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Firm hit with massive disciplinary fine over unqualified audits

6th Aug 2019
Editor AccountingWEB
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Accountancy firm Creaseys LLP has been slapped with a £125,000 fine and a severe reprimand by the ICAEW over numerous reporting failures such as unqualified audit reports.

Creaseys agreed to the ICAEW consent order on six complaints, with the first dating back to December 2009, according to ICAEW's disciplinary decisions

The ICAEW Investigation Committee found that each year between 2009 and 2011, Creaseys issued audits for a limited company that were not in compliance with client money rules.

During this period, Creaseys failed to ensure shortfalls from internal reconciliations were paid into a client bank account by the close of business on the day the reconciliation was performed and failed to inform the FSA. 

Creaseys also issued unqualified audit reports on the financial statements of a limited company during the same period.

The Investigation Committee criticised Creaseys for failing to obtain the appropriate audit evidence to be able to draw reasonable conclusions.

The committee questioned Creaseys on the appropriateness of the management’s use of the going concern assumption in the preparation of the financial statements. The auditor’s reports over the three years did not give a fair view on whether the cash and bank balances were understated or whether the amounts of client money held were overstated.

In addition to the fine of £125,000 and reprimand, Creaseys has been ordered to pay the ICAEW costs of £12,180.

Chris Cope, solicitor and director of Accountants National Complaint Services Limited comments:

ANCSThis case exposes the dilemma faced by any chartered accountant or firm of chartered accountants presented with a consent order by the investigation committee, writes Chris Cope. 

The committee will consider the papers and a report prepared by the case manager, which should summarise the regulatory’s arguments in support of the complaint, together with any defence submitted and if the complaint is admitted, the plea is in mitigation.

If the committee concludes that the complaint has been substantiated, it may decide to offer a consent order, which normally involves a severe reprimand or a reprimand, a fine, costs and publicity of name. In the alternative, it could simply pass the matter on to the disciplinary committee.

The chartered accountant or the firm offered a consent order should immediately discuss the position with their insurers. There is the possibility that the complaint may lead to a claim. By accepting the consent order, the chartered accountant or the firm is admitting liability. That might be considered by insurers as prejudicing their position.

Let us say that the accountant or the firm admits misconduct, but does not accept the sanction proposed by the committee. A consent order does not have to be accepted. It could be rejected. In that case, the committee must automatically refer the matter to the disciplinary committee.

When the disciplinary committee considers the matter, it does not know and should never be told anything about the consent order which has previously been rejected.

However, the disciplinary committee will consider the sanctions guideline, which is identical to that considered by the investigation committee.

The difference between the two committees is that there is no right to appear before the investigation committee. There is every right to appear before the disciplinary committee with or without legal representation. Furthermore, the defence may decide to call expert evidence.

The sanctions guideline is simply that. It is not a set of penalties which the disciplinary committee must slavishly follow. Having heard all the evidence and the mitigation, the committee may decide to impose a sanction less than that recommended in the sanctions guideline.

Worth the gamble?

Let us take the case of Creaseys, and the options available to firms like them in such a case. Creaseys were offered a consent order, namely a severe reprimand, a fine of £125,000, costs of £12,180, together with the publicity of the firm's name.

You may ask: why was such a large fine imposed? The fine is calculated on the basis of the annual audit fee. While we do not know the exact amount of the annual audit fee, we do know that the conduct under scrutiny extended over a period of three years.

A severe reprimand from the disciplinary committee was almost certain, and it would have been almost impossible to avoid publicity of name. The unknown factors on sanction were, therefore, the fine and the costs.

Let’s firstly take the costs. The costs before the investigation committee were just over £12,000. If the case went on to the disciplinary committee, presumably there would be no defence and it would simply be a matter for the tribunal to hear the mitigation and decide upon penalty. Accordingly, the case presenter’s costs would not need to be of too great an amount. Let us say that they were £6,000, making £18,000 in all.

The firm would almost certainly wish to be legally represented before the disciplinary tribunal. It may be that counsel would be engaged. You would then have barristers’ fees and solicitors’ costs. These could be in excess of £20,000 in all. And if an expert was to be engaged, there might be another £15,000-£20,000 in expert costs.

The object of the exercise would be to come away from the disciplinary proceedings with a fine substantially less than £125,000. There is no guarantee that the disciplinary tribunal would arrive at a much lower figure. On the above figures, even if one avoided using an expert, one would have to cut the fine by at least £26,000 for the exercise to be cost-effective.

