ADMISSIONS AND LICENSING COMMITTEE OF THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS

Transcription

1 ADMISSIONS AND LICENSING COMMITTEE OF THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS REASONS FOR DECISION In the matter of: Mr Myron Lipson Heard on: 10 February 2015 Location: The Chartered Institute of Arbitrators, 12 Bloomsbury Square, London, WC1A 2LP Committee: Legal Adviser: Mrs Lubna Shuja (Chairman), Mr Bill Sahota (Accountant) and Mrs Judith Venables (Lay) Miss Judith Chrystie Persons present and capacity: Mr Ian Pickering (Case Presenter on behalf of ACCA) Ms Kathryn Reece (Committee Officer) PRELIMINARY APPLICATION 1. The parties each applied for additional papers that had been served outside of the timescales permitted by the Authorisation Regulations 2014 to be admitted in evidence. 2. The Committee was content to admit the late evidence. BRIEF BACKGROUND 1. The Member was present and was represented by Kenneth Hamer of Counsel. 2. The Committee was provided with the following papers: a. A bundle of papers numbered pages 1-34 b. Additional papers numbered pages c. A service bundle numbered pages 1-7 d. Further service bundle numbered pages 8-16 e. Papers admitted in evidence by the Committee

2 3. ACCA invited the Committee to consider making an appropriate order in respect of two matters: a. the firms eligibility to hold an auditing certificate b. the standard of audit work found at a second audit monitoring visit 4. The background is that Lipson & Co Limited and Lipson & Co ( the firms ) are the sole practices of ACCA member, Mr M Lipson FCCA. The firms have 27 limited company audit clients, including three public limited companies, and four limited liability partnerships which require an audit. All the UK audit reports are signed in the name of Lipson & Co Limited, whereas the audit reports on Irish registered companies are signed in the name of Lipson & Co. 5. On 4 July 2011 the firms audit and regulatory work was monitored and found to be unsatisfactory. This was the firm s first monitoring visit. The compliance officer found serious deficiencies in audit work which resulted in audit opinions not being adequately supported by the work performed and recorded. The compliance officer also informed the firm of serious deficiencies in its work on the report to the Law Society on its solicitor client. 6. On the 29 November 2011 the Admissions and Licensing Committee made an order which included the suspension of the Member owing to concerns about the standard of his audit work and the firms relationships with an entity called Firm A. The order was appealed and considered by the Appeal Committee on 1 May The suspension was rescinded by the Appeal Committee, which, in summary, ordered that: a. The files of three audit clients were to be the subject of hot reviews, b. An accelerated monitoring visit should be conducted before 30 September 2013

3 c. Within six weeks the Member should provide ACCA with written proposals as to how he would ensure that the independence and integrity of his audit work is not interfered with by persons who do not hold an appropriate qualification or who were not members of his firm. If ACCA is not satisfied with the proposal then the matter is to be referred back to the Admissions and Licensing Committee. 7. Mr Lipson was advised of the Appeal Committee s decision in a letter dated 17 May He responded with his proposals in a letter dated 18 June ACCA responded on 25 September 2012 but that letter was sent to Mr Lipson s old address, despite him notifying ACCA of his new address in March In that letter ACCA did not raise any concerns about Mr Lipson s proposals and in any event, the matter was not referred back to the Admissions and Licensing Committee. 8. A second monitoring visit was conduct on 14 and 30 October 2014 to: a. Follow-up from the July 2011 visit; b. Confirm the firms eligibility for registered auditor status c. Monitoring compliance with the Chartered Certified Accountants Global Practising Regulations 2003 (GPRs) 9. A summary of the concerns identified at the second monitoring visit and by the Case Presenter at the hearing, are set out in paragraphs below. No oral evidence was called by ACCA. 10. The Case Presenter acknowledged that sub-contracting was acceptable if the auditor properly supervised and controlled the work. He submitted that ACCA was concerned that the firms do not appear to meet all the eligibility criteria for an auditing certificate in that they do not have arrangements to prevent unauthorised individuals exerting an influence on the conduct of audits that would be likely to

