Audit Firm Held Not Liable in Negligence Claim

Audit Firm Held Not Liable in Negligence Claim

A recent UK High Court case reported in January 2024 makes interesting reading. The auditors were cleared of any liability in a claim for negligence brought by their former client.

A claim for negligence was made by a Travel firm called Ickenham Travel Group (Ickenham) against its auditors, Tiffin Green (TG) Ickenham alleged that as a result of the auditors’ negligence Ickenham achieved £6m less than it could have achieved otherwise, when it sold a business division called BTD.

The claim stated that TG were:

  • Negligent and
  • In breach of contract;
  • Failed to identify various irregularities and an understatement of £4.5m in the financial statements (caused by overstated creditors);
  • For each of the four years ended 30 September 2014, 2015, 2016 and 2017 in which they audited Ickenham.

Ickenham stated that if the error had been identified, the company could have taken action to address the amount and avoid any recurrence of the issue.

Ickenham is a travel agency and that had two divisions until July 2019:

  • a business travel division called ‘Business Travel Direct (BTD)’ and
  • a consumer travel agency, called ‘LetsGo2’.

In early 2019, Ickenham discovered serious irregularities in its accounting systems and records, which originated before the FY14. As a result the trade creditors of LetsGo2 were overstated by £4.5m (the ‘understatement’). In 2019, the combined turnover of LetsGo2 and BTD was £95m, so the understatement was material, even though the accounting problems only related to LetsGo2.

The £4.5m understatement is believed to have built up over a long number of years and started before TG was appointed. It was accepted by Ickenham at the end of the trial that the understatement was at least £2.5m in September 2014 when TG were first appointed. TG first identified the understatement before completion of the audit of the FY 2018 , when new auditors were appointed.

In response to Ickenham’s claim, TG said that BTD was sold for its true value and among other matters was not the ‘type of loss for which TG was liable’.

The Court agreed with the expert witnesses for both sides who gave evidence at the trial and concluded that ‘a reasonably competent auditor probably would have identified and alerted Ickenham to the irregularities and understatement’. TG had failed to do so and had accordingly breached their duties as auditors in both contract and tort by failing to act as a reasonably competent auditor.

These breaches included:

  • failing to identify the understatement of £4.5m and
  • failing to identify the irregularities’.

Judge Tinker ruled in favour of TG stating that Ickenham had failed to prove that it suffered any loss when it sold BTD, rejecting the loss and factual causation argument.

In the writer’s opinion the claimant would be more likely to have made a more successful case if they had made a different type of claim.

To hear more about the latest AML developments and how to be on the alert for suspicions of money laundering and terrorist financing under the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010 to 2021, see our latest Anti-Money Laundering webinar here.

All our courses are listed here.

Please also go to our website to see our:

  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

 

  • We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
Accountant Excluded for Lying about AML Policy

Accountant Excluded for Lying about AML Policy

A 2023 ACCA disciplinary decision relating to a member makes interesting reading.

The main complaint was that he had created a document falsely claiming that his AML policies had been in existence for five years, when in fact they had not.

An ACCA remote AML inspection in October 2020 concluded by seeking additional documents including the firm’s AML Policy and Procedures document.

The ACCA compliance officer asked for the original version of the AML policy allegedly created in October 2018. The member claimed no updates had been made to the document and said that after reviewing the firm’s AML policy there was no need to make any changes to it.

At the subsequent disciplinary tribunal, the ACCA Case Officer pointed out that the AML Policy and Procedures document could not have been created in October 2018 because it was based on and ACCA technical factsheet “Anti-Money Laundering (AML) Policy and Procedures”, published by ACCA in February 2020.

The member eventually admitted that he had acted dishonestly when he claimed the AML policy had been in place since October 2018.

AML breaches

The AML Policy and Procedures created by the member had the following deficiencies:

There was a lack of evidence of:

  • A Firm-Wide Risk Assessment;
  • AML training to relevant staff;
  • The firm’s criteria for different risk ratings.

There were also problems with:

  • Inconsistency in the firm’s application of its AML Policy and Procedures Manual, because some clients had been incorrectly assessed as ‘medium risk’ when they displayed characteristics of one of more of the ‘high-risk’ factors listed in the firm’s AML Policy and Procedures document
  • Lack of evidence of AML training for staff;
  • The simple ‘Yes’/’No’ template used didn’t provide an assessment of the risks the firm faced or the actions to take to mitigate those risks;
  • The AML template document did to relate to relevant AML processes operated by the firm and had few details of the firm’s day-to-day processes.