Also, the firm might decide that even if it did incur fairly substantial costs, should it manage to reduce the fine from say £125,000 to £80,000 that would be a worthwhile exercise for the reputation of the firm.

Creaseys would undoubtedly have sought legal advice as to whether to accept the consent order. Solicitors would have presented the firm with all the arguments set out above. They would also have had to say that there was no guarantee there would be a better result before the disciplinary tribunal than the consent order offered by the investigation committee. In other words, it is a complete gamble.

It may well be that Creaseys considered the matter carefully and decided that it was simply not worth taking the risk of rejecting the consent order and taking their chance before the disciplinary tribunal.

One other potential solution to this dilemma is to sign up to a service like the one offered by our sister company, Accountants’ Defence & Advisory Services Ltd (ADAS). Membership requires the payment of an annual subscription, which entitles firms to up to £25,000 in professional fees if they decided to take their chance before the disciplinary committee. If the costs exceeded £25,000, then the excess would have to be borne by the firm.

Fixed penalty order round-up

In addition to the offering of consent orders, the investigation committee now has an additional power to make a fixed penalty. These are offered to accountants by the relevant case manager. The difference between the two orders is that a consent order involves costs, but a fixed penalty order does not.

The latest round of fixed penalty orders covers five cases.

In the first case, an accountant (I won’t give her name) was reprimanded, but there was no financial penalty involved. She had driven a motor vehicle after consuming alcohol in excess of the prescribed limit. It is interesting that drink driving offences involving chartered accountants are now regarded as potential disciplinary matters.

The other four cases concerned chartered accountants who engaged in public practice without holding a practising certificate.

A fixed penalty of, say, £1,000 can be discounted by 30% on the basis that the accountant has immediately admitted liability and has fully cooperated throughout the investigation. In each of these five cases, the discount was applied.

In all four cases, after the discount, each chartered accountant was given a fixed penalty of £700, together with a reprimand and publicity of name.

Where the investigation committee makes no distinction is with regard to the period of time in which the accountant was engaged in public practice.

In the first case, the period of time was 33 months. In the second, it was 31 months. In the third, it was just two months and in the fourth, it was ten months.

It seems very odd that the investigation committee did not distinguish between the first and second cases and the third and fourth.

Surely, it is far more serious to be practising without a practising certificate for nearly three years, than for only two months?

If you are presently subject to a complaint, you can call the Accountants National Complaint Services Limited for advice (01769 581581) or visit their website.

Replies (5)

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By KazN
06th Aug 2019 10:30

My first thought : why has this only happened now, 10 years after the 1st infringement? No use whatsoever, this should have been dealt with much quicker.
I agree with the practising certificate issue - how can 2 months be the same as 33 months? Very doubtful that the accountant practising for 2 months had signed as much as the one practising for 33 months. The one practising for almost 3 years should be advised they can't practise again, ever, as an Chartered Accountant.

Thanks (1)
By Sheepy306
06th Aug 2019 16:01

3 years practising certificate fees alone must be £1,500, presumably didn't bother with CPD so that's at least another £1k, perhaps didn't bother with PII? What else didn't they bother with? If they weren't being supervised for MLR by ICAEW then probably didn't sign up with HMRC either? Were they doing KYC searches on clients? Have they now had a monitoring visit to ensure the quality of their files and procedures are up to standard? You don't have to be an accountant to work out that for £1,000 they've done rather nicely out of it, and a further 30% discount applied for bad behaviour, well done ICAEW.

Thanks (1)
By AnnAccountant
07th Aug 2019 10:54

Known tax name Heather Self copped for a fine. Oops!

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Replying to AnnAccountant:
By Dib
07th Aug 2019 16:36

What, for drink driving?

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By Ian McTernan CTA
08th Aug 2019 13:24

Sorry but what has the ICAEW got to do with drink driving offences? They should stick to dealing with issues involving accountancy. talk about overstepping your remit.

On the main case, it highlights the way small firms and sole traders are at a huge disadvantage- as the costs of this case seem a lot lower then your typical sole trader case ( I know it didn't get all the way, but 3 years of offences investigated).

All fines and associated costs should be pro rated, with costs not to exceed 25% of the fine - so bigger fine, bigger costs awarded, and smaller practitioners aren't smashed with huge costs.

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