ICAEW Consultation on new Disciplinary Sanctions Guidance

The ICAEW is currently consulting on a new Disciplinary Sanctions Guidance to be used by the ICAEW’s Conduct Committee, Tribunals Committee and Appeal Committee when considering disciplinary allegations. [1]

Introduction

We have set out below our summary and comments on some of the key changes being proposed. We also address two issues that seem to us as important based on our experience of acting for firms and individuals in investigations/disciplinary proceedings under the ICAEW Disciplinary Bye-laws and associated Regulations – namely (a) the absence of an early settlement regime; and (b) the danger of regulatory overlap.

We have focused below on how the draft Sanctions Guidance ("the Proposals") may affect auditors in particular, however the Proposals also introduce new and updated sections on other areas of practice regulated by the ICAEW including a new section on breaches of the Professional Conduct in Relation to Taxation (PCRT); a revision to sanctions impacting on Insolvency Practitioners; and an updated section on anti-money laundering compliance.

• Purpose of the Consultation
• Length and detail
• Increased overarching guideline amounts for financial penalties
• Increased penalties for failure to cooperate
• Other key sanction increase points
• Allegations of defective audit work
• Aggravating and Mitigating factors
• Clyde & Co comments

Purpose of the Consultation

The ICAEW’s intention, as stated on their website, is to:

• “Improve the clarity, consistency and usability of the guidance for decision-makers and those subject to disciplinary proceedings.
• Ensure sanctions are proportionate to the seriousness of the misconduct.
• Promote transparency and fairness in outcomes.
• Reinforce ICAEW’s commitment to acting in the public interest.”[2]

Key changes/issues to consider

Length and detail

The immediate notable change is in the length of the Proposal, which runs to 133 pages in contrast to the Current Guidance’s 79 pages. Whilst the Current Guidance is for use both by the ICAEW’s disciplinary committees and regulatory committees, the new guidance is limited in its scope to use by the disciplinary committees only.  Overall, we can therefore expect in the future the package of guidance on sanctions to be far lengthier and more detailed than it has been to date.

Increased overarching guideline amounts for financial penalties

As with the Current Guidance, the Proposal includes a list of financial penalty starting points depending on the seriousness of the allegation.  The Proposal increases the overarching guidelines per category, which the ICAEW states on its website is to be in line with inflation.  For ease of reference, we have created the below table to show the Current Guidance bands against the Proposal:

We consider that clearly these figures cannot have been updated only with inflation in mind (as this would suggest a range of inflation between 25% and 100% since June 2023, i.e. the date the Current Guidance came into effect).  However, the consultation document itself asks whether “the revised financial penalty bands appropriately balance deterrence, fairness and inflationary adjustments”. Therefore, there seems to be some acknowledgement in the consultation that the changes go beyond inflationary concerns and into ensuring the punishment has a deterrent effect.  In any case, these increases are significant, whilst continuing to be of a lower order of magnitude than fines imposed by the FRC in public interest cases under the Accountancy Scheme or the AEP.

Increased penalties for failure to cooperate

There are also increased sanctions in respect of failing to cooperate with ICAEW investigations.

The consultation is clear that the Proposal if enacted in its current form will mean that the following examples of non-cooperation will attract a higher sanction than they do currently:

• “Failure to comply with a Disciplinary Bye-law (DBL 8) Notice to produce information/documents;
• disregard of a formal order issued by a Disciplinary Tribunal; and
• persistent or repeated non-cooperation that impedes ICAEW’s ability to regulate effectively.”[3]

Notably the aspect of “persistence” is only included for the final bullet point above, indicating that under this proposal the ICAEW does not envisage that non-compliance with its disclosure requirements under DBL 8, or “disregard” of a formal order, will need to have involved persistent breach before the higher sanctions come into play.

Other key sanction increase points

We also note that the Proposal includes:

a. Increased sanctions in respect of ethical breaches and also new distinct sanction starting points for ‘Discrimination/Harassment/Bullying’ and ‘Sexual Misconduct’.

 b. Creating a distinct category for cases of ‘Dishonesty’ with its own indicative sanctions table that is set apart from the section on ethical breaches. Whereas in the Current Guidance an allegation of dishonesty would fall under the ethical breach of “Failure to comply with the Fundamental Principle of Integrity”, dishonesty now carries its own sanction starting point (exclusion and a category A financial penalty) which is not tiered by seriousness.[4]. We can surmise that the Proposal wishes to bring dishonesty out as more significant allegation in its own right and for it to be treated more robustly; however there is no clear guidance on the thresholds or characterisation of what might be deemed ‘dishonesty’.

c. The Proposal includes express wording that in respect of ethical breaches arising in audit matters “Committees/Tribunals when imposing a financial sanction can increase or decrease a financial penalty having had regard to a firm’s annual turnover or the annual income of an individual.” [5]

d. The same wording quoted immediately above is also included in the section for specific audit breaches (page 42 onwards in the Proposal). It is our view that this may tie in to the ICAEW’s wish to ensure that there is sufficient proportionality, robustness and fairness in outcomes.  Although not explicitly stated, the consideration may be that for the larger audit firms a category A penalty (£25,000) is not be considered a sufficient deterrent. 

e. There are also increased sanctions starting points in respect of certain specific audit breaches (again, from page 42 onwards in the Proposal), so when taking the example of an allegation that a firm was acting as auditor when not registered/ineligible, in the Current Guidance a ‘very serious’ audit case would have a starting point for sanctions of a severe reprimand and a category A financial penalty. Under the Proposal, the starting point for a very serious audit case is a severe reprimand and a financial penalty equal to 2 x audit fee or a category A financial penalty, whichever is the greater. Even leaving aside that a category A financial penalty will increase by £5,000 under the Proposal, the introduced multiplier could mean a significantly increased penalty especially for a large audit.

