HEARING DISCIPLINARY COMMITTEE OF THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS. Heard on: Tuesday, 02 and Wednesday, 03 October 2018

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1 DISCIPLINARY COMMITTEE OF THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS REASONS FOR DECISION In the matter of: Mr Brian Charles Downs Heard on: Tuesday, 02 and Wednesday, 03 October 2018 Location: Committee: Legal Adviser: Persons present and capacity: The Adelphi, 1-11 John Adam Street, London WC2N 6AU Mr Ian Ridd (Chairman), Mr Jonathan Beckerlegge (Accountant Member) and Mr Robin Hay (Lay Member) Mr Leighton Hughes Mr Benjamin Jowett (ACCA Case Presenter) and Miss Rachael Davies (Hearings Officer) Summary: Allegation 1(a) Not proved Allegations 1(b),(c) and (d) found proved, and cumulatively to amount to misconduct Allegations 2(a) and 2(b) found proved, and cumulatively to amount to misconduct Allegation 3 found not proved in its entirety. OUTCOME: (i) Severe Reprimand (ii) Costs 10,000 EFFECTIVE DATE OF ORDER: At the expiry of the appeal period

2 1. The Committee had hearing bundles of papers paginated A-GG, 1-368, , , , and (the last two bundles not being before the Committee until the sanction stage of the hearing). 2. ACCA was represented by Mr Jowett. Mr Downs was unrepresented and participated by way of telephone link. 3. The Committee's Chairman had previously sat on a hearing of the Admissions and Licensing Committee concerning Mr Downs on 21 June Mr Ridd had no independent recollection of that hearing and was provided with no greater details by the Hearings Officer. Mr Downs was informed of this and consented to this Committee continuing to determine the present allegations as presently constituted. All Committee members and ACCA agreed with this course of action. APPLICATION TO AMEND ALLEGATION 3(a) 4. At the outset of the hearing Mr Jowett applied to amend Allegation 3(a) in order to refer to Section of the Code of Ethics and Conduct (as applicable in 2012), rather than the presently pleaded Section Mr Downs did not object to the application, and the Committee granted it, having been satisfied that the amendment could be made without prejudice to Mr Downs. ALLEGATIONS (AS AMENDED) Allegation 1 Pursuant to bye-law 8(a)(i), Mr Downs is guilty of misconduct, in relation to any or all of the following: (a) On or before 28 September 2012 Mr Downs signed an audit report to the accounts of Company A for the year ended 31 December 2011, certifying that he had undertaken the audit work identified in the report, when he had not undertaken that work sufficiently or at all. (b) Failed to retain the audit file for Company A for the year ended 31 December 2011 for five years after 28 September 2012 as required by International Standard on Auditing 230 then in force.

3 (c) On or before 28 September 2012 Mr Downs signed an audit report to the accounts of Company A for the year ended 31 December 2011, which was undated contrary to International Standard on Auditing 700 then in force. (d) Failed to perform an audit in respect of Company A for the year ended 31 December 2012 in accordance with Section 477 of Companies Act 2006 then in force. Mr Downs's conduct in relation to allegation 1(a) was: i. Dishonest, in that Mr Downs knew that he had not undertaken the audit work sufficiently or at all; and ii. Contrary to the Fundamental Principle of Integrity (as applicable in 2012) In the alternative Pursuant to bye-law 8(a)(iii), Mr Downs's conduct in relation to allegation 1(b) and/or 1(c) and/or 1(d) breached Global Practising Regulations 18(1) Annex 1 (as applicable from 2012 to 2013). In the alternative Pursuant to bye-law 8(a)(ii), Mr Downs's conduct in relation to allegation 1(a) and/or 1(b) and/or 1(c) and/or 1(d) breached the Fundamental Principle of Professional Competence and Due Care (as applicable from 2012 to 2013). Allegation 2 Between September 2008 and March 2014 Mr Downs failed to comply with ACCA s Code of Ethics and Conduct in that he: (a) In connection with the accounts prepared for Company A for the years ended 31 December 2009, 2010, 2011 and 2012 failed to retain a signed copy of the engagement letter contrary to section 3.18 (5) (as applicable in 2008 to 2010) and section B9 (5) (as applicable in 2011 to 2014)

