) of the Scheme as:

“..an act or omission….. by a Member… in the course of his or its professional activities…. or otherwise, which falls significantly short of the standards reasonably to be expected of a Member…. or has brought, or is likely to bring discredit to the Member…. or to the accountancy profession.”

It must, in my view, therefore follow that where para 14(1) and 14(2) are not in play (as in this case) misconduct as defined is a necessary component of the Evidential Test.

[56]By para. 10 of the Guidance, in the event that the Evidential Test is not satisfied, that is the end of the matter; the Executive Counsel does not move on to consider the Public Interest Test found at para. 10 of the Guidance. It is therefore only against the backdrop of a likely finding of misconduct as defined in the Scheme that the examples of ‘public interest factors favouring delivery of a Formal Complaint’ found at para. 12 and ‘examples of factors which indicate that a hearing may not be desirable in the public interest’ found at para. 13 are to be weighed before an overall public interest assessment is made. (para.11 (4)).

[57]Having looked at the structure of the Guidance and the nature of the misconduct identified within the factors found at para.12 (for example: dishonesty, pre-meditation, abuse of trust, lack of objectivity) I cannot regard those factors as merely a list providing examples of simple misconduct. Rather they are in my view, features which serve to aggravate the misconduct already regarded as likely to be made out against a Member and, as such, serve to reinforce the public interest presumption set out at para.11(2) of the Guidance.

[58]I am reinforced in this view having also looked at the nature of the factors found in para.13 of the Guidance; for example: age of the member, inadvertence, delay, these can be classified as features with the potential to mitigate the misconduct found to be likely to be established and thereby to reduce the public interest in the making of a Formal Complaint.

[59]I am therefore satisfied that para.12(1) provides a list of aggravating factors which the Executive Counsel must ‘carefully and fairly’ weigh before making his or her overall assessment. I would agree with Sales LJ that para. 12(1)(f) (which specifies as a factor a “non-trivial failure on the part of the Member or Member Firm to act with professional competence or due care, or otherwise involved action that could discredit the profession”) identifies a significant (i.e. non-trivial) failure on the part of the Member to act with professional competence etc, over and above that which it has been necessary to regard as likely to result in a finding of misconduct as defined under para 2(1) of the Scheme for the purposes of satisfying the Evidential Test.

[60]In my judgment such an interpretation gives, as Sales LJ put it, a ‘practical meaning and coherent effect’ to the provision. Whilst the drafting of the factor found at para. 12(1)(f) of the Guidance might be regarded as clumsy at best, the interpretation favoured by Sales LJ recognises what I regard as the clear intention of the provision, namely that the more serious the misconduct, the more likely it is to be in the public interest for a Formal Complaint to be made. It follows that I do not agree with what Arden LJ says at para.[45] and would adopt the reasoning of Sales LJ at para.[78].

[61]I too would therefore dismiss the appeal in relation to the challenge to the lawfulness of para.12(1)(f) of the Guidance and I would join with Sales LJ in encouraging the Conduct Committee to consider redrafting the sub-paragraph in order to make it clearer.

Lord Justice Sales:

[62]I too would dismiss the appeal. My reasons for doing so are somewhat different from those given by Arden LJ so I need to set them out. I accept the alternative submission of Mr Fordham QC regarding the meaning of para. 12(1)(f) of the Guidance rather than his primary submission.

[63]The Executive Counsel fulfils a role as investigator and prosecutor in respect of allegations of professional misconduct. Where he considers that a charge of professional misconduct should be prosecuted he must deliver a Formal Complaint to the Conduct Committee and pursuant to para. 2 of the Guidance must give reasons for his decision.

[64]By virtue of para. 7(11) of the Accountancy Scheme, the Executive Counsel must deliver a Formal Complaint where he considers that two conditions are satisfied:(i) there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member or Member Firm (“the Evidential Test”) and

(ii) a hearing is desirable in the public interest (“the Public Interest Test”). The Guidance is issued by the Conduct Committee to inform the way in which the Executive Counsel applies those tests. The Guidance has to be read alongside the Accountancy Scheme, to which it refers.

[65]The Guidance addresses the Evidential Test at paras. 7 to 9. Under that test, the Executive Counsel must decide whether it is more likely than not that an Adverse Finding will be made. “Adverse Finding” is defined in the Accountancy Scheme to mean a finding by a Disciplinary Tribunal “that a Member or Member Firm has committed Misconduct” or has failed to comply with their obligations to co-operate with an investigation into a complaint. “Misconduct” is likewise a term defined in the Accountancy Scheme: see para. [3] above.

