Ernst & Young (A Firm) v. The Hong Kong Society of Accountants (A Body Corporate)
Read the full judgment text of HCAL 139/1999 on BabelCite. This High Court CFI judgment was delivered on 16 March 2000.
1. The applicants are a firm of certified public accountants practising in Hong Kong. Between December 1992 and February 1998, they were the auditors of a publicly listed company, Shun Shing Holdings Limited ("Shun Shing"). Shun Shing are building contractors and developers, owned as to 60% also by COSCO (Hong Kong) Group Limited, the Hong Kong investment arm of China Ocean Shipping Group Company, an enterprise established on the Mainland. In January 1997, the applicants reported upon their audi
Cited by 2 cases · Cites 1 case
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HCAL000139/1999 HCAL139/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO. 139 OF 1999 -----------------------
----------------------- Coram: Hon Stock J in Court Dates of Hearing: 7 - 9 March 2000 Date of Judgment: 16 March 2000 ----------------------- J U D G M E N T ----------------------- BACKGROUND 1. The applicants are a firm of certified public accountants practising in Hong Kong. Between December 1992 and February 1998, they were the auditors of a publicly listed company, Shun Shing Holdings Limited ("Shun Shing"). Shun Shing are building contractors and developers, owned as to 60% also by COSCO (Hong Kong) Group Limited, the Hong Kong investment arm of China Ocean Shipping Group Company, an enterprise established on the Mainland. In January 1997, the applicants reported upon their audit of Shun Shing's statutory accounts for the year ended 31 August 1996 that those accounts gave a true and fair view of the state of affairs of Shun Shing in all material respects. In March 1997, Shun Shing was acquired by COSCO. Another firm of accountants were then auditors of COSCO and as a result of this change in ownership, that other firm was appointed auditors of Shun Shing (by then renamed COSCO International Holdings). The applicants resigned as auditors at the same time, namely, February 1998. On 14 May 1999, COSCO announced its results for the year ended 31 December 1998, the accounting year having changed to 31 December. That announcement contained the following passages :
2. That announcement came to the attention of the Hong Kong Society of Accountants, the respondent to this application. The Society is a statutory body established to regulate the practice of the accountancy profession in this territory, to represent the views of that profession, to conduct examinations, and to safeguard professional interests of its members. On 1 June 1999, the Council of the Society decided to appoint an Investigation Committee, purportedly under powers conferred by section 42C of the Professional Accountants Ordinance, Cap.50 ("the Ordinance"), to examine the conduct of the audits by the applicants. That is to put the terms of its decision loosely, because the terms of its decision are a matter of relevant dispute, and I shall return to them later. 3. On 22 July 1999, the Society wrote to the applicants informing them that an Investigation Committee had been constituted. The applicants replied, asserting that the audit gave rise in fact to no justifiable criticism, and they welcomed the opportunity to have that confirmed by the Investigation Committee; but they asked for clarification of the Investigation Committee's terms of reference, doubting whether the terms of reference suggested were lawful, and they asked also about the procedures which it was intended should be adopted. 4. They wrote again on 6 August 1999 asking why the Council had concluded, if it had, that the questions raised could not be resolved by the voluntary co-operation of the applicant firm. They raised that question because they were willing to co-operate and because of an announced policy of the Society that such Investigation Committees would not be tasked, unless voluntary co-operation would not suffice - again, I state the policy loosely because its precise terms and its import must be carefully analyzed. The applicants asked also for documents considered by the Council, the minutes of the meeting at which the decision was taken, and to clarify the ambit of the proposed inquiry, in particular to state what was meant when the Society had said that the Committee would not merely look at the conduct of the audit of the transactions relating to construction contracts referred to in the letter, but also at "related areas". The applicants also expressed dismay at reports in various newspapers that had appeared in which not only was there revelation of the decision of the Council to constitute an Investigation Committee, but also of the names of the two firms, including the applicants, whose audits were to be investigated. There had apparently been a leak, and the applicants wanted an undertaking that there would be no leak in the future. 5. The Society replied saying that the Council would not reveal documents or information. They further felt that they could give no undertakings that there would be no future leaks, but stated their intention not to volunteer information to the public about the extent of the investigation. THE JUDICIAL REVIEW 6. It must be emphasized that the attack which, by these proceedings, the applicants launch is not an attack against any adverse finding by the respondent or by any of its constituent bodies. There has been no such finding. Indeed, there has been thus far no investigation. What the applicants attack is the manner in which they say they have been treated by the respondent, and the legality of the respondent's actions thus far. 7. This judicial review attacks three decisions made, or allegedly made, by the respondent :
The date of the decision to appoint the Investigation Committee is incorrectly stated in the Notice of Application for leave to be 15 June 1999. All are now agreed that the correct date is 1 June 1999. 8. The relief sought by the Notice of Motion is :
