Dispute leads to discipline
B was an accountancy practice with offices in C and R. E (the complainant) was based at R. The other partners (including the defendants and) were at C.
A was a corporate member of B. It’s only income was its share of the profit in B. E, J and I were partners in B and directors and shareholders in A.
There was a seriously acrimonious partnership dispute between E on the one hand and J and I (and presumably other partners) on the other, resulting from which E reported J and I to the ICAEW. This resulted in disciplinary proceedings against J and I.
The first three complaints against J and I were identical. It was alleged that the CT600 for the year ended 31st March 2010 and 31st March 2012 for A understated profits by £200,000 and £140,000 respectively, compared with the figures appearing in the accounts filed at Companies House. Accounts for A to 31st March 2012 were understated by £140,000 being the share of profit allocated from B.
There was a fourth complaint against I, namely that he accepted a loan of £100,000 from a client of B without having sufficient regard to Section 280 of the Code of Ethics.
None of the seven complaints made any allegation of dishonesty.
The hearing extended over seven days (five in February 2019 and two in May 2019).
Both defendants, together with the Investigation Committee, were represented by external counsel. All complaints were denied apart from the loan complaint which I admitted. Ultimately, the complaints were upheld.
There were various witnesses, including E, J and I. Character references were also given orally.
The background was that B ran into financial difficulty in 2010/11 due to the recession and also payments being made to ex-partners. Payment of wages and partner drawings became difficult. The business was threatened with administration.
The loan negotiated by I was not for his benefit, but for the benefit of B. E had also invested some £40,000 in B.
E discovered that there were discrepancies between the CT600s and the accounts. He concluded that the corporation tax liability had been under-declared by at least £70,000.
The Investigation Committee engaged H, an FCA and forensic accountant who gave evidence before the tribunal.
There were issues relating to the preparation of the accounts. There was a fundamental flaw in the preparation and subsequent scrutiny of the accounts. There had been no assessment of the recoverability of debts. In relation to work in progress, there had been no assessment of what was billable. There were issues in relation to an onerous lease.
With regard to J, his conduct was considered to fall within the less serious category. No clients had been affected. There was no loss to the Revenue. In fact, the shortfall in corporate tax had been made good. The investigation by the Institute had taken five years.
J was fined £3,000 and given a reprimand. The Investigation Committee sought costs in the sum of £151,000. This included H’s time recorded at 191 hours at an hourly rate of £445, or £85,000. The tribunal held that this was an excessive amount. The costs were reduced by £31,000 and divided by three. That meant that J had to pay £40,000.
It would appear that there was a third defendant (also a partner) involved with regard to these proceedings. His/her case has not been reported, presumably because there is an appeal.
With regard to I, it was held that he was the main protagonist. He had prepared the accounts and the CT600s. In relation to the loan, it was said that he had misled the investigators as to the status of the client.
I was reprimanded and fined £10,000. He was also ordered to pay costs of £40,000.
My comments on this case are as follows:-
The summary refers to correspondence between J and the Institute dating from November 2013. There would also appear to be correspondence between I and the Institute at around that time. However, we do not know when the complaint was made. I suspect that this was in late 2013. It is frankly disgraceful that disciplinary proceedings did not commence until February 2019, some five and a half years later. I have previously commented on the delays in other cases in bringing proceedings before disciplinary tribunals. My comments seem to have fallen upon deaf ears. There does not seem to be any sign of an improvement either in carrying out investigations at much greater speed or in getting cases listed before the tribunal.
It is surprising that the Investigation Committee decided to instruct external counsel, as opposed to one of its in-house lawyers. We do not know how much counsel would have charged the Institute. However, that would have been included in the figure of £151,000.
It was clearly a fairly complex case and therefore there was a need to engage forensic accountants, particularly as the complaints were denied. Nevertheless, it is astonishing that an expert should be engaged charging at a rate of £445 per hour. It is even more unbelievable that the expert spent 191 hours on the matter. Even if you factor out the expert costs of £85,000, the remaining costs totalled £66,000, which in itself is a considerable sum of money and probably greater than most disciplinary cases have averaged in recent years. In any event, the disciplinary tribunal found that the amount claimed by the Investigation Committee was excessive. One would hope that this message will be well heeded by senior members of the Institute’s Professional Conduct Department.
Overall, the case has cost two members of the ICAEW some £92,000 in fines and costs, quite apart from whatever legal costs they may themselves have incurred through representation. We do not know whether they had the benefit of insurance.
It is sad that a partnership dispute should end up before the disciplinary tribunal. The papers hint at one of the defendants having health problems, which is hardly surprising. Disciplinary proceedings inevitably take their toll, particularly those spread over seven days, which in itself is unusual. The five-year investigation would also have taken a heavy toll.