4 (b) Failed to verify the identity of Company A and its director and/or retain evidence of the client identification work contrary to Section 3.8 (9) (as applicable in 2008 to 2010) and Regulation 7 of the Money Laundering Regulations 2007 (as amended) then in force. Allegation 3 (a) On 30 August 2012 Mr Downs sent an to Mr B, the sales manager at Company A confirming an arrangement with Company A and /or senior personnel of Company A that would financially benefit him or Downs & Co (Accountants) Limited contrary to Section of the Code of Ethics and Conduct (as applicable in 2012). (b) By reason of his conduct at 2(a) and/or 2(b) and/or 3(a) above, Mr Downs is: i. Guilty of misconduct pursuant to bye-law 8(a)(i); or ii. Liable to disciplinary action pursuant to bye-law 8(a)(ii) 5. Mr Downs denied all of the allegations save for allegation 1(c), which he admitted. ACCA's CASE 6. Mr Downs was a member of the Association of Authorised Public Accountants ( AAPA ), having been admitted as a member on 5 June Since 1996, AAPA members have been subject to the same regulatory and membership arrangements as apply to ACCA members. In 2016, all AAPA members had their membership transferred to ACCA. 7. Company A was a client of Downs & Co (Accountants) Limited from September 2008 until it was placed in liquidation on 14 March As the sole director of Downs & Co (Accountants) Limited (as set out in the ACCA report), Mr Downs was responsible for this client. 8. On 26 February 2014, Company A was subject to a compulsory winding up order on public interest grounds following an investigation by the Secretary of State for

5 Business, Innovation and Skills. A licensed insolvency practitioner was appointed liquidator of Company A on 14 March Allegations 1(a) and 1(b) 9. On or before 28 September 2012, Mr Downs signed the audit report of Company A for the year ended 31 December ACCA's case was that no evidence has been produced of any audit work having been undertaken by Mr Downs. An accounts working paper file was provided but it contained no audit working papers. 10. ISA 230 states that the audit file should provide evidence that the audit was planned and performed in accordance with ISAs and applicable legal and regulatory requirements. It is expected that an audit file would contain the following sections: i. Planning; ii. Programmes of work to be completed; iii. Audit tests; iv. Checklists; v. Completion/conclusion; vi. ACCA alleged that no audit working papers have been produced in respect of the audit of Company A. ISA 230 also provides: "The retention period for audit engagements ordinarily is no shorter than five years from the date of the auditor s report ACCA's case was that, in the absence of any audit documentation, the Committee could draw the inference that no, or no sufficient, audit work had been undertaken in connection with the accounts of Company A for the year ended 31 December 2011, and that no audit file had been retained as required. Allegation 1(c) 12. The audited accounts of Company A for the year ended 31 December 2011, which had been filed at Companies House, contained an auditor s report which was undated.

6 13. According to ISA 700: 41 The auditor s report shall be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor s opinion on the financial statements... A38 The date of the auditor s report informs the user of the auditor s report that the auditor has considered the effect of events and transactions of which the auditor became aware and that occurred up to that date... Allegation 1(d) 14. The accounts of Company A for the year ended 31 December 2012, which had been filed at Companies House, had not been subject to an audit. 15. According to Section 477 of Companies Act 2006: a company that qualifies as a small company in relation to a financial year is exempt from the requirements of this Act relating to the audit of accounts for that year. 16. GOV.UK provides further guidance and states that for financial years beginning before 1 October 2012, a company may qualify for audit exemption if it has both an annual turnover less than 6.5 million and assets less than 3.26 million. 17. According to the accounts filed at Companies House, Company A's relevant annual turnover was 19,329,380 and its assets were 3,590,906. It would follow that Company A did not meet the criteria for audit exemption. Allegations 2(a) and 2(b) 18. Company A had been a client of Downs & Co (Accountants) Limited since September The audit, accounts and correspondence files compiled by Downs & Co (Accountants) Limited in connection with the accounts prepared for Company A for the years ended 31 December 2009, 2010 and 2012 and the audit for the year ended 31 December 2012, did not contain a signed engagement letter nor any evidence of the client identification work having been completed by Mr Downs prior to accepting Company A as a client.