 The disciplinary committee decided that Hung’s dishonesty and AML breaches reached the highest threshold of sanctions and excluded him from membership of the ACCA and he was ordered to pay costs of £6,000.

To hear more about the latest AML developments and how to be on the alert for suspicions of money laundering and terrorist financing under the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010 to 2021, see our latest Anti-Money Laundering webinar here.

All our courses are listed here.

Please also go to our website to see our:

  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

 

  • We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
Solicitors Accounts Regulations Part 2

Solicitors Accounts Regulations Part 2

Following on from last week’s blog about the introduction of the new Solicitors Accounts Regulations 2023, it’s worth bearing in mind that the existing Solicitors Accounts Regulations 2014 remain applicable for any accounting period that commenced before 1 July 2023, until such time as the solicitor has filed the Reporting Accountant’s report with the Law Society.

Here is a list of some of the changing and new requirements for the accounting by solicitors:

  • Balancing statements must be prepared quarterly for client-account transactions;
  • A list of client ledger balances outstanding for two years or more must be prepared at the accounting date, and given to the Law Society by the Reporting Accountant;
  • A separate client bank account is no longer needed where a solicitor is acting as the personal representative of an estate;
  • Client ledger balances must be reviewed for undue/unnecessary delays in discharging client moneys. Immediate action must be taken to clear same, where appropriate;
  • Clients are to be given a statement of account for each matter;
  • Client moneys are to be returned to clients when the legal service is completed;
  • Evidence of payments in cash must include the witnessed signature of the recipient;
  • Transfers of funds from the ‘client’ to the ‘office’ account must be for specific clients;
  • The Law Society must be notified where a deficit cannot be rectified within seven days of the deficit coming to the solicitor’s attention;
  • Cheque signatories or transaction authorisers on the client account are to include a solicitor who is a partner or a sole practitioner with a current practising certificate;
  • A ‘Register of Undertakings’ and of ‘Funds Held On Joint Deposit’ are to be maintained;
  • A file of documents or record for electronic transfers must be maintained;
  • The Compliance Partner is to provide specific confirmation to the Law Society, through the ‘Form of Acknowledgement’, of compliance with the regulations in respect of:
    • balancing statements;
    • balances outstanding two years or more;
    • review of client-ledger balances for undue or unnecessary delays; and
    • back-up of computerised accounting systems.
  • Borrowing/lending/organising loans from/to Client Accounts are prohibited, as are loans between Client Accounts;
  • Client accounts must not hold moneys other than for the legal services provided;
  • Client accounts are not to be used to hold/pass through, solicitors’ personal moneys;
  • Responsibility for breach of the regulations extends to the solicitor responsible for the actual breach, and not just the principal or partners of the firm;
  • The Law Society may conduct investigations remotely;
  • The Law Society may instruct an authorised person to communicate with such persons and seek such information and documentation as the Society considers necessary.

The full text of the Regulations is here.

All our courses are listed here.

Please also go to our website to see our:

  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

 

  • We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
Solicitors Accounts Regulations

Solicitors Accounts Regulations

The Law Society of Ireland has introduced new Solicitors Accounts Regulations 2023 which came into operation on 1 July 2023. Among the changes, there are new requirements for reporting accountants.

From 1 July 2023 reporting accountants must:

  • Examine Balancing Statements prepared at quarterly intervals in respect of client-account transactions (currently these are examined at six monthly intervals);
  • File reports within five months of the accounting date;
  • Test-check that withdrawals of fees are notified to the clients;
  • Test-check postings before and after the accounting date;
  • File the Closing Reporting Accountant’s Reports within three months of cessation;
  • Provide reasons for the withdrawal of approval of a Reporting Accountant;
  • Report, directly to the Law Society, an opinion or a suspicion of a deficit, rather than waiting to submit an annual report; and
  • Provide to the Law Society a list of any client ledger balances outstanding for two years or more prepared as at the accounting date.

The full text of the Regulations is here.

All our courses are listed here.

Please also go to our website to see our:

  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

 

  • We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.

 

The 6 Principles of AML Compliance

The 6 Principles of AML Compliance

There are at least six principle aspects of the AML legislation that accountants in practice must cover in order to comply with the law.

 

  1. Policies, Controls & Procedures

There must be an AML Policies, Controls & Procedures Manual which is appropriate to each firm, and which describes the specific AML policies and procedures which the firm really implements.