9. The application for leave was dated 21 October 1999. Leave was granted on 1 November 1999. THE ORDINANCE 10. The Ordinance came into effect in January 1973, but significant amendments were made in 1994. 11. Amongst the objects demanded of the Society by section 7 of the Ordinance are these :
12. By section 10, there is established a Council of the Society. It is empowered by section 17 to regulate its own procedure. The Council is the body entrusted with the management of the Society and with the implementation of the objects of the Ordinance. 13. Part V of the Ordinance is entitled "Disciplinary Proceedings", and requires the establishment of a Disciplinary Panel. Section 34 of the Ordinance requires that complaints within one or more of the categories there itemized shall be referred by the Registrar of the Society to the Council, which may in its discretion refer the complaint to the Disciplinary Panel. Where a complaint is referred to the Disciplinary Panel, the Council is required (see section 33(3)) to constitute a Disciplinary Committee to deal with the complaint, and if that Committee is satisfied that a complaint referred to it under section 34 is proved, that Committee may impose penalties which include removal of the culpable accountant from the register; a fine; a reprimand; the payment of costs; and postponement of judgment (section 35). 14. The very provisions of section 34(1)(a) are said to be important in this case, and they need to be set out :
15. A complaint to the Council is however not the only way in which alleged or suspected misconduct or neglect by a professional accountant may be investigated. 16. The powers then existing were, it seems, considered by the mid-1990s to be inadequate, and perhaps unnecessary, in some cases. There were moved in the Legislative Council a number of amendments, and it was said that :
It was said that there were no powers to compel an accountant to respond to inquiries arising from Disciplinary Committee proceedings, and that persons were discouraged from the task of presenting complaints to the Committee. There might also be cases in which there was public concern about the professional conduct of an accountant, where there had been a report by a regulatory authority, but where nonetheless there was insufficient evidence for the Council to refer the matter to the Disciplinary Committee. So Part VA was enacted. 17. Section 42C(2) provides thus :
18. Section 42C(1) provides that where, pursuant to such a referral, the Investigation Committee tells the Council that :
and the Disciplinary Committee will then proceed as if the referral were a complaint under section 34. 19. Section 42D confers certain powers upon the Investigation Committee necessary to give it teeth. That section stipulates that an accountant to whom the Investigation Committee's proceedings relate may be obliged to produce documents in his possession or control which the Committee believes to be relevant to its proceedings; to give an explanation or further particulars in respect of anything thus produced; and entitles the Committee to take copies and to inspect. A person is not excused from compliance with a requirement of the Committee on the ground that to do so might incriminate him, but if he claims that an answer might incriminate him, then the answer may not be used in subsequent criminal proceedings (section 42D(4)). THE POLICY STATEMENT 20. The documents before me show that the proposal to establish this investigatory function was met by some concern within the profession, and during the Second Reading of the Bill in the Legislative Council it was stated that :
21. In the January-February 1995 edition of the professions' magazine "The Hong Kong Accountant", there was promulgated the Council's "Policy to Circumscribe the Instigation of Investigations". It reads as follows :
GROUNDS 1. ADDRESSING THE WRONG QUESTION 22. It is well established that if a decision-maker fails in exercising a statutory function to address the correct key questions when making a decision, his decision may be unlawful. It is an aspect of Wednesbury unreasonableness, for he fails to take into account relevant matter, or takes into account irrelevant matter. It is said that the Council, in coming to its decisions in this case, did not ask the right questions. 23. The first ground of attack is that the Council has acted unlawfully in appointing the Investigation Committee in that it has exercised its discretion wrongly in the following way :
24. Foundation for the complaint is said to be found in a number of sources :
25. The applicants took up the point in their reply of 27 July, pointing out that it was not within the power or competence of the Committee to ascertain whether there were breaches of the provisions of section 34(1)(a), but rather to inform the Council whether in its opinion, if a complaint were made, the firm would have a case to answer. "Please confirm that the terms of reference of the Investigation Committee will be as set out in section 42C .... and not as suggested in your letter." In response, the Registrar, Mr Louis Wong said that the words used in his letter were shorthand for the Investigation Committee's task, and he confirmed that the terms of reference were those set out in section 42C. 26. Although this particular point (that is, whether the Council decided to task, and tasked, the Investigation Committee to ascertain whether there were breaches, rather than whether there was a prima facie case of breach) does not appear to have been pressed by Mr Dykes in oral argument, it remains alive in the Notice of Application. I do not think that there is anything in the point. The fact is that the terms of reference themselves made it clear to the Investigation Committee that it was expected to do no more than to ascertain whether there was a prima facie case. Whilst the terms of reference (communicated in a letter from the respondent to the Committee dated 15 July 