[66]The Guidance addresses the Public Interest Test at paras. 10 to 15. Paragraph 10 provides that if the Evidential Test is not satisfied, the Executive Counsel does not proceed to consider the Public Interest Test; but if it is satisfied, he must go on to consider whether a hearing is desirable in the public interest. Thus the section in the Guidance in relation to the public interest proceeds on the footing that the Executive Counsel has made an assessment that it is more likely than not that a charge of Misconduct (as so defined) will be made out against the relevant Member or Member Firm.

[67]Paragraphs 11 to 14 of the Guidance are set out in Annex 1 to the judgment of Arden LJ. Paragraph 11(2) provides that where the Evidential Test is satisfied “A Formal Complaint … should usually be delivered to the [Conduct] Committee unless contrary public interest factors clearly outweigh those favouring delivery.” Paragraph 11(4) provides that in addressing that question the Executive Counsel must make an overall assessment. Paragraph 12 then gives examples of public interest factors which, in that assessment, will favour delivery of a Formal Complaint. Paragraph 13 gives examples of factors which tend to indicate that a hearing may not be desirable in the public interest. In context, para. 12 and para. 13 pick out factors from the general range of background matters which (in the case of para. 12) particularly point in favour of an assessment that a hearing is in the public interest or which (in the case of para. 13) particularly point in favour of an assessment that a hearing is not in the public interest.

[68]In the context of the scheme of paras. 11 to 13 of the Guidance, the matters set out in sub-paragraphs (a) to (f) of para. 12(1) are in my view all instances of aggravating factors in relation to “The gravity of the alleged misconduct and/or breach of obligation” (see the opening words of para. 12(1)). If a particular case falls within sub-paragraphs (a) to (f) of para. 12(1), the Executive Counsel is instructed that “It is likely that a hearing is desirable in the public interest”. Where these sub-paragraphs apply, therefore, this language provides for an additional presumptive effect going beyond the general presumption in para. 11(2) in favour of delivery of a Formal Complaint.

[69]The appellants seek to quash the reasoned decision of the Executive Counsel dated 23 May 2014 to deliver a Formal Complaint in respect of their alleged misconduct (“the reasoned decision”) and also to quash para. 12(1)(f) of the Guidance as unlawful or repugnant to the Guidance as a whole or to obtain a declaration to that effect.

[70]In the reasoned decision the Executive Counsel identified the key elements of the complaint, which related to alleged defects in the auditing of the two largest assets on the balance sheet of the audit client (Tanfield Group) and its key subsidiaries, together with alleged failure of the partner review process (para. 4); explained that the Evidential Test was satisfied (paras. 6-10); and set out his assessment why the Public Interest Test was also satisfied (paras. 11-15). In para. 11 the Executive Counsel referred to the presumption in para. 11(2) of the Guidance in favour of delivery of a Formal Complaint where the Evidential Test is satisfied. In para. 12 he identified the factor at para. 12(1)(f) of the Guidance as being particularly relevant in favour of delivery of a Formal Complaint, “because of the nature and extent of audit failings identified, compounded by the apparent failure of the partner review process”; he also identified the factor at para. 12(2) of the Guidance in relation to “The gravity of the actual or potential consequences of the alleged misconduct …” as being particularly relevant:

“The consequences of the alleged misconduct are serious, in that there was a real risk that the financial statements of Tanfield Group, a listed company, contained material misstatements”

. In para. 13 of the reasoned decision the Executive Counsel referred to para. 13 of the Guidance and identified the factor of long delay as a particular public interest matter which weighed against delivery of a Formal Complaint, but said “However, this factor is of limited weight where the alleged misconduct is serious”. He thereby indicated that in his view the alleged misconduct to which he had referred in para. 12 of the reasoned decision was properly to be characterised as “serious”. Having regard to the materials available to the Executive Counsel, including in particular a detailed expert report by John Leech of KPMG LLP, this was plainly a view to which the Executive Counsel could rationally and lawfully come.

[71]The reasoned decision has to be read with the Formal Complaint to which it relates. In the Formal Complaint the Executive Counsel expressly set out the definition of “Misconduct” from the Accountancy Scheme, which was the test of misconduct which he applied in making his decision.

