Disciplinary: Accountant banned after preparing false and misleading accounts
An ICAEW disciplinary tribunal has excluded an accountant after he showed a “total disregard” of accepted accounting standards and FRSSE 2008 in the preparation of accounts for a limited company, according to April's ICAEW disciplinary orders.
Radlett-based FCA David Harrod admitted that he deliberately failed to account for provisions, which enabled his client to take a dividend that he should not have received.
The ICAEW tribunal judged Harrod at the most serious end of its scale, resulting in exclusion and a financial penalty of £10,500 in addition to the investigation committee’s costs of £13,324.50.
The ruling came after a formal complaint was made against Harrod after the collapse of his client’s royalty collecting company unearthed his failure to prepare the accounts in accordance with the FRSSE 2008. This enabled his client wrongfully to take a dividend because there would have been insufficient retained profits.
The tribunal concluded that Harrod “lacked the independence required of a chartered accountant and was influenced in his professional dealings by his long-standing relationship with a client”.
Harrod’s client worked as the chief operating officer for a company that owned the rights to a number of songs performed as part of a musical. The client was also the director of an agency that collected royalty payments due from the performance of the songs, where Harrod also acted as the external accountant.
However, the music rights company terminated the contract between the two, shortly after the late owner’s daughter took over and accused Harrod’s client of financial misconduct.
Harrod’s client hit financial difficulties and entered a creditor’s voluntary liquidation. That’s when the music rights business discovered the accounts Harrod prepared for his client did not include provisions for all the amounts due.
‘Under severe pressure’
As a result of the contract termination, the music rights business agreed to pay a £1m compensation payment to Harrod’s client and in return Harrod’s company would pay the royalty collected on their behalf. But with the assets of the business in insolvency, the investigation committee accused Harrod of arranging the £1m compensation to be paid directly to his client.
Harrod claimed to the ICAEW that the compensation offer had been dropped and as a liquidator had not been appointed, he argued that “there was no question of the liquidator being misled”.
However, Harrod raised concerns in an email to a tax consultant about the treatment of the compensation payment, where he enquired about treating the compensation payment as “some sort of gratuity payment for the maintenance of his client’s family” and if that would “work from a tax angle”.
However, Harrod insisted that the offered compensation payment was never made. His client had reached a personal settlement with HMRC regarding the outstanding PAYE liabilities.
In his final representations to the ICAEW, Harrod told how he was under severe pressure from his client who was on the verge of a breakdown because of the debt he had to repay.
Harrod pointed out that due to this pressure he made some regrettable “rash statements” which he claimed were “completely out of character”.
“These episodes have weighed heavily upon me,” he told the ICAEW. “With the benefit of hindsight I should have dealt with the matters completely differently although I would point out again that there was no loss suffered by HMRC.”
Tribunal left unimpressed
In the sentencing order the tribunal concluded: “[Harrod] was prepared to put his name to accounts which were false and misleading, with the intention of assisting his client and enabling the client to access funds to which he was not entitled.”
The tribunal also said it was unimpressed by Harrod’s explanation that he was under pressure from his client when he prepared the accounts. “In such circumstances he should have taken greater care to ensure that his professionalism was not impugned by pressure from a client.”
Chris Cope (solicitor/director of Accountants' National Complaint Services Ltd) writes:
|The tribunal proved all four complaints against Mr Harrod. The first was that he had dishonestly prepared two sets of accounts in which he had failed to account for amounts due to a third party, namely £242,000 in the first year and £307,000 in the second.The third complaint was that Mr Harrod had sought to arrange a settlement of about £1m to be paid to the managing director personally, thereby removing this asset from the limited company as it went into insolvency.
These were serious matters which, rightly, resulted in Mr Harrod’s exclusion from membership. However, I fail to understand why it is necessary when excluding a chartered accountant from membership to fine him as well. Why effectively impose a double punishment? It is also significant that despite written representations from the defendant’s solicitors, the tribunal ordered Mr Harrod to pay the costs of £13,324.50.
Unusually, the hearing took place, by agreement, in the absence of the defendant, his solicitors or even a representative of the Investigation Committee. This enabled the tribunal to consider matters on the papers, alone. Presumably, there was an understandable desire to minimise costs.
However, this seems to me to be a high-risk strategy. What happens if the tribunal has questions? There would be no one present to provide answers. Should this then have resulted in an adjournment? If not, the tribunal proceeds to impose sanctions in the absence of answers.
There is also an embarrassing revelation from the report. Mr Harrod’s solicitors (a top firm in the North West) suggested that the matter be disposed of by consent order. As the tribunal pointed out, consent orders are not available once the case has been referred to the disciplinary committee. In addition, a consent order, as defined in the byelaws, cannot exclude the defendant from membership.
One would have thought that these solicitors would have checked the regulations before making their written submission. It just goes to show that when one faces disciplinary proceedings, it pays to obtain specialist legal and professional advice. Don’t assume that top-class law firms will always get it right. Expect, though, a large bill.
My view (and I’ve been representing accountants before tribunals since 1984) is that the defendant should always attend the hearing. It is not essential that the defendant is legally represented. If the defendant chooses not to attend, surely this shows discourtesy. In any event, if you are absent, who is going to answer questions to which you might have had a plausible answer?
If you are presently subject to a complaint, you can call Chris Cope for advice (01769 581581) or visit his website