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‘Naive’ partner rapped after a client deceived him

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A partner at an accounting firm received a severe reprimand and was labelled “naive” after falling prey to a client’s scam and unwittingly providing two letters with the firm’s letterhead that were used to mislead potential investors.

7th Aug 2023
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As reported in disciplinary orders for August by the Institute of Chartered Accountants in England and Wales (ICAEW), Jagdish Singh Natt was severely reprimanded and fined £2,100 alongside paying the costs of £8,870 after a client duped him into providing an approval statement that was used to falsely claim investment. 

The client did this knowing that the firm was not authorised to conduct investment business.

Natt was described as being “a little naive” and his disciplinary should be seen as a lesson to accountants to apply the requisite amount of professional scepticism to client requests. 

The case

In May 2014, the firm agreed to assist the client with tax matters and producing cashflow forecasts and financial projections as it was looking to raise finance through the promotion of shares to investors. 

The client issued five promotions of its shares to potential investors. One promotion was aimed at high-net-worth individuals and was promoted through brokers authorised by the Financial Conduct Authority (FCA), while the other four promotions from October 2014 through to September 2015 were aimed at retail investors. But none of the communications sent to the retail investors were approved by an FCA-authorised person. 

The client, however, obtained two letters from Natt, dated 3 October 2014 and 5 March 2015, which explained the financial projections prepared for the promotions and included without any caveats the line: “We have reviewed the memorandum of information and have approved it for the purposes of Section 21 of the Financial Services and Markets Act 2000 (FSMA).”

Natt was led to believe that he was providing a comfort letter that would be shown to an FCA-approved broker after the client insisted that the brokers required the accountant to provide assurance that the financial projections were accurate and had been properly compiled. 

Natt thought the statement was just a preamble and he didn’t think he was actually providing the s21 approval statement. 

The client did this with the knowledge that the firm was not permitted to approve financial promotions under Section 21 of the Financial Services and Markets Act 2000

Deliberate and sustained deception

The FCA hauled the client and his partner in front of a judge in March 2020 and found them guilty of knowingly sharing investment communications to retail investors that were not approved and contained false information.

The judge ruled that the client knew their investment communications were not approved and concluded that he gained these letters through “a deliberate and sustained deception” of Natt. 

Natt gave evidence that he thought the client needed the letters for the brokers, who he assumed were the ones responsible for approving the Information Memorandums (IM). 

The judge raised that the client even asked Natt in an email for the letters to be put on the firm’s letterhead to be shown to the brokers. 

The Judge concluded: “I have found that [the client] did not at any point tell Mr Natt that his letters would be used for the purposes of a general retail IM, but instead told him that the letters were required to show to [the client’s] brokers. There were, however, no brokers asking to see the letter from Mr Natt at either point – the broker story was therefore a complete fabrication.”

Natt said there were seven versions of the IMs that the client shared with him, but none of them made any reference to s21 and that he was unaware that the client intended to use the approval statements he provided in the IMs. 

The judge viewed the fact that there was no evidence the chartered accountant had seen the versions of the letters that contained the s21 approval statement, or that the versions sent to Natt in March 2015 where the statement had been “whited-out”, as proof that the client had concealed that the letters were being issued to retail investors with the approval statement. 

ICAEW investigation

Meanwhile, the Professional Conduct Department (PCD) asked Natt why he provided the s21 approval statement when the firm wasn’t authorised to provide it. Natt claimed that he was providing a comfort letter that would be shown to the FCA-approved brokers. 

He added that the client had repeatedly told Natt that his brokers required the accountant to provide assurance that the financial projections were accurate and had been properly compiled. 

While Natt was under the impression that the letters were a preamble to give context to the opinion about the financial projection, the chartered accountant accepted that he failed to exercise professional scepticism. The tribunal concluded that had Natt approached the client’s request with the requisite scepticism he would not have provided him with the wording he was insisting on. 

Clear deception

ICAEW’s investigation committee recognised that Natt had been a victim of “clear deception”, but the fact still stood that he should not have provided the statements and, as a result, consumers were misled by the client into investing and had lost a huge sum of money. The statements Natt provided contained no caveats explaining their purpose and read as if the firm had given the appropriate approval. 

ICAEW maintained that Natt should have used more professional scepticism and conducted fuller enquiries. 

Natt’s representatives counted that the chartered accountant was a victim of a deceit and any consequences from the communications were due to the client’s deception, not the partner. 

The tribunal agreed that the financial loss to the investors couldn’t be directly attributed to the accountant but should be aimed at the client’s “sophisticated deception”. 

In Natt’s favour was the fact he had self-reported the matter and had cooperated and engaged with ICAEW throughout the process, and he did not know at the time that the client was acting dishonestly. 

The tribunal raised concern that Natt didn’t seek advice before he provided the statements seeing as the firm was not authorised to issue a section 21 statement. 

In sentencing Natt, the tribunal took into account his unblemished 33-year membership with ICAEW and considering he is close to retirement, it didn’t think additional training was appropriate. 

The tribunal concluded that the appropriate punishment would be a severe reprimand, a financial penalty and he was ordered to pay ICAEW’s costs.

Replies (7)

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the sea otter
By memyself-eye
07th Aug 2023 18:00

What, no comments?
The lesson here is never say anything to anyone, ever.

Thanks (5)
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By Bill34
08th Aug 2023 07:53

The judge raised that the client even asked Natt in an email for the letters to be put on the firm’s letterhead to be shown to the brokers.

Thanks (1)
7om
By Tom 7000
08th Aug 2023 10:12

I wonder if he got the 2k fine and 8k costs back off the client?

Thanks (0)
Replying to Tom 7000:
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By Casterbridge Hardy LLP
08th Aug 2023 11:57

Ho ho!

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By Postingcomments
08th Aug 2023 12:02

Naive or part and parcel of the deception?

At his age he should have known better - so maybe he did.

Thanks (1)
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By AndrewV12
09th Aug 2023 09:31

Natt was described as being “a little naive” and his disciplinary should be seen as a lesson to accountants to apply the requisite amount of professional scepticism to client requests.

Normally being a little native does not cost you £10,970.

Thanks (0)
Replying to AndrewV12:
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By Hugo Fair
10th Aug 2023 13:54

That may depend on which giants you encounter (and their intentions)? :=)

Thanks (3)