7 19. The files contained unsigned engagement letters dated 3 June 2010, 1 June 2011, and 1 March 2012, in respect of the financial years ended 31 December 2009, 2010 and 2011 respectively. 20. Section 3.18(5) (as applicable in 2008 to 2010) and Section B9(5) (as applicable in 2011 to 2014) provided:...the professional accountant (member) shall (must) ensure they retain a copy of the engagement letter which has been signed by the client Section 3.8(9) (as applicable in 2008 to 2010) provided: Before any work is undertaken, members should verify the identity of the potential client by reliable and independent means. Members should retain on their own files copies of such evidence Regulation 7 of the Money Laundering Regulations 2007 (as amended) then in force provided:...a relevant person must apply customer due diligence measures when he: (a) Establishes a business relationship... Allegation 3(a) 23. On 30 August 2012, Mr Downs sent an to Mr B, the sales manager at Company A, which stated:...it was agreed that any new recruits or existing contractors that you have in [Company A] that have not yet used the services of this firm and you introduce to us, then you will be paid a commission of 15% of the annual fee of each client for a period of three years...i hope that this meets with your approval [NAME REDACTED]...and that we can quickly move forward and that again it can be more business for you and more business to us. 24. On 4 September 2012 Mr B sent an to Mr Downs which stated:

8 I have spoken to [Director] and he has agreed with our arrangement Section (as applicable in 2012) defines "a close business relationship" and ACCA's case was that the exchange set out above evidenced the existence of a close business relationship falling within this definition. MR DOWNS'S CASE 26. Mr Downs gave evidence to the Committee. He said that he was close to selling his practice as an accountant, by reason of a combination of his advancing years and his ill health. He denied ever acting dishonestly or without integrity, and maintained that would never intentionally commit misconduct, or do anything that would be considered professionally wrong. 27. As to Allegation 1, Mr Downs said that he had carried out audit work in respect of Company A for the year in question and fully documented that audit. He stated that all the appropriate accounting and auditing documentation for Company A between 2008 and 2014 had been handed, by a member of his firm, to the representative of the Official Receiver. 28. Mr Downs said that the audit files included all accounting documentation in respect of Company A. In the audit files would have been the audit programme, details of the audit checks carried out, a bank certificate, a stock certificate and details of the company creditors at the accounting date. He said that the most important documentation would have been the audit programme, where it would have clearly been indicated what work had been carried out. He said that all correspondence was also on the audit files, which he described as ring binders that would have been marked "audit files." 29. Mr Downs had resigned his position as a registered auditor in He said that, with hindsight, perhaps he should have kept a copy of the audit files that he provided to the Official Receiver. However, he said that he had assumed that the files would be returned to him in due course, as that was what had always previously happened. He said that, in fact, they were returned to the client. 30. As to Allegation 1(c), Mr Downs admitted that the audit report to the accounts for the year ended 2011 was undated. "In mitigation", he said over the many years of his

9 practice, he had on occasions submitted documentation to Companies House and, that if there were obvious errors or omissions, they would be returned. He said that the audit report for Company A for the year ended 31 December 2011 had been accepted by the Registrar and had not been returned. Had they been returned he would have corrected the error straight away. 31. Mr Downs denied Allegation 1(d). His case was that he would not have known if an audit was required for that accounting period, until such time as the accounts had been formalised and the balance sheet was prepared. He said that when he saw that an audit was required he spoke to the representative of the Official Receiver, and was told to file the accounts without an audit. 32. Mr Downs strenuously denied any dishonesty or lack of integrity. He said that he had never been a dishonest person and never would be. 33. Mr Downs denied Allegation 2. He said that each year he sent out a "full pack" including signed bound accounts, the CT600 and two engagement letters. When returned signed those letters were placed in the permanent account file, which he said was handed over to the representative of the Official Receiver. As to the allegation that he failed to retain engagement letters, or to verify and retain client identification evidence, Mr Downs said there was "no way that could happen in this office". Furthermore, that the certificate of incorporation would be obtained, and a copy of the identification documents for the individual director would be on the individual director's file and the limited company file. Mr Downs said that, as was his normal practice, all the necessary documents were on the file when they left his office. Further that all of the appropriate identification documents had been obtained at the time of the company's incorporation, and that he would not have acted without those documents. 34. In relation to Allegation 3, Mr Downs said that Mr B was not an employee of Company A; he had a private limited company that was used to receive commission and payments from Company A. He said that the arrangement he entered into was with Mr B s company and not with Company A. He accepted that with hindsight he probably should not have made such an agreement, even with a separate company. However, he considered that he had done nothing wrong as he was ensuring that Company A was doing business with legitimate companies. Mr Downs said he that could not explain why Mr B referred to himself as the sales manager of Company A.