Allegations of defective audit work

The Current Guidance includes starting points for sanctions on the firm and separately the RI/second review partner for either “Audit work of a seriously defective nature” or “Lesser forms of bad audit work”. The new Proposal introduces a three-tiered approach to allegations of defective audit work.  The ICAEW’s stated view is that this does not sufficiently cover the spectrum of defective audit work and therefore an additional middle tier between serious and less serious has been added as “Audit work of a defective nature” to cover “where some or limited assurance work was performed and/or the assurance work related to significant areas and/or the assurance work falls between Seriously Defective and Lesser Forms of defective work.”[6] We understand that this is intended to sweep up those cases which do not appear to fall into either of the previous binary categories.  We also note that for audit work of a seriously defective nature, the multiplier for the potential sanction has increased (from 1.5 x the audit fee to double the audit fee).

Aggravating and Mitigating factors

The Proposal includes updated common and breach-specific aggravating and mitigating factors.

Although we do not in this article go into all the changes, it is notable that there appears to be an intention in the Proposal to provide further scope for individuals to claim personal mitigation e.g. difficult family circumstances, and perhaps most noteworthy from a firm’s perspective, a “lack of workplace support at the time of the misconduct that may have influenced the conduct. Such factors may help provide context to the subject’s actions.”[7]

Clyde & Co comments

As set out above the proposed changes reflect a trend towards higher financial sanctions. Whilst, unlike the FRC, the ICAEW’s financial sanctions are principally based on a tariff structure – the changes further allow the ICAEW flexibility to impose potentially much higher sanctions particularly in respect of ethical breaches which could be considerable.

It does also seem to us that there are two issues which should be addressed as part of any changes to the sanctions regime:

(a) Regulatory Overlap/double jeopardy

As with the existing guidance on sanctions, it remains the case in the Proposal that where there has been a criminal conviction or where another regulatory body has imposed a sanction, a Respondent can be subject to further sanctions by the Disciplinary Committee. However, the Proposal expands its guidance in respect of sanctions by other regulatory bodies further (at section 5 of the Proposal) setting out that:

“Where a Court has made a sentencing order, or where another regulatory body has imposed a sanction, against the subject of the allegation, this should be taken into account by the Disciplinary Committee. However, they should not prevent the Disciplinary Committee from imposing further sanctions, particularly non-financial sanctions, if it considers that it is appropriate to do so.

…

“the Disciplinary Committees are equally unfettered by a sanction imposed by another professional body and are free to impose whatever sanction they deem to be appropriate to mark the conduct. Due consideration should be given however where a financial penalty has been imposed by another body and the principle of proportionality should be given due weight in the Disciplinary Committee’s considerations and decision. However, it should always ensure that the sanction properly marks the conduct.”

In circumstances where regulatory regimes overlap (for instance a CASS auditor may be subject to investigation and sanction by any of the FCA, FRC and ICAEW), we do not think that it should be the case that a member maybe be subject to a lengthy investigation into potential audit failings by one regulator and then also subject to an investigation and/or sanction into the same matter by another – and effectively sanctioned twice for the same failings. That seems to run counter to (a) the usual principles of proportionality and fairness; and (b) the Government’s instruction to regulators to reduce unnecessary regulatory burden. It may also give rise to potential double jeopardy.

(b) Early Settlement and discount 

A common observation amongst firms is that ICAEW investigations are often very lengthy. As things stand no provision in the sanctions regime exists whereby there is a meaningful discount to incentivise a quick and early resolution prior to the conclusion of an investigation (possibly because of the lack of a resolution procedure in relation to that stage within the Disciplinary Bye-Laws).

Whilst there are some proposed changes to the wording on discounts to financial sanctions, the level of discount that can be applied where a full and unequivocal admission has been made remains capped in the Proposal at the current 30% and is only available once a Consent Order has been served (i.e. after the conclusion of a potentially very long period for investigation). It does not seem to us that there is any compelling reason to cap the settlement discount available nor should it be necessary for there to be a “full and unequivocal admission” where for instance parts of the complaint or investigation report may be flawed (and there might be agreement to that end between the Conduct Department and the firm). In our view, consideration should be given to removing these constraints and providing a further discount for (a) an early settlement prior to a Consent Order being offered; and (b) further discounts for exceptional co-operation.  

If you would like to discuss this article or any of the issues arising from it, please contact Tim Crockford (tim.crockford@clydeco.com), Andrew Forsyth (andrew.forsyth@clydeco.com) or Bertie Rooke (Bertie.rooke@clydeco.com)