[72]As I understood the argument presented by Mr Drabble for the appellants, it had two aspects, both focussing on para. 12(1)(f) of the Guidance. First, Mr Drabble contends that on proper interpretation of that provision it is simply referring to something which amounts to a “non-trivial failure … to act with professional competence”, which is something less than and certainly no more than “Misconduct” as that term is defined in the Accountancy Scheme. But, he says, this is nonsensical in the context of the Guidance read as a whole, since it would amount to saying that the fact there has been an allegation of such a “non-trivial failure” or mere basic “Misconduct” as defined is always a public interest factor of special weight, with the additional presumptive effect to which I have referred in favour of delivery of a Formal Complaint to the Conduct Committee, whereas para. 12 of the Guidance already presupposes that the matter under investigation is “Misconduct” as defined in the Accountancy Scheme. The sub-paragraphs of para. 12(1) of the Guidance are concerned with identifying reasons of special weight which tend to indicate it is in the public interest to deliver a Formal Complaint, but since there must be a charge of Misconduct (which satisfies the Evidential Test) in every case to which the public interest has to be applied, it is not rational or lawful for the Guidance to treat an allegation of a “non-trivial failure … to act with professional competence” (i.e. conduct which does not even meet the definition of “Misconduct”) or alternatively to treat an allegation of such a failure merely at the most basic level of “Misconduct” (as defined) as a reason of special weight and as having such additional presumptive effect in the context of para. 12.

[73]Secondly, Mr Drabble says that the Executive Counsel at para. 12 of the reasoned decision placed weight on para. 12(1)(f) of the Guidance and thereby committed an error of law, with the result that his decision should be quashed. Paragraph 12(1)(f) is an unlawful provision, so to rely upon it is also unlawful. Moreover, in placing reliance on it the Executive Counsel has erred as a matter of substance by treating the mere fact that there is a sustainable complaint of a “non-trivial failure … to act with professional competence” (to a standard less than “Misconduct”) or alternatively that there is a sustainable complaint of such conduct amounting merely to a basic level of “Misconduct” (which is a factor which will be present in every case to which the Public Interest Test applies) as a reason of special weight in the public interest balance in favour of delivery of a Formal Complaint in this case, whereas it could not properly have been singled out and treated as having such special weight in this way. The Executive Counsel has given excessive weight to the appellants’ failures to act with professional competence by applying the additional presumptive effect of para. 12(1)(f) in relation to them, above and beyond the usual presumption in para. 11(2), when it was irrational and wrong to do so. The Executive Counsel should be required to reconsider his decision on a proper basis.

[74]The first issue which requires to be addressed is the proper interpretation of para. 12(1)(f) of the Guidance. I do not accept Mr Drabble’s proposed interpretation, either to say that it refers to a “non-trivial failure … to act with professional competence” (to a standard less than “Misconduct”) or alternatively to equate what is set out in the material part of para. 12(1)(f) with the basic definition of “Misconduct” in the Accountancy Scheme. As to the first suggestion, I consider that the judge is clearly right at para. [110] to say that para. 12(1) of the Guidance has to be read in the light of the Accountancy Scheme and that it uses the word “misconduct” in the sense given by the definition of “Misconduct” in the Accountancy Scheme. Sub-paragraphs (a) to (f) of para. 12(1) of the Guidance are thus concerned with matters which tend to indicate that the “Misconduct” alleged is more grave or serious than in a case of “Misconduct” at the most basic level. It is therefore not a tenable interpretation of para. 12(1)(f), in context, that it is referring to a “non-trivial failure … to act with professional competence” at a standard below “Misconduct” as defined in the Accountancy Scheme. Since the term “Misconduct” is defined for the purposes of the Accountancy Scheme and the Guidance it is not necessary to go to authorities referred to by Mr Drabble which deal with the meaning of the concept of misconduct in the context of other professional disciplinary schemes. It is common ground that it is not necessary for the disposal of this appeal for the court to resolve any differences of nuance between the definition of “Misconduct” in the Accountancy Scheme and the meaning given to the concept of misconduct in those authorities.

[75]For similar reasons, I do not accept Mr Drabble’s alternative suggestion that those words in para. 12(1)(f) equate only to basic “Misconduct” as so defined and therefore are, again, nonsensical and unlawful as part of para. 12(1) of the Guidance, on the basis that such a factor “ought to be present by definition in any allegation of misconduct based on lack of professional competence, so that its presence is logically irrelevant to whether the misconduct is more than ordinarily grave or serious” (para. 54 of the appellants’ skeleton argument for the appeal, emphasis in original). It is not clear that this variant of Mr Drabble’s argument was distinctly put to the judge.

[76]I would accept that if para. 12(1)(f) on its proper interpretation is plainly irrational or nonsensical in its effect, it would be open to the court to quash it as unlawful (compare, e.g., R v Immigration Appeal Tribunal, ex p. Manshoora Begum [1986] Imm AR 385) or to treat it as repugnant to the terms of the Accountancy Scheme as a whole and so declare that it has no effect. However, in answer to Mr Drabble’s suggestion, I consider that there is another possible construction of para. 12(1)(f) which is, on an objective approach and in context, the proper construction. This is that it will be likely that a hearing is in the public interest “where there is evidence that the alleged misconduct … (f) involved a non-trivial [i.e. significant] [degree of Misconduct comprising] failure on the part of the Member or Member Firm to act with professional competence or due care …”. On this interpretation, it is not every allegation of Misconduct (which satisfies the Evidential Test) which will constitute a matter of special weight in favour of satisfying the Public Interest Test, but where the degree of Misconduct alleged is significant (i.e. significantly more than something which would merely satisfy the basic test of “Misconduct”) that will be a factor of special weight indicating that a hearing would be desirable in the public interest. It cannot be said to be irrational to apply the additional presumptive effect given by the wording which introduces sub-paragraphs (a) to (f) of para. 12(1) in cases where the “Misconduct” is significant rather than merely at the most basic level which would satisfy the definition of that concept.