10 He denied that his conduct as alleged in Allegations 2 and 3 amounted to misconduct. Mr Downs said that none of the issues raised by ACCA in this hearing had been raised by the Official Receiver. THE COMMITTEE'S FINDINGS AND REASONS 35. The Committee bore in mind that ACCA had brought these allegations and the burden remained upon ACCA to prove its case. Mr Downs did not have to prove anything. The standard of proof was the balance of probabilities, but the Committee was mindful that it had to look for cogent evidence when considering an allegation of dishonesty. 36. Notwithstanding that Mr Downs participated in the hearing only by way of telephone link, the Committee had the opportunity to assess him during the course of his evidence. It found him to be a generally persuasive witness who was genuine in his indignation at the suggestion that he would have behaved in a dishonest or unprofessional way. Allegation 1(a) 37. In the absence of documentary evidence that any audit work was undertaken, ACCA submitted that the Committee should draw the inference that the only explanation was that no audit work had been undertaken. The Committee considered whether it could safely draw this inference, in the face of the unequivocal denial by Mr Downs. The Committee could find no reason for Mr Downs not to have undertaken the alleged audit work, or to have signed an audit report without having done so. This would have been contrary to the unchallenged evidence of his usual good practice. In the absence of cogent evidence to undermine the oral evidence of Mr Downs, the Committee could not be satisfied that Mr Downs had signed the audit report when he had not undertaken that work. Accordingly, the Committee found Allegation 1(a) not proved. Allegation 1(b) 38. There was no dispute that Mr Downs did not retain the audit file for the year ended 31 December 2011, but his explanation was that he had handed the file to the representative of the Official Receiver. The Committee was satisfied, on the clear

11 wording of Allegation 1(b) that the allegation was proved; whilst it would perhaps have been prudent for Mr Downs to have kept a copy of the audit file, it was evident that he had not retained the audit file itself. The Committee determined that merely by knowing that the audit file was in the possession of a third party, did not amount to Mr Downs "retaining" it. Accordingly the Committee found Allegation 1(b) proved. Allegation 1(c) 39. Allegation 1(c) had been admitted by Mr Downs and the Committee found it proved by way of that admission. Allegation 1(d) 40. Mr Downs had admitted that he had not performed an audit in respect of Company A for the year ended 31 December The Committee considered his explanation, but found it to be implausible. He had undertaken an audit for the previous accounting year and the Committee was satisfied that, in the absence of any obvious change in Company A's circumstances, he should have expected to undertake an audit for the following year. The Committee rejected Mr Downs's explanation and found it was unreasonable for him to have left preparation of a set of accounts until the very last moment. Accordingly, the Committee found Allegation 1(d) proved. 41. The Committee next considered whether the conduct found proved in relation to Allegations 1(b) and/or 1(c) and/or 1(d) amounted to misconduct. It was mindful that not every professional failing is sufficiently serious as to be characterised as misconduct. The Committee reminded itself of Bye-laws 8(c) and 8(d) (as applicable in 2015 to 2017), namely: "misconduct includes (but is not confined to) any act or omission which brings, or is likely to bring, discredit to the individual or relevant firm or to the Association or to the accountancy profession. [and] in considering the conduct alleged (which may consist of one or more acts or omissions), regard may be had to the following:...(i) whether an act or omission, which of itself may not amount to misconduct, has taken place on more than one occasion, such that together the acts or omissions may amount to misconduct."

