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Reporting Misconduct - Updated ICAEW Guidance puts the spotlight on personal behaviour

  • United Kingdom
  • Employment litigation and dispute resolution
  • Financial services disputes and investigations
  • Litigation and dispute management

19-10-2020

Many regulators, including the FRC and ICAEW, require firms and/or individuals to report misconduct to them. While the rationale for such reporting is well understood, determining the circumstances in which a report should be made is not always straightforward.

The ICAEW has recently updated its guidance on the duty to report misconduct (Guidance on your duty to report misconduct as an ICAEW member | ICAEW effective 1 October 2020). Its stated aim of providing further clarity on what does and does not need to be reported is to be welcomed. However its apparent breadth (while supplemented by helpful examples) may mean it does not achieve its intended objective. Either way, firms and individual members need to ensure they are familiar with the guidance, given the duties placed on ICAEW members in relation to their own conduct and that of others.

ICAEW Guidance and the Duty to Report

Under Disciplinary Bye-laws 9.1 and 9.2, ICAEW members have a positive duty to report misconduct of individual members or firms where it is in the public interest to do so. The obligation arises when the member has a reasonable belief that there has or may have been misconduct.

What is in the public interest can be a difficult judgment call. The guidance describes it as misconduct which, if it were to go unreported, could adversely affect the reputation of the ICAEW and/or the accountancy profession. This wording could potentially cover a very wide spectrum of conduct and the guidance expressly includes professional and personal activities.

For example, there is a duty to report (i) breach of any ICAEW bye-law or regulation and (ii) conduct in the course of carrying out professional work or otherwise which is likely to bring discredit on the member or the accountancy profession or falls significantly short of the standards reasonably expected of an ICAEW member or firm.

The guidance provides non-exhaustive examples of misconduct in two appendices - one relating to professional activities and one relating to personal activities. Examples under professional activities include acting with a lack of integrity and intentionally providing misleading information. Personal activity examples include inappropriate use of social media, abusive behaviour and sexual misconduct/harassment.

Non-financial misconduct

It is not surprising that the ICAEW’s updated guidance refers specifically to personal activities. This is also a focus for other regulators, including the FCA and the SRA.

In addition to the ICAEW guidance, the six largest accountancy firms also need to bear in mind their obligations to report to the FRC under the Audit Firm Monitoring and Supervision (AFMAS) framework. Under AFMAS, the six firms are required to report on a quarterly basis on the level of non-financial conduct complaints and how those complaints are dealt with. The FRC considers that this information provides it with “valuable assurance over the effectiveness of the monitoring arrangements that firms have in place, along with a picture across the industry of potential emerging areas of concern”.

Further, in accordance with the FRC’s “Risk Reporting protocol” letter of May 2017, the FRC expects these same firms to notify it of any incidents which could pose a significant threat to the reputation of the firm. In 2019, the FRC confirmed that this included matters relating to non-financial conduct and extended to all partners (not just audit partners) and RIs.

Kingman Review

At present, monitoring under AFMAS is conducted on a voluntary basis. However, the Kingman Review (published 18 December 2018) recommended that the monitoring of audit firms should not be carried out on a voluntary basis, but instead that the proposed new independent regulator, ARGA, should have statutory powers to carry out this monitoring work. Interestingly, the Kingman Review also suggested that the Government may want to consider an equivalent to the Senior Managers Regime (SMR), which operates in the financial services sector, to be adopted in respect of audit firms conducting public interest entity (PIE) audits. Under the SMR, the FCA considers non-financial misconduct to be very relevant to its assessment of a person’s fitness to perform a regulated role and any misconduct may also give rise to enforcement action.

It may be some time until we see whether anything similar to the SMR is adopted under the new legislation that will bring ARGA into being. The much-anticipated legislation has been delayed by Covid-19 and Brexit, but the pressure is growing on the Government to implement the reforms it has committed to. In the meantime, it is clear that both the ICAEW and the FRC are concerned about non-financial misconduct and how firms deal with it.

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