Unprofessional behaviour in the accountancy world – how is it regulated?

Inappropriate behaviours inside and outside work, including sexual misconduct, bullying and harassment, have increasingly come under scrutiny by several professional services regulators.

Following the High Court’s controversial judgment in Beckwith v SRA [2020] EWHC 3231 (Admin) and an increase in sexual misconduct complaints being lodged against solicitors, the Solicitors Regulation Authority (“SRA”) published new guidance on sexual misconduct (effective 1 September 2022), becoming the first professional services regulator in England and Wales to explicitly set out to its regulated community its expectations in relation to such conduct.

The Beckwith case sent a cautionary message to all professional services regulators that popular outcry around inappropriate sexual behaviours does not in itself provide “proof that a particular set of events gives rise to any matter falling within a regulator’s remit.” Importantly, the SRA guidance attempts to (loosely) demarcate situations relating to sexual misconduct where it will take action, suggesting it will consider how close any behaviour is to a person’s professional practice, the seriousness of the conduct in question, and relevant context.

Since Beckwith, the SRA has significantly increased its focus on workplace culture and wellbeing in law firms. In February 2022, the SRA published its “Workplace Culture Thematic Review” alongside new guidance for firms on the “Workplace environment: risks of failing to protect and support colleagues”. This was swiftly followed by amendments to the SRA Codes of Conduct to include an explicit requirement for individuals and firms to treat colleagues fairly and with respect, not to bully, harass, or discriminate unfairly against them, and for law firm managers (partners) to challenge behaviour that does not meet this standard. These new rules came into effect in April 2023.

So where does this leave other professional services regulators?

While the SRA has led the way in laying down guidance and introducing explicit rules relating to unprofessional behaviour, such behaviours are equally on the radars of the UK’s financial services regulators. The upward trend in allegations of inappropriate sexual behaviour across the financial services sectors over the past five years is pushing it up the regulatory agenda.

On 25 September 2023, the FCA published Consultation Paper CP23/20 on “Diversity and inclusion in the financial sector – working together to drive change” with its stated aim of “boosting diversity and inclusion to support healthy work cultures.” The consultation proposes a widening of the FCA’s remit to include the regulation of non-financial misconduct such as bullying, harassment and sexual misconduct within the workplace and similar serious behaviour in an individual’s personal or private life. If the proposals are adopted, they would represent a substantial expansion of the FCA’s remit over regulated firms.

Unprofessional behaviour in professional accountancy

In December 2018, two Big Four accounting firms, KPMG and Deloitte, disclosed that over the preceding four years, 7 and 20 partners respectively had been dismissed following internal investigation for unprofessional behaviour, including sexual harassment and bullying. These disclosures prompted questions around the roles that the FRC and accountancy bodies should play in tackling such behaviours in their regulated communities.

One of the five pillars of the FRC’s Audit Firm Monitoring and Supervision (AFMAS) framework focuses on values and behaviours. Traditionally, the FRC’s concern has primarily targeted a firm’s values and behaviours where it negatively impacts audit quality and the arrangements firms have in place to support this.

However, signs of a change in direction was noted in July 2019 when the FRC issued a request to the six largest audit firms for their policies and procedures relating to the reporting of and response to non-financial conduct matters. Specifically, the FRC asked firms for such policies and procedures should include “those which cover bullying and harassment, discrimination and alcohol/substance abuse”. Its rationale for doing so was clearly stated:

“Under the values and behaviours pillar, we wish to build on our current framework of interaction with the firm to understand and assess the design and effectiveness of the policies and procedures the firms have in place to facilitate the reporting of and response to non-financial conduct matters … Under the AFMAS framework we are also seeking to establish a clear process for the regular reporting to the FRC of the level of non-financial conduct complaints and how those complaints are dealt with … This will provide us 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.”

The FRC further made its expectations clear that from 30 September 2019, the six largest audit firms will be expected to notify the FRC of incidents which could pose a threat to the reputation of the firm, including matters related to non-financial conduct, with the aim of providing the FRC with assurance that the firms have effective monitoring arrangements in place.

It is now more than four years since the FRC’s initiative into non-financial misconduct was launched and we understand that the regulator continues its monitoring of policies and procedures in the regular Audit Quality Reviews that it undertakes with firms falling within its regulatory remit. The FRC’s interest in non-financial misconduct may be read broadly to include sexual misconduct, sexual harassment, discrimination and bullying that is committed inside or outside the workplace, demonstrating its increasing focus on unprofessional behaviours beyond those that may directly impact audit quality. This represents a marked shift in the FRC’s position, from a policy perspective if not from an enforcement one. That interest will still be on the table despite few public developments since. Indeed, it may be on the agenda to be taken forward by the FRC’s successor, ARGA.

For the time being, however, it appears that the professional accountancy bodies are engaging in a greater level of regulatory activity in this area.

 the icaew strengthens its position 

Over the past three years, the ICAEW has demonstrated its growing intent on addressing unprofessional behaviour through successive policy changes and statements.