12 42. The Committee found Mr Downs's failings in Allegations 1(b) and 1(c) to amount to a lack of professional care and attention by him, rather than deliberate blameworthy conduct. Nevertheless, it was conduct that fell below the standards expected of an ACCA member, and was thereby liable to bring discredit upon Mr Downs and the Association. As to Allegation 1(d), the Committee found this to be a more serious failing and the neglect of Mr Downs to perform an audit for the year ended 31 December 2012 when it should have been apparent that this was required. The Committee did not consider that any one of these proved failings individually crossed the threshold of misconduct, but cumulatively they represented a series of breaches of expected good practice that was properly described as misconduct. 43. Having misconduct established in relation to Allegations 1(b), (c) and (d) when assessed cumulatively, the Committee did not need to consider the alternativelypleaded routes that could render Mr Downs liable to disciplinary action pursuant to bye-law 8(a)(ii) or (iii). Allegation 2 (a) and 2(b) 44. Mr Downs did not dispute that he did not retain a signed copy of the engagement letter; his case was that it would have been placed in the permanent account file, which was handed over to the representative of the Official Receiver. It was not specifically alleged that there never was a signed engagement letter, and therefore the Committee did not need to decide this point. As with the Committee's finding in relation to Allegation 1(b), it did not consider that Mr Downs's knowing the whereabouts of the engagement letter to be in the possession of a third party, could amount to him "retaining" it. Accordingly, the Committee found Allegation 2(a) proved. 45. In relation to Allegation 2(b), the Committee accepted Mr Downs's evidence that he appreciated the importance of complying with the Money Laundering Regulations, and that he considered that the systems in place in his firm ensured compliance. However, the Committee found his confident assurance that he had in fact received the necessary identification documentation from the director of Company A to be misplaced. Mr Downs said that he would not have released the Company A certificate of incorporation until he had received the identification documentation; however this was undermined by documentary evidence in the hearing bundle. On 18 September 2008, Mr Downs wrote to the director requesting prior to the incorporation of

13 Company A and its registration for VAT. He subsequently sent a further letter on 26 September 2008, in which he enclosed a copy of the certificate of incorporation, and set out "I am still awaiting your identification documents." The Committee found that this evidence provided support for ACCA's submission that it could safely infer, from the absence of evidence of client identification work, that either the identity of the director had not been properly verified or, at the very least, the evidence had not been retained. Accordingly, the Committee found Allegation 2(b) proved. 46. The Committee next considered whether the facts found proved in relation to Allegations 2(a) and/or 2(b) amounted to misconduct. It found Allegation 2(a) represented a technical failure to retain the engagement letter, demonstrating a lack of professional care and attention to detail, rather than wilful misconduct. However, it was conduct that fell below the standards expected of an ACCA member. As to Allegation 2(b), this was a more significant failing. Mr Downs was clearly aware of the importance of obtaining the necessary verification of identity, as demonstrated by the two letters that he sent to the director client, and his evident appreciation of the importance of doing this expressed when giving evidence. The Committee was satisfied that the cumulative professional failings in Allegations 2(a) and 2(b) crossed the threshold and amounted to misconduct. Allegation The Committee had some difficulty understanding the way in which ACCA sought to present and prove this allegation. However, having considered the available evidence, the Committee was not satisfied that the arrangement made between Mr Downs and Mr B evidenced by the s, amounted to his having a close business relationship with his audit client. In the alternative, if it did, the Committee was not satisfied that such an interest crossed the threshold of materiality and significance explicitly set out in Section of ACCA's Code of Ethics and Conduct (as applicable in 2012). Accordingly, the Committee found Allegation 3 not proved. SANCTION AND REASONS 48. Mr Jowett informed the Committee that Mr Downs had a previous disciplinary finding on 13 November In summary, he was found to have dishonestly omitted to disclose to ACCA the existence of an audit client on two occasions, and to have signed an audit report without having undertaken adequate audit work. Mr Jowett

