Administrative law – Decisions of administrative tribunals – Institute of Chartered Accountants – Investigations – Accountants – Disciplinary proceedings – Professional misconduct / conduct unbecoming – Penalties and Suspensions – Judicial review – Evidence – Procedural requirements and fairness – Natural justice – Failure to provide reasons – Standard of review – Reasonableness simpliciter – Correctness
Barrington v. Institute of Chartered Accountants of Ontario,  O.J. No. 1136, 2010 ONSC 338, Ontario Superior Court of Justice, March 22, 2010, J.M. Wilson, S.N. Lederman and K.E. Swinton JJ.
Livent was a high profile, public company and “leading promoter of live musical entertainment and musical theatre in Canada and the United States”, with significant real estate holdings. Livent was co-founded by Garth Drabinksy (“Drabinsky”) and Myron Gottlieb (“Gottlieb”), who remained its largest shareholders and most senior corporate officers after Livent went public. Livent had a history of “aggressive revenue reporting” in its financial statements.
In 1997, the accounting firm of Deloitte & Touche (“Deloitte”) conducted an audit of Livent’s financial statements. Although Livent was responsible to prepare its financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”), Deloitte was responsible to review audit evidence and satisfy itself that it could opine that the financial statements were prepared in accordance with GAAP.
Power was the lead client services partner, Barrington the “advisory partner on Livent engagement” and Russo the audit client service provider for Livent in 1997. Deloitte viewed the engagement as Livent’s auditors to be high risk. Working papers from the 1997 audit disclosed a need for “an increase in the professional skepticism of all personnel involved in the audit engagement.” In April 1998, Deloitte issued an unqualified audit opinion approving Livent’s 1997 Canadian financial statements. The statements were signed by Drabinsky and Gottlieb, rather than by the chief financial officer.
In 1998, Livent was sold. Problems with Livent’s books were identified soon thereafter. An internal investigation was conducted by Livent’s new management, resulting in restatement of Livent’s 1996 and 1997 financial statements. Drabinksy and Gottlieb were charged (and later convicted) for fraud.
The Professional Conduct Committee (“PCC”) of the ICAO charged Barrington, Power and Russo with professional misconduct alleging breaches of GAAP due to releasing the unqualified opinion in 1997, and some breaches of Generally Accepted Auditing Standards in the conduct of the 1997 audit. There was no allegation that the three accountants should have known or discovered the fraud.
The particulars of the professional misconduct charges against Barrington, Power and Russo included an allegation that certain revenues should not have been recognized in the 1997 financial statements.
A discipline committee (“DC”) of the ICAO held a 34-day hearing into the charges. On February 11, 2007, a 77-page decision was rendered finding Barrington, Power and Russo guilty of professional misconduct on all charges.
During the DC hearing, evidence was presented about an agreement called the “Put agreement”, which was an agreement included in a transaction between Livent and Dundee Realty to develop lands at Pantages Place. The Put agreement provided Dundee Realty with a limited right to exit its investment by transferring its shares and debentures back to the development corporation, allowing Livent to become majority shareholder of the development and ending Dundee’s involvement. Livent wanted to recognize the revenue under the Dundee/Livent agreement in the second quarter ending June 30, 1997. The Deloitte audit team advised that it would not be appropriate to recognize the revenue in the second quarter, and that GAAP required that it be recognized in the third quarter, after the agreement had closed. In addition, Deloitte advised that the Put agreement was not in accordance with GAAP, and had to be removed. There was evidence that Livent told Deloitte the Put agreement had been removed, when in fact it had not. Deloitte tried to determine whether it had been lied to by Livent management, and whether it therefore ought to resign as Livent’s auditor. Deloitte put Livent on notice of certain conditions it would be required to meet in respect of these issues in order for Deloitte to continue as its auditors. None of the experts who testified at the DC hearing took issue with the appropriateness of the steps taken by Deloitte to confirm that the Put agreement had been rescinded within the required timeframe. Despite the lack of criticism by any expert witness, the DC found certain of the professional misconduct charges against Barrington, Power and Russo had been proved “because of the Put agreement.”
The DC also reviewed a number of other charges, substantiating some (e.g. failure to obtain sufficient audit evidence of unsupported transactions and additions to Livent’s fixed asset accounts), and dismissing others (e.g. amortization of pre-production costs). In conclusion, the DC discussed whether the breaches constituted professional misconduct and commented:
“As these departures individually constitute professional misconduct, it follows that collectively, they constitute professional misconduct. Also, collectively, they reveal the essential nature of the misconduct, namely an improper exercise of professional judgment with respect to the reasonable suspicions about the Put and the failure to reconsider their planned auditing procedures. The auditors said their scepticism was “sky high”. However, with respect to the impugned conduct, the evidence disclosed that the auditors failed to exercise the professional scepticism required in the circumstances. (para. 66)
The DC imposed a reprimand, a $100,000 fine, and costs of $417,000, against each of Barrington, Power and Russo.