[77]To my mind, this makes obvious sense of para. 12(1)(f) in the context in which it appears. This interpretation reflects the construction contended for by Mr Fordham on his alternative submission. It accords with the opening words of para. 12(1), which require a focus on the seriousness (“gravity”) of the alleged Misconduct. If the degree of Misconduct alleged is significant rather than merely basic, that is a significant factor, not present in every case, which points with particular force in favour of it being desirable in the public interest to hold a hearing. Clearly, the more serious the Misconduct alleged the stronger the public interest will be in holding a hearing into the allegation. In fact, I also consider that Mr Drabble’s own argument that, on his interpretation of para. 12(1)(f) equating the relevant language used in it with the basic test of Misconduct, it would be a nonsensical and irrational provision points towards the interpretation of the provision which I prefer being the correct one. Given a choice between an interpretation which gives practical meaning and coherent effect to a provision in the scheme of an instrument like the Guidance and an interpretation which would treat the provision as incoherent, nonsensical and repugnant to that scheme, a court will naturally favour the former interpretation as correct.

[78]Paragraph 11(2) of the Guidance supports the same conclusion. It makes express provision for the presumption in favour of delivery of a Formal Complaint in relation to an allegation of an ordinary case of Misconduct, so there is no good or proper reason to read para. 12(1)(f) as making different provision in relation to the presumption to be applied in that same basic category of case.

[79]Since para. 11(2) has this general effect, I do not agree with what Arden LJ says at para. [45] above. In a case in which there is a charge of Misconduct which satisfies the Evidential Test but in relation to which there are no additional positive public interest factors of special weight falling within para. 12 of the Guidance, yet there are one or more contrary public interest factors falling within para. 13, the Executive Counsel would have to weigh those factors against the force of the presumption in para. 11(2) in order to see whether they were sufficient to outweigh that presumption. They may not be sufficient to achieve that. The strength of the presumption in para. 11(2) is indicated by the requirement stated in that paragraph that the contrary public interest factors must “clearly outweigh” any public interest factors in favour of delivery of a Formal Complaint, which include as a significant item the very fact that there is a charge of Misconduct which satisfies the Evidential Test. I say nothing about the CPS Guide for Prosecutors, about which we heard no submissions.

[80]For the reasons I have given, I would dismiss the appeal in relation to the challenge to the lawfulness of para. 12(1)(f) of the Guidance. However, it is fair to say that the drafting of the sub-paragraph is less than perspicuous. It would be desirable for the Conduct Committee to review and amend it, to make it clearer.

[81]Turning to the challenge to the reasoned decision, there is nothing to indicate that the Executive Counsel has misdirected himself or applied the wrong test of “Misconduct” or under para. 12(1)(f) of the Guidance. As pointed out above, the Executive Counsel expressly referred to the relevant test of “Misconduct” in the Formal Complaint to which his reasoned decision related. His decision regarding the satisfaction of both the Evidential Test and the Public Interest Test is a lawful one, turning upon a rational and lawful assessment of relevant factors. Indeed, even if I had accepted Mr Drabble’s submissions about the true interpretation of para. 12(1)(f), I would have dismissed the appeal in relation to the reasoned decision itself, because any misdirection involved in the Executive Counsel’s reference to that provision in the context of his consideration of the Public Interest Test would have been immaterial in light of the reasoning in the decision.

[82]As appears from the reasoned decision, in particular at paras. 4, 10, 12 and 13, the Executive Counsel considered that the alleged Misconduct did not simply meet the basic definition of “Misconduct” but was “serious” (see para. 13, read with para. 12) and had serious consequences (see para. 12, read with paras. 4 and 10). The Executive Counsel was plainly entitled to treat an allegation of serious Misconduct as one in relation to which “The gravity of the alleged misconduct” (para. 12(1) of the Guidance) was a particular public interest factor weighing in favour of delivery of the Formal Complaint to the Conduct Committee, whatever the precise test under para. 12(1)(f) might be.

[83]For the reasons I have given, I would dismiss the appeal both in relation to the challenge to para. 12(1)(f) of the Guidance and in relation to the challenge to the reasoned decision.