14 acknowledged that the allegations found proved in this hearing pre-date both the previous hearing and the matters giving rise to that case. 49. The Committee had regard to ACCA's Guidance for Disciplinary Sanctions. It had, at the forefront of its consideration, the public interest, which included not only the protection of members of the public, but also the maintenance of public confidence in the profession and in ACCA, and the declaring and upholding of proper standards of conduct and behaviour. The Committee recognised that the purpose of sanctions was not to be punitive, although a sanction may have a punitive effect. 50. The Committee acknowledged that any sanction must be proportionate and that it should consider sanctions starting with the least restrictive before moving upwards. 51. The Committee identified the following aggravating features of Mr Downs's misconduct: The misconduct was not an isolated incident, but represented five separate procedural failings; The previous disciplinary finding. 52. The Committee identified the following mitigating factors: There was no evidence of gain for Mr Downs, and his conduct was not motivated by personal gain; The time that it has taken for this case to be heard, now six years since the matters giving rise to the case, with no fault on the part of Mr Downs; Mr Downs's age, ill health and expression of regret; Mr Downs's insight, demonstrated by him relinquishing his auditing qualification in 2015; Mr Downs's engagement with ACCA in the regulatory process and this hearing.

15 53. The Committee first considered taking no further action. It was in no doubt that to do so would fail properly to mark the misconduct of Mr Downs, and would undermine confidence in ACCA as a Regulator. 54. Having decided that it was necessary to impose a sanction in this case, it considered the question of sanction in ascending order, starting with the least restrictive. 55. The Committee first considered whether the appropriate sanction would be the Admonishment of Mr Downs. In light of the nature of the misconduct found proved, the Committee determined that an Admonishment would not adequately reflect the facts of this case and would not be a proportionate outcome. 56. For the same reason, the Committee determined that a Reprimand was not appropriate, and that to impose a Reprimand would not mark publicly the nature and seriousness of the misconduct in this case, nor would suitably declare and uphold proper standards of conduct. 57. The Committee concluded that Mr Downs's misconduct represented a serious departure from the standards expected of a member of ACCA. It was satisfied that no sanction short of the Severe Reprimand of Mr Downs was appropriate. The Committee considered that a lesser sanction would fail properly to declare proper standards of professional behaviour and would undermine public confidence in the profession and in ACCA as its regulator. 58. The Committee heard from Mr Downs that he was at a very advanced stage of selling his firm, but that he was proposing to continue working as a consultant for the firm for the next twelve months. The Complaints and Disciplinary Regulations 2014 did not permit the imposition of conditions upon Mr Downs's practising certificate by this Committee, however Mr Downs will be aware that that course may be a consideration for ACCA's Admissions and Licensing Committee in light of this Committee's findings. EFFECTIVE DATE OF ORDER 59. This order shall have effect from the date of the expiry of the appeal period, unless Mr Downs gives notice of appeal prior to the expiry of that period, in which case it shall become effective (if at all) as described in the Appeal Regulations.

16 COSTS 60. ACCA claimed costs in the sum of 15, The costs schedule had been sent to Mr Downs prior to this hearing. Mr Jowett acknowledged that the most serious allegation, that alleging dishonesty, had not been found proved. However, he submitted that Mr Downs had largely brought the disciplinary proceedings upon himself, through his failure to keep copies of the relevant audit files and/or to obtain them so that they could be produced to the Investigations Officer. Furthermore, Mr Jowett invited the Committee to make some reduction to the sums claimed to reflect the fact that the hearing had not taken the estimated number of hours for the Case Presenter. 61. The Committee regarded the sum claimed by way of costs, in principle, to be fair and to represent an appropriate sum for work reasonably undertaken. However, it considered a discount should be applied, and the Committee therefore directed that Mr Downs pay 10,000 by way of costs to ACCA. 62. The Committee was not provided by Mr Downs with a statement of his means. The Committee bore in mind that a number of the allegations, including the most serious allegation of dishonesty, had not been found proved. It also accepted that this hearing has not occupied the full two days for which it had been scheduled. In the circumstances, the Committee was satisfied that some reduction of the costs claimed would be appropriate. Mr Ian Ridd Chairman 3 October 2018