• 1 October 2020 – ICAEW revises its guidance on the duty to report misconduct for the first time since August 1993                                                                                                                                                                                                                      Definition of inappropriate behaviours includes sexual misconduct and harassment of work colleagues or other persons outside of the workplace.
• 13 July 2021 – Consultative Committee of Accountancy Bodies (CCAB), of which the ICAEW is a member, issues new guidance                                                                                                                                                                                                        CCAB guidance on the boundaries of professional and private behaviour sets out, for the first time, a list of agreed principles which will apply when a professional accountant’s behaviour in their personal life could become of regulatory interest.
• 7 October 2022 – ICAEW raises awareness on unprofessional behaviour                                                                                                                                                        ICAEW publishes an article – “Calling our unprofessional behaviour” – dealing with a number of matters which it considers to be reportable, including sexual misconduct and plagiarism, and making it clear that it takes all reports of such conduct very seriously.  
• 1 June 2023 – ICAEW updates duty to report misconduct again         

                                                                                                                                          Although the ICAEW’s guidance on the duty to report misconduct had only just been updated in October 2020, the regulator deemed it necessary to update it again, this time with a more substantial broadening of the duty to report misconduct both in scope (what must be reported) and application (who must report).

  The current iteration of the duty to report misconduct guidance (effective from 1 June 2023) lowers the threshold in relation to the duty to report misconduct, removing the public interest requirement such that ICAEW members, firms, affiliates and relevant persons must now report to the ICAEW any events or behaviours which may indicate that they or another member firm, affiliate or relevant person may be liable to disciplinary action. Significantly, accountancy firms, in addition to individuals, are now obliged to report misconduct by themselves, another ICAEW member, provisional member or firm.

• 9 October 2023 – ICAEW cautions to keep Christmas parties professional                                                                                                                                                      With party season on the horizon, the message is sounded loud and clear from the ICAEW: “keep it professional” both inside and outside the office, and if you’re a member firm, the time is now to ensure you have up-to-date and robust policies about what is and what is not acceptable behaviour. Importantly for firms, the ICAEW will now hold firms accountable for failures to report unprofessional behaviour to the regulator. 

ALL POLICY AND NO action? 

Despite these policy developments, enforcement action for unprofessional behaviour in professional accountancy remains relatively rare. The ICAEW has taken action only once for sexual misconduct, imposing a sanction on a Big Four firm Partner in 2021 for “sexually suggestive comments” made towards a junior female colleague during an unofficial firm-organised skiing trip.

Notwithstanding the apparent lack of published disciplinary outcomes relating to unprofessional behaviours, the accountancy regulators are clearly starting to treat the stamping out of unprofessional behaviours as one of their regulatory imperatives. Indeed, the latest step taken by the ICAEW to broaden the duty to report misconduct and extend it to firms suggests that the regulator’s appetite for driving change and taking enforcement action where necessary has shifted up a gear.

 A New ERA FOR ACCOUNTANCY  FIRM RISK AND COMPLIANCE 

The message from the accountancy regulators is that unprofessional behaviour is a regulatory issue and will be investigated and treated seriously.  While we have not yet seen a noticeable increase in enforcement action by the accountancy bodies for matters related to non-financial misconduct, including those involving sexual misconduct, there has certainly been a distinct policy change over the past three years, suggesting the regulatory scope in this area will be further defined in the near future.

In light of the ICAEW extending the duty to report misconduct to member firms, this future is likely to involve greater accountability being placed onto firms and we expect the ICAEW will not go lightly in enforcing against failures by firms to take responsibility and report inappropriate behaviours promptly.

We are also yet to see what action the FRC may take, if any, if it considers that a firm’s arrangements for addressing unprofessional behaviour are deficient, or indeed what standards it will assess such arrangements against. Regardless, it is clear that the accountancy bodies are taking these issues seriously.

Close attention should be paid to the ICAEW’s revised guidance on the duty to report misconduct. This will include reviewing policies and procedures to ensure those relating to, for example, bullying and harassment, diversity and inclusion, social media use, whistleblowing, and reporting, are in place and working as they are intended to.

With the duty to report misconduct now extended to firms, we are certainly entering a new era for accountancy firm risk and compliance. Having robust internal investigations processes in place to respond quickly and effectively to complaints will be vitally important to help firms to identify and assess when an event or behaviour needs to be reported. Getting this wrong now carries a much greater risk for firms; leaving aside employment law and reputational considerations, firms must now grapple with the increased scrutiny of the regulator.

 

FURTHER INFORMATION

If you have any questions regarding this blog, please contact Julie Matheson in our Regulatory team.

 

ABOUT THE AUTHORS

Julie is a partner in the Regulatory team. Her expertise lies in advising professional services firms, particularly in the accountancy, audit and built environment sectors, on regulatory compliance, investigations and enforcement proceedings.