1999) directed the Investigation Committee to investigate certain aspects of the conduct of the accounts to ascertain whether there were breaches of the provisions of section 34(1)(a) of the Ordinance, those terms of reference went on to state that the Investigation Committee was "to report its findings to Council, specifying whether in the opinion of the Investigation Committee there is a prima facie case against each of the firms and/or any professional accountants." There is, furthermore, express reference in the minutes, and in the letter to the applicants dated 22 July, to the section of the Ordinance under which it was intended that the Investigation Committee was to operate, namely, section 42C. That section makes perfectly clear the ambit of the Committee's role. Furthermore, the establishment of these Investigation Committees had been the key point in new legislation enacted but a few years previously, and it is idle to suppose that the Council was unaware of the Committee's intended function or failed to have that function in mind when they made their decision. The minutes are not a statutory instrument to be construed as such, or to be divorced from the reality of the matter; and in my judgment it is unrealistic to conclude that the Council assumed, intended, or decided anything other than that the function of the Investigation Committee was to ascertain whether there was a prima facie case. 27. As for the complaint about the failure to identify the sub-sections of section 34(1)(a) to which suspicion was directed or upon which the Investigation Committee was to concentrate, this is a contention that is addressed by affidavit evidence before the court. The evidence of Mr Louis Wong, who at all material times was the Registrar of the Society, and who attended the meeting of 1 June 1999, is that the Council was satisfied that it had on the papers before it reasonable grounds to believe or suspect that there had been a breach of section 34(1)(a) of the Ordinance. "Specifically," he says, "the various possibilities which would have been in the minds of the members of the Council were ...." and he then lists them by reference to sub-sections (iii), (iv), (v), (vi), (viii) and (ix) of section 34(1)(a) of the Ordinance. The phrase "would have been" struck me as odd, and possibly speculative. But there is an affirmation by Mr Kam Pok Man who is President of the Society and who was present at the meeting of 1 June 1999. He chaired the meeting and he "confirms the accuracy of everything said by Mr Wong in his affidavit both as to what happened at that Council meeting and the thought process of the Council in its deliberations prior to the appointment of the Investigation Committee." Now, this is said not to be reflected by the minutes and, more particularly, that it does not suggest that there was a specific discussion by the Council about the sub-sections of section 34 which applied to the applicants - what conduct was it in respect of which a reasonable belief of possible contravention had been formed? 28. Mr Huggins accepts that the evidence thus phrased might mean, on the one hand, that the Council actually discussed the sub-sections and articulated the relevant ones; or it might mean, on the other, that nothing was articulated because it was all too obvious for words. In the absence of further particulars in these affidavits, I must assume in the applicants' favour that it is the second of the two versions that is being put forward. The question then is : does it matter? Is there some need, as Mr Dykes suggests, that the Council expresses itself by reference to particular sub-sections? I do not think so. I think that this whole exercise must be approached with common sense and reality. Of course the Council must have in mind the provisions of section 34, and of course it must address the question whether it has reasonable suspicion of a breach of section 34 and its provisions. But it is clear from the minutes that this Council was addressing the provisions of section 42C. The minutes say so. Section 42C, in turn, is riddled with references to section 34 and its sub-sections. It is what section 42C is all about. The Council had met to discuss this very question in a case that had received wide publicity and was a serious and high profile case. The subject matter of the members' concern was clear enough and was before them. It had already been explained fully in a minute of 27 May, and the kind of questions that arose must have been clear to any experienced professional person. And in those circumstances, it is in my judgment perfectly open to the Council to say that it was obvious which features of section 34 were potentially engaged, and that they did not need articulation. One has but to glance through the various sub-sections of section 34 to see that some, by the very nature of the case that was before the Council, would clearly be engaged and that some would not. It would be obvious, and would not need articulation, for example, that the nature of the issue did not involve failure to comply with some direction issued to the firm by the Practice Review Committee (sub-section (v)). I have in the circumstances no reason to disbelieve Mr Kam when he says in his affirmation that these matters were in the mind of the Council. And if they were, only artificiality would, in the circumstances of this particular case, require an articulation of precise sub-sections at the meeting. 