First time offenders avoid exclusion in ICAEW disciplinary hearing

In a decision published this month, ICAEW member firm Butterworth Barlow Ltd and its Directors, Gavin Butterworth and Barry Barlow, were given severe reprimands and fines following an ICAEW disciplinary hearing earlier this year.

The ICAEW disciplinary proceedings started as a result of a routine practice assurance visit undertaken by ICAEW’s Quality Assurance Department (QAD). QAD discovered that between November 2014 and March 2015 the firm had committed a number of breaches of the Clients’ Money Regulations (CMR). 

The breaches occurred because the firm had been in a precarious financial position and needed to use client money to settle the firm’s financial liabilities when it was about to exceed its overdraft facility. The ICAEW investigation focused on the following breaches:

• Unauthorised withdrawals from client account in breach of regulation 21
• Failure to transfer client funds to the designated account within 30 days contrary to regulation 13
• Failing to obtain a bank trust letter as per regulation 9b
• Failing to carry out the minimum five-weekly reconciliations of the balance on its client account with the sums held on behalf of clients

Mr Barlow who had been a member of ICAEW since 2001 admitted the majority of allegations and that he was reckless as to whether transfers from client account were made in breach of the CMR. However, he denied knowing that the transfers were made in breach of the regulations. Mr Barlow claimed that at the time of the transfers he was suffering from a large number of personal problems, which affected his working capacity and ability to earn income for the firm.  As a result, the firm was in a precarious financial position and this clouded his judgment in respect of the transfers.  The tribunal rejected his submission and found that he fully appreciated that the transfers were contrary to the regulations.

Mr Butterworth had been an ICAEW member since 2002 and made similar admissions to Mr Barlow. He explained to the Tribunal that he was not very familiar with the CMR and, because of the precarious financial position of the firm, he did not stop to think whether he was breaching the rules. This was rejected by the Tribunal who stated “it is inconceivable that he did not realise he was breaching the rules regarding client accounts”.

The tribunal pointed out that the case concerned serious breaches of CMR. The most serious was using client money to meet the firm’s outgoings given that the unauthorised withdrawals were made to prevent the firm from going over its overdraft facility. The tribunal also found it significant that a sum of £10,000 was used to fund the business for over three months, and it was only capable of being repaid because the firm had been able to negotiate a loan.

When imposing the sanctions, the tribunal noted various mitigating factors including that neither the firm nor its directors had been the subject of any previous ICAEW disciplinary proceedings. It was also noted that no client had suffered any loss, and the directors had made early admissions, demonstrated contrition, they learnt lessons from their errors and they had not been repeated since.

The tribunal pointed out that were it not for the fact that they were first time offenders and had shown remorse, the starting point for sanction would have been exclusion. In the circumstances, the tribunal concluded that the firm and its directors ought to receive a severe reprimand and fines of £3,000 and £2,000 respectively.

Commentary

It is not uncommon for ICAEW disciplinaries to commence after practice assurance visits, as in this case. What is interesting and reassuring for accountants facing allegations of this nature is that the ICAEW did not allege dishonesty or a lack of integrity. This suggests that the ICAEW adopted a proportionate approach to the charges given the circumstances of this particular case. When thinking about defence tactics, early admissions are usually advised. However, this case highlights that there can be a tactical advantage in not making early admissions to a knowledge allegation because it may reduce the likelihood of a regulator pursuing an integrity or dishonesty allegation.

Sian Jones is a lawyer in the Regulatory team with expertise in advising regulated professionals across the finance, legal and health sectors.