4 affect the independence or integrity of the audit. The reasons for ACCA s concerns that there was a breach of PR 6(g) were set out in the report prepared for the Committee as follows: a. Nearly a quarter of the firms income from audit services is provided to clients of an accountancy practice (Firm A) that is not audit registered and which Mr Lipson does not control b. The firms had relied on audit work carried out by staff of Firm A, with little evidence on the audit files that Mr Lipson had properly controlled the audit work on which he intended to rely c. Mr Lipson did not appear to have had sufficient direct contact with the clients and there was no correspondence between them and either firm in relation to matters such as subsequent events and going concern reviews, and management representations d. Firm A invoices the clients for audit services and Mr Lipson invoices Firm A for his time. 11. ACCA submitted that the Guidance for Regulatory Orders (updated in November 2014) paragraphs to explained that this situation represents a clear threat to objectivity and set out the normal approach in these cases. 12. In addition, ACCA was concerned that serious deficiencies were identified in the audit work of the client files reviewed at the second monitoring visit in October In summary, ACCA identified that there were deficiencies in the planning, control and recording of audit work, and on three of the four cases examined the audit opinions were not adequately supported by the work performed and recorded. In particular:

5 a. The firms were not tailoring the standard audit programme to meet the needs of the audit of each client and, as a result, on three of the four files examined the audit opinion was not adequately supported by the work performed and recorded. b. No engagement letter was found on file 4 (ISA 210). c. On all files the firm had not communicated its responsibilities as auditor of the financial statements to those charged with governance. (as required by ISA 260). d. The files did not contain adequate information to show its understanding of each client and their environment (as required by ISA 315). e. File 3 did not contain adequate information to show the firm s general understanding of the legal and regulatory framework applicable to the entity and the industry or sector in which the entity operates and how the entity is complying with that framework (as required by ISA 250). f. On file 3 the firm could not demonstrate that the requirements of ISA 240 had been met in respect of fraud risk factors and, management s processes for identifying fraud and its assessment of the risk that the financial statements may be materially misstated due to fraud. g. On files 1, 2 and 3, the firm had not established an adequate overall audit strategy (as required by ISA 300) and had not properly planned its audit work leading to deficiencies in the audit evidence obtained. h. On files 1, 2 and 4 it was not clear that the engagement principal had taken responsibility for the overall quality on each audit engagement. i. The persons engaged on the audit did not appear to be clear on the objectives of tests and how they should carry them out. j. In addition, it was not clear that the engagement principal, through a review of the audit documentation and discussion with the engagement team, had satisfied himself that

6 sufficient, appropriate audit evidence had been obtained to support the conclusions reached and for the auditor s report to be issued. k. On files 1, 2 and 3 the firm had not adequately documented matters which were important in providing audit evidence to support the audit opinion as required by ISA 230. l. There were a number of deficiencies, serious on files 1, 2 and 3, in the extent and quality of audit evidence (ISA 500) including in relation to fixed assets, stock valuation, assessment of recoverability, confirmation of loans verification of bank balances, material balances due, creditors, accruals, corporation tax, VAT creditors and income. m. The firm had not designed and performed adequate substantive analytical procedures to assist it in forming an overall conclusion as to whether the financial statements were consistent with its understanding of the entity (ISA 520). n. The firm had not performed adequate audit procedures designed to obtain appropriate audit evidence that subsequent events that necessitated adjustment of, or disclosure in, the financial statements had been identified (required by ISA 560). o. On files 1 and 4 the written representations from management were unreliable in that the letters were either undated or over two months old (as required by ISA 580). 13. ACCA also submitted: a. On all files the firm had not recorded that it had adequately considered the entities ability to continue as going concerns, as required by ISA 570