The Manual needs to be specially tailored to what services the firm provides and copying the one from a friend from down the road (without to specific tailoring) will just not be good enough. In other words you need to know what you are doing.

 

2 Firm-wide Risk Assessment

Every firm must have to have a Firm-Wide Risk Assessment (FWRA) document (also known as a Business-Wide Risk Assessment or BWRA).

This must be relevant and specifically tailored to the firm and not simply a copy of a standard template with your firm’s name inserted into the heading.  The FWRA must show that you have thought about your firm, it’s clients and the services provided (all under 5 main headings) in the context of ML risk.

 

3 Client Risk Assessments

This is the most onerous part of the AML law. For every client there must be written assessments of the risk of ML or terrorist financing associated with that client.

These risk assessments must be reviewed regularly and the review recorded.

Typically these reviews conclude for each client that the risk is either ‘low’ (usually for stock exchange listed companies and their subsidiaries and clients that are Government agencies and clients from other designated bodies regulated for ML), ‘normal’ (most clients are likely to be in this category – also called ‘medium’ risk), or ‘high’.

Where the client risk is high, there must be a record of additional steps taken to address that high risk (called ‘enhanced due diligence’).

 

4 Know Your Client or Client Due Diligence Records

On an individual client basis there firstly need to be records demonstrating that the firm has gathered information about each client (and their beneficial owners) to confirm their identity and the client’s financial activities in outline.  This is commonly referred to as KYC or CDD. This information is collected when the firm commences to act for a new client and reviewed, and updated if necessary, at least annually).

Commonly referred to as KYC or CDD – there must be appropriate records that demonstrate sufficient background knowledge about each client (and their beneficial owners) to confirm their identity and the client’s financial activities and justify the risk category allocated.  This CDD/KYC data needs to be reviewed, and updated where necessary, at least annually).

 

5 MLRO

Ensure that there is at least one person who has overall operational responsibility for operating the AML Policies Controls & Procedures. Often this person is described as the Money Laundering Reporting Officer (or MLRO), although that title is not mentioned in the AML laws.

 

 6 Training

The MLRO and all relevant staff must have received up to date training in relation to money laundering and terrorist financing, and there must be a record of that training having been undertaken by them. The training needs to be refreshed regularly.

 

All our courses are listed here.

 

Please also go to our website to see our:

 

  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

 

  • We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
Money Laundering – Watch the Tell Tale Signs

Money Laundering – Watch the Tell Tale Signs

It’s extremely important that practitioners give the Anti-Money Laundering (AML) legislation the attention it deserves and ensure full compliance with the responsibilities placed upon them by the law.

 

A case that dates back to December 2016, illustrates the importance of remaining alert for the red flags that can indicate money laundering (ML) is taking place. An ICAEW member, based in Leeds, was fined £5,000 by Leeds Magistrates Court and also the ICAEW severely reprimanded him, ordering that he pay costs of over £3,000 and seek training in the operation of the AML legislation.

 

The AML offence related to the fact that the client ‘Ms A’, was advised by HMRC that they were enquiring into their Corporation Tax Return. Ms A in turn advised the accountant that she and her husband were moving to another accountant who was presumably more experienced in tax enquiry work. She also pointed out that the issue related to an over-claim on mileage expenses and filing false tax returns.

 

This very fact was enough to warrant that the accountant ought to have known that the client had falsified their claims and tax was understated, irrespective of the amount of tax involved and that a ML offence had occurred. Yet the accountant did not make the necessary notifications to the authorities. Unknown to the accountant, the client’s company was involved in a much more serious fraud on the NHS by supplying false invoices for training services provided by her husband, who worked within the NHS.

 

The Judge indicated his view that the defendant ought to have been aware of his professional obligations concerning disclosures of this type. The belief that those disclosures would be taken up by the newly instructed tax specialists for Ms ‘A’ was not a meaningful excuse.

 

Money Laundering legislation needs respected and reports must be made where the circumstances necessitate it, irrespective of the amounts involved, as materiality is zero. This accountant has paid dearly for failure to do so and it is a salutary lesson for us all.

 

To hear more about the latest AML developments and how to be on the alert for suspicions of money laundering and terrorist financing under the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010 to 2021, see our latest Anti-Money Laundering webinar here.

 

All our courses are listed here.

 

Please also go to our website to see our:

 

  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

 

  • We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.