29. But I am bound to say that, in any event, there must be a realistic limit to the specificity that can be expected of the Council at this stage of the process, either in the remit that the Council gives to the Committee, or in the information that it can be expected to provide to an accountant who is targeted as someone under investigation. So, for example, to require a choice of one particular sub-section rather than another is to ignore the function of an Investigation Committee, and the stage that proceedings have reached. What may well happen in many a case is a reference to most of the sub-sections of section 34(1) to which section 42C applies. All that the Council had at the stage of its decision of 1 June 1999 was a report, a passage in a report, which suggested that fundamental accounting errors had been made with the suggestion that they should have been provided for, but were not. The alleged errors were identified in the very broadest of terms, namely, that profit had been recognized whereas there were significant anticipated losses, and that there had been errors in the recording of accounts receivable. The Council could not, in my view, be expected at that early stage to limit itself, say, to an investigation that concentrated on whether there had been a failure to observe a professional standard and to exclude thereby the possibility that the default, if there was any default at all, might have been the result of negligence or even misconduct. There may be cases in which the nature of the allegation or concern can readily be tied to a narrow area, because it must be recognized that the range of circumstances, the variety of factual matrices, in which some form of default is suspected must be very wide indeed, from the very simple to the very complex. And in the simple case, it may well be possible to say that the area of concern is specific to one of the sub-sections of the Ordinance; whereas in the potentially vast and complex case - and the present case presents itself within that range - how is the Council at this stage to know what, if anything, might emerge from the paper work? 30. This is an apt point at which to comment on an alternative, or further, approach which Mr Dykes appeared to advance, which was that in so far as the affidavit of Mr Wong and the affirmation of Mr Kam purport to evidence a decision, or a mental process, which embraced several sub-sections of section 34(1)(a) of the Ordinance, the minutes, so it is argued, evidence a decision to appoint an Investigation Committee to conduct an investigation which engaged only section 34(1)(vi) of the Ordinance, which sub-section is directed at a failure or neglect to observe, maintain or otherwise apply "a professional standard". So, too, in that the letter of 15 July to the Investigation Committee states that the Council has constituted the Committee on the basis that there was a reasonable suspicion that one or more of several sub-sections of section 34 applied, that conflicts, it is said, with the minutes of the meeting. Those minutes state that the Investigation Committee "should be appointed to examine whether the firms concerned had complied with the professional standards of the Society in their audits of the financial statements of the company for the periods concerned" (emphasis added). Mr Dykes says that that is an allegation restricted to section 34(1)(a)(vi) of the Ordinance. I think that that reading of the minutes is one which proceeds on too broad an assumption. I think it quite unrealistic in the context of this case and its facts, and the documents that were before the Council, to suppose that the minutes evidence a decision that there should be an investigation no broader than sub-section (vi). A professional standard may refer to a specific promulgated standard or benchmark. But it may also, especially when used in the plural, refer to the panoply of appropriate expertise and conduct expected of a professional man or woman. Given the use of the plural, in the context, I think that Mr Dykes' argument in this particular aspect proceeded from an erroneous premise. 31. Nor can the complaint that the Council failed to identify specific provisions to the Committee, and that it gave to the Committee a roving commission, hold water. Specific provisions were stipulated in the letter to Committee members of 15 July. The letter of 15 July identifies the transactions which are to be the subject of the proposed investigation and the audits at issue. The trigger for the Council's concern, namely, the company's press announcement of its results, was specifically referred to; and the range of subsections of section 34(1)(a) that were potentially engaged were stated. It was, for reasons that I have identified, perfectly permissible for the Council to draw its terms of reference as it did. I do not think that the Council could reasonably be expected to have said more at that stage. 2. PROCEDURAL FAIRNESS 32. The complaint here is similar to that with which I have already dealt, for it concerns the lack of specificity about the sub-section "engaged". It is said that the letter dated 22 July 1999 failed to identify which provisions of section 34(1)(a) were potentially engaged by the decision of the Council to appoint an Investigation Committee. It is said that the requirements of procedural fairness are such that the Council ought to have told the applicants which provisions were potentially engaged so that the applicants could then determine whether the Investigation Committee was acting within its terms of reference and so that the applicants could be advised on the precise consequences of complying with such requirements that were then made by the Investigation Committee. Why, for example, should they disclose confidential material if the actual decision of the Council provided no basis for making the request for that material? 33. The applicants also say that procedural fairness required that they be informed of the outline of the case against them, and the materials relied upon by the Council when making the decision, the more so since the fact of the decision had been reported in the press. What was not revealed in this case which should have been revealed, argues Mr Dykes, is the information that appears in the minutes of the Council's meeting of 1 June and most particularly the information that the investigation was to be directed at the question whether there had been a breach of professional standards. The vagueness of the information provided was compounded, he suggests, when the Council merely told the applicants that what was to be investigated was the conduct of the audit of the transactions relating to construction contracts referred to in COSCO's financial statement "and related areas", without specifying what was meant by "related areas". 