7 b. The firms do not have documented procedures to comply with International Standard on Quality Control 1 (ISQC 1) to quality control policies and procedures c. Mr Lipson did not have insight in that he was disputing the findings of the monitoring visit and had not properly actioned the previous concerns. 14. Mr Hamer made oral submissions on behalf of Mr Lipson and identified the relevant parts of the bundle prepared on his client s behalf. Mr Lipson gave oral evidence. Witness A, a senior manager in Firm A, was called to give oral evidence. 15. On behalf of Mr Lipson, the key elements of Mr Hamer s submissions were: a. Mr Lipson was fully compliant with Global Practising Regulations 6(a)-(f) and the issue was a narrow one of mechanics as to whether the relationship with Firm A would be likely to influence the independence and integrity of the audit. This was disputed and denied by Mr Lipson there was nothing inherently wrong with Firm A clients being audit clients of the firms. b. Firm A had members who were fellows of ICAEW, and was registered with ACCA as an approved employer. The employees at Firm A to whom Mr Lipson sub-contracted the audit fieldwork were all, except one, ACCA, AAT or CTA trained. c. Mr Lipson had provided his proposals regarding the relationship with Firm A in accordance with the Appeal Committee Order in June 2012 and no response was

8 provided or action had been taken by ACCA to suggest they were not satisfied with Mr Lipson s plans. d. It was not fair to say that Mr Lipson has no insight. Mr Lipson had cooperated fully and promptly and he had sufficient insight to seek a view from Firm B on the files that ACCA had reviewed at the second visit, whose report he had disclosed. Firm B had accepted some, but not all of the ACCA s concerns. e. There had been improvements since the previous visit. The issue was not about the audit but the sufficiency of the documents. f. Mr Lipson used the Firm B system for conducting an audit. There was no suggestion that the system set out in a lengthy manual was wrong. g. Formal notification of the outcome of the second monitoring visit and the draft report for the Committee was contained in a letter from ACCA dated 18 December The letter requested a response by 24 December Mr Lipson responded on 23 December 2014 in which he accepted there were deficiencies in the audit files. 16. Mr Lipson gave oral evidence that he undertook all the planning, discussions with the client, reviewing and closing for each audit file and that the fieldwork was managed by Witness A from Firm A. He explained the action he had taken since the Appeal Committee and the steps he proposed to take if he was permitted to keep his audit certificate. 17. Witness A from Firm A gave oral evidence which corroborated Mr Lipson s evidence regarding his role in controlling the audit and

9 confirmed that there were no stages at which Mr Lipson was not involved. DECISION ON FACTS AND REASONS 18. The Committee considered all the documents provided, the evidence and the submissions of both parties. The Committee received and accepted the advice of its Legal Adviser. 19. The Committee first considered whether Mr Lipson s and the firms relationship with Firm A affects his eligibility under Practising Regulations 6(g). The Committee recognised that in order to be and to remain eligible for an audit certificate there had to be arrangements to prevent individuals who do not hold an appropriate qualification and persons who are not members of the firm from being able to exert an influence over the way in which an audit is conducted in circumstances in which that influence would be likely to affect the independence or integrity of the audit. 20. ACCA s submissions that Mr Lipson and his firms were not eligible were based on the following concerns: a. 25 of the firms 27 clients were accountancy and tax clients of Firm A (which is controlled by persons who are not audit-qualified with ACCA); b. Mr Lipson has no financial interest in Firm A and it does not appear he will be able to obtain a controlling interest in it, c. Nearly a quarter of Mr Lipson s income is from providing audit services to accountancy and tax clients of Firm A; d. The firms have relied on the audit work carried out by Firm A without controlling that work effectively; and