An Appeal Committee (“AC”) of the ICAO heard an appeal by the three accountants, and dismissed the appeal.
The Court turned to the standard of review question. Prior to Dunsmuir, decisions of the ICAO, AC were reviewed on a reasonableness standard on questions of penalty. The Court held that reasonableness applied to disciplinary decisions of the ICAO (DC and AC) as a whole, given that there was no privative clause or statutory right of appeal, the AC had expertise relative to the Court on issues of what constituted professional misconduct and the determination of appropriate penalties, and the questions were ones of mixed fact and law.
The AC’s conclusion that the DC had jurisdiction to award costs was held to be a true jurisdiction question to which a standard of correctness applied.
Procedural fairness was also considered, with the question being whether the appropriate level of procedural fairness was accorded.
The Court held that Barrington, Power and Russo were denied procedural fairness based on a lack of notice respecting certain charges. The case against them was not appropriately disclosed to them, and therefore the DC had breached the rules of natural justice and procedural fairness.
The allegation appeared to be that they had failed to comply with GAAP because significant acts remained to be completed in relation to the AT & T and Dundee transactions. The PCC never raised the issue concerning treatment of the Put agreement and its significance in relation to these charges. Although none of the experts testified as to the Put agreement being significant, the DCC based its finding that that accountants had not met the standard because there was no reasonable assurance that the significant acts were completed on “suspicions about the likely existence of the Put” that had “not been dispelled.
No notice was given that a case would be made that the accountants did not have “reasonable assurance that significant acts remained to be completed because of the Put”. Indeed, the PCC never even made a submission to this effect, but the DC found against the accountants on this basis.
The Court held that the accountant’s were prejudiced by the DC’s focus on the Put issue. The accountants were not given appropriate notice to allow them to respond and the DC denied them natural justice by proceeding in this fashion.
The AC did not find DC to have erred in respect of these charges, and repeated many of the DC’s errors. The convictions on these charges were set aside.
The DC did not err in law in the way it articulated the test for professional misconduct. The DC had to determine what the standard of practice was, and then determine whether there had been a breach of the standard. However, the DC misstated the concept of professional judgment in finding that there can be only one correct conclusion, whereas “the honest and intelligent exercise of judgment is not misconduct, even if the conclusion is wrong.” (para. 162).
The Court held that the AC’s conclusion that the defence experts’ opinions were based on a faulty factual foundation, and the decision to reject their evidence, was reasonable in the circumstances.
The findings of misconduct against the three accountants on other charges were upheld as reasonable, based on a review of the evidence. The issue of the appropriate level of professional skepticism was standard of the profession. It was central to the professional misconduct finding on certain charges because it was important to the proper assessment of the reliability of the management’s representations and estimates. The failure to apply the appropriate level of skepticism made the errors significant enough to constitute professional misconduct.
On some charges, the Court held that the DC did not provide sufficient reasons to explain how skepticism played a role in the errors identified. The particulars of those charges did not relate to a “failure to properly assess the reliability of the management’s representations.” The DC did not state that Power and Russo’s consideration of whether the transaction in question was properly a sale or financing, or whether a contingent liability should have been disclosed on the financial statements, was based on accepting the management’s representations or otherwise required increased professional skepticism by them. The DC did not refer to the applicant’s expert evidence that their exercise of professional judgment was reasonable. The DC did not discuss the fact that the treatment of the impugned transaction as a sale was not changed upon reissuance of statements after discovery of the fraud. Thus, the Court was left with a finding of mere error of professional judgment over which there was conflicting expert evidence. The convictions on these charges were quashed as unreasonable.
Although the DC has the authority to award costs of the investigation and hearing under the bylaws to the CA Act, the jurisdiction to award costs is limited by the provisions of the Statutory Powers and Procedure Act (“SPPA”), given that at the SPPA prevails in case of a conflict with another statute.
The Bylaw provides for no limits on costs awards, whereas the SPPA requires a findings that a party’s conduct is unreasonable, frivolous or vexatious or that the party has acted in bad faith, and that the tribunal has made rules governing the award of costs, as preconditions to a costs award aimed at provided fairness to the parties. Thus, there was a conflict and the SPPA provisions should have governed. The costs award was quashed.
Disposition of the Applications was as follows:
Barrington’s application for judicial review was granted. The decisions of the AC and DC, and the costs award, and penalty against him, were quashed.
Power and Russo’s judicial review applications were granted in part.
None of these charges were remitted for rehearing. The penalty decision against Russo and Power was set aside and remitted for hearing because the basis for the finding of professional misconduct against them was significantly changed by the Court’s conclusions.
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