34. Mr Dykes has taken me to the decision of the Privy Council in Rees v. Crane [1994] 2 AC 173 in support of his proposition that whilst in general those at the receiving end of preliminary or initiating investigations are not entitled to be heard, particularly if there is an entitlement at a later stage, the rule was nonetheless not universal. As a proposition, it is not contentious, and the question, so it seems to me, is always : "What do the circumstances of the particular case require?" Fairness is not an abstract concept. It can only be assessed by reference to the particular situation at hand. 35. In Rees v. Crane, the Privy Council trawled the authorities, thereby showing that it was unusual for there to be afforded a right to be heard at a stage when all that was being determined was whether there was a prima facie case. So, in Parry Jones v. Law Society [1969] 1 Ch 1, it was decided that a solicitor had no right to know what complaints were before a notice requiring him to produce documents was served. In Furnell v. Whangarei High Schools Board [1973] AC 660, a teacher had no such right to be heard before his suspension pending an inquiry; and in Louis v. Heffer [1978] 1 WLR 1061, Jeffrey Lane LJ, as he then was, said, (at pp 1078 - 1079) that :
36. Mr Dykes argues that fairness in this case required the revelation of the nature of the case for the following particular reasons : that the applicants were duty bound to co-operate under the formal investigatory process; that the Investigation Committee was empowered to require information concerning the affairs of the applicants' clients and that that encroached upon matters of confidentiality; that co-operation with the Investigation Committee could be an expensive and lengthy process requiring the deployment of staff and use of lawyers, and there was no provision for the recovery of costs; and that disclosure of the factual basis for the decision to establish the Investigation Committee would not run contrary to the policy of the Ordinance. 37. I have some difficulty in following this complaint and the argument in support of it. The complaint here is not that the applicants should have been provided with information about the scope of an intended inquiry before a decision was made whether to order an investigation at all - that comes under a later head. The complaint here is that once it had been determined to hold the investigation, the specific sub-section engaged by the proposed investigation and the materials before the Council should have been revealed. But, assuming that the decision to appoint the Investigation Committee was a valid one, the complaint that there was no revelation of the sub-section (or sub-sections) "engaged" and of the material before the Council is, in my judgment, flawed, and that for two reasons : (1) The applicants knew full well, or well enough, the subject matter of the proposed investigation and what it was that concerned the Council. It is not as if the applicants were merely told that the Committee was going to look at some audit that had been conducted of financial statements of Shun Shing. They were told exactly what the root of the concern was, and the subject matter that had led to the establishment of the Investigation Committee. They were referred to the financial statements of COSCO for the year ended 31 December 1998, a financial statement available for all the world to see; and to the opinion expressed in it that there were deficiencies in the controls over construction contracts which resulted, so it was said, in fundamental accounting errors being made in recognizing profit on incomplete contracts when in fact there were significant anticipated losses on those contracts. The amount of the suggested losses was stated, and it was said that the losses in that sum should have been, but were not, provided for. They added that there was a suggestion in the financial statement of the company that there were fundamental errors in relation to the overstatement of turnover and accounts receivable as a result. Yet, added the Council in its letter of 22 July, the applicants had issued an unqualified audit opinion on the financial statements of the company for the year ended 31 August 1996. The Investigation Committee wanted to look at the conduct of the audit of the transactions relating to the construction contracts. I would have thought that all that was clear enough, and that the applicants knew full well what it was that had prompted the move by the Council, and that the starting point by the Investigation Committee would necessarily be broad. But the subject matter was identified, and the area of concern was identified. There was hardly anything else that the Council could reasonably be expected to say. I simply do not see how much specificity, or further specificity, about the precise sub-sections of section 34 would take the matter, or what further documents the Council could then be expected to provide. Given the information thus provided, and given that the applicants knew, or should have known, that the Council was drawing its concern from the public announcement of the financial statement, it did not surely take much professional experience to know which of the sub-sections might be engaged, and that little more could at that stage be expected. (2) The complaint is in any event premature. The applicants were not in the dark. They were not taken by surprise. No one was asking them then and there to produce all information that might conceivably be relevant to the inquiry. The letter of 22 July said that the Investigation Committee would communicate directly with the applicants about the inquiry. That was repeated in a letter dated 3 