10 e. The directors and shareholders of Firm A are in a position to influence the conduct of audit work carried out by Mr Lipson. 21. The Committee considered paragraphs to of the Guidance for Regulatory Orders and, in particular, the provisions set out at paragraph This paragraph set out ACCA s view that there is a self-interest threat to a significant influence being exerted on an auditor where 15% or more of a firm s total income is derived from a number of clients with a common connection. The Committee appreciated the potential threat but recognised that it must consider the evidence and the particular circumstances in each case. 22. In this matter the Committee was satisfied that Mr Lipson and the firms remain eligible for an audit certificate. It was content that there were appropriate arrangements in place to comply with Practising Regulation 6(g). The current arrangements were identified in a letter from Mr Lipson to ACCA dated 18 June 2012 following an order by the Appeal Committee. ACCA did not respond to this aspect nor did it refer the issue back to the Admissions & Licensing Committee (as required by the Appeal Committee if ACCA was not satisfied with those proposals). 23. Further the Committee received evidence that satisfied it that there were arrangements that meant it would not be likely that Firm A or its clients would be able to influence and affect the independence or integrity of the audits conducted by Mr Lipson and the firms. In particular the Committee received copies of client letters of engagement, which demonstrated that Mr Lipson was communicating directly with the clients and in which he expressly identified himself as the auditor. The letters also contained more detail about the arrangements relating to the fees to be charged. Further, the Committee received copies of audited accounts that had been

11 qualified by Mr Lipson. These demonstrated that he had not allowed himself to be influenced. 24. Moreover, the Committee heard oral evidence from Mr Lipson that he is involved in the planning, review and conclusion of each audit although he sub-contracts the field work to staff from Firm A in accordance with a formal written service agreement. ACCA accepted that auditors are permitted to sub-contract field work. The fact that Mr Lipson controls the audit was supported by the oral evidence received from Witness A, a senior manager at Firm A. 25. The Committee was content with these arrangements and did not find any breach of Practising Regulations 6(g). 26. Further Mr Lipson gave evidence about the additional steps that he intended to undertake to enhance and strengthen the independence of his audits: the financial relationship with Firm A was to cease with all services being billed directly to the client, he intended to employ an audit qualified individual and all fieldwork would be conducted by himself or employees of the firms. 27. Turning, however, to the audit findings, the Committee was extremely concerned to learn that there had been a second unsatisfactory monitoring visit for Mr Lipson and his firms in less than 4 years. ACCA described the failings identified at the visit as widespread and significant, but did not call the Senior Compliance Officer who conducted the visit to assist the Committee despite the fact that elements of her evidence were challenged by Mr Lipson. Mr Lipson did accept there were deficiencies in the files but described these as minor technical difficulties. In addition, Mr Lipson had had the same files reviewed by Firm B, an accountancy group of which Mr Lipson was a member. He disclosed the review report but did not call the author to give oral evidence. The Firm B report identified, weaknesses on all four files. In response to questions from the

12 Committee, Mr Lipson accepted that he did not know why he did not pick up the deficiencies and that his competence must be the issue. 28. The Committee was satisfied that the identified and admitted deficiencies were material and lead to a breach of Practising Regulation 18(1)(a) of Annex 1 and Practising Regulation 16(1)(a) of Annex 2. However, the Committee was also mindful that Mr Lipson had not been given a sufficient opportunity to address the issues raised. 29. Given the extent of the shortcomings, the Committee considered that there was a need for regulatory action to both protect the public and to seek an improvement in the standard of Mr Lipson and the firms audit work in order to maintain public confidence in the professional and declare and uphold appropriate standards of conducting audit work. 30. The Committee was conscious that the Guidance on Regulatory Orders suggests that normally the Committee would order the withdrawal of the firms audit certificate following a second unsatisfactory visit However, in this particular case, the Committee was mindful of the prompt responses, cooperation and the action that Mr Lipson had taken to date, in a relatively short period as he was only formally notified of the outcome of the visit on 18 December The Committee was conscious that, in contrast, there had been long episodes of inactivity by ACCA, followed by intense activity and the imposition of tight deadlines on Mr Lipson, with which he had complied. Letters had also been sent by ACCA to Mr Lipson to the wrong address so he was not immediately aware of them. Further, the Committee was reassured by Mr Lipson s evidence that he was prepared to take whatever steps were necessary to improve the audit work including by subjecting his files to hot review, ensuring that his own employees conduct the field work and recruiting a further audit

13 qualified individual and that he accepted the importance of ensuring that there was proper evidence on the files. 31. As a consequence, the Committee was prepared to offer Mr Lipson the opportunity to demonstrate the commitment he had expressed to this Committee to improving the standard of his audit. The Committee was content that it would be proportionate and sufficient, given the particular circumstances and specific chronology of this case, to impose conditions. The Committee made an Order pursuant to Authorisation Regulation 5(2)(f) that Mr Lipson and the firms: 1. Provide Governance Practice Monitoring within 30 days of the date of written notification of this decision with a list of current audit clients, identifying any Public Interest Entity (PIE) audits; 2. Promptly notify Governance Practice Monitoring if the firm accepts any new audit appointments or if any of the audits identified in 1 above ceases to be an audit client at any time in the future whilst this decision remains in effect; 3. Save where the firms have less than 10 audit clients, the firms are required to have 10 audit client work files to be selected and confirmed by Governance Practice Monitoring reviewed by a training company each year before the audit reports are signed, such training company being subject to ACCA approval, with all and any points raised in the review being satisfactorily resolved before the audit report is signed, but should the firms have less than 10 audit clients in one year then all audit clients should be subject to the review identified in this paragraph;

14 4. Notify ACCA of the identity of the training company in 3 above within 14 days of the date of Governance Practice Monitoring confirming the audit clients to be subject to review in accordance with 1 and/or 2 above; 5. Submit all reports prepared by the nominated training company (including details of how the firm has addressed the points raised by the reviewer) pursuant to 3 above to Governance Practice Monitoring within seven days of signing the audit report; 6. Be subject to an accelerated monitoring visit before 2 years time at a cost to the firm of 1,000 and 400 for each additional audit qualified principal; and 7. Note that failure to make the necessary improvements in the level of compliance with auditing standards and with the requirements of any regulators by that time will jeopardise his and his firms continuing audit registration. And that Mr Lipson should: 8. Undertake at least 12 hours each year of formal, structured CPD courses on audit related topics, until a satisfactory monitoring visit has taken place. 32. The Committee was aware that Firm B has already been conducting reviews of audit reports prior to signing - so called hot reviews on behalf of Mr Lipson and the firms but given that this is a fresh order, it remains necessary for Mr Lipson to notify ACCA of the identity of the training company he wishes to conduct the reviews in accordance with the provisions of this order.

15 EFFECTIVE DATE OF ORDER 33. The Committee did not consider that there were any reasons to exercise its discretion in the public interest that its order should have immediate effect. It is satisfied that the order can take effect in accordance with the provisions of Regulation 9 of the Authorisation Regulations PUBLICITY 34. ACCA s regulations require the Committee s findings and order to be published as soon as practicable through a news release that names the relevant person. Whilst the Committee has discretion in exceptional circumstances to direct that the relevant person is not named, it was content that there were no exceptional circumstances in this case a fact accepted by Mr Lipson. 35. On behalf of Mr Lipson, Mr Hamer argued that it was not necessary for the news release to be sent to the local press. The Committee determined to exercise its discretion to order a news release be issued to ACCA s website and to the local press referring to the Member by name on the basis that today s hearing had been a public hearing and the previous orders involving Mr Lipson had been subject to the normal order on publicity. The purpose of publicity was to inform the public as part of the function of protecting the public. There was no justifiable reason for departing from the usual order for publicity in this case. Lubna Shuja Chairman 24 February 2015

16 Schedule of Anonymisation 1. Firm A = AccounTrust 2. Firm B = HAT Group of Accountants 3. Witness A Witness A