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January 30, 2015

FRC Deloitte appeal successful due to ICAEW code of ethics “lack of clarity”

By Isabella Grotto

The FRC has overturned several findings of misconduct against Deloitte in the case of the Big Four firm’s role as an advisor to failed British car manufacturer MG Rover, citing "a lack of clarity in the ICAEW’s guidance" as a mitigating factor.

Following an appeal on 29 September 2014, the independent Appeal Tribunal overturned eight out of the original 13 counts of misconduct identified in a 2 September 2013 ruling and is now considering the level of sanctions to be applied.

At the time of the original ruling, the FRC cited instances of "a persistent and deliberate disregard" for the principles and statements of the Institute of Chartered Accountants of England and Wales (ICAEW)’s code of ethics.

Among the 13 counts against Deloitte alleged by the FRC, the Tribunal found the firm failed to manage the conflict of interest entailed by its dual role of advisor to businesses involved with MG Rover and its acquirers and auditor to the carmaker.

In light of the 2014 findings, Deloitte was ordered to pay a record fine of £14m, while a £250,000 penalty was also imposed on one of the firm’s partner at the time of the facts, Maghsoud Einollahi.

In the latest development in the case, the Appeal Tribunal said, following its comprehensive review of the need for accountants to act in the public interest, it had concluded in favour of the need for accountants to take such factors into consideration when accepting or continuing an engagement.

However, it also identified "a lack of clarity in the ICAEW’s guidance for accountants on how they should do that" and promised the FRC would continue to work with the profession to address the issue.

FRC executive director of conduct Paul George said: "The FRC welcomes the Appeal Tribunal’s decision that there were some significant issues of misconduct in this case concerning the need for accountants to act with objectivity.

"Firms should identify who the client is at as early a stage as possible so that any conflicts of interests can be addressed," he explained, "In the event of a change in clients it is also essential to inform a previous client of the change and of the need to obtain independent advice."

George added: "Threats of self-interest in relation to fees must also be safeguarded. These are important measures in safeguarding and maintaining confidence in the accountancy profession and in upholding the standards expected of members."

Commenting on the Appeal Tribunal’s ruling, a spokesperson for Deloitte said: "We are pleased that the findings of failing adequately to consider the public interest and deliberate serious misconduct have been overturned," adding that the findings were "entirely unreflective of the integrity and values" of the firm.

In relation to the remaining counts, the spokesperson added: "However, we accept the Tribunal’s findings that aspects of our client engagement processes could have been better.

"As part of the continuous review of our internal guidelines, which have been strengthened regularly in the 14 years since this project, we will consider whether any further action is required."

Commenting on the ruling, ICAEW chief executive Michael Izza said that a fuller understanding of the details of the Tribunal’s ruling should precede "any firm conclusions".

However, he added: "Today’s ruling suggests there needs to be greater clarity for the accountancy profession with regard to its public interest responsibilities."

The case pertains to Deloitte’s role as advisors to MG Rover in 2005.

The car maker was acquired by four businessmen in 2000 for the nominal sum of £10. Despite a £6.5m government loan, the business went into administration in April 2005, with debts of £1.4bn.

The sanction originally imposed by the FRC on Deloitte marks a record sum, well above the £1.4m PwC was fined in 2012 over its audit of US lender JP Morgan.

 

Related articles:

Deloitte subject to formal complaint by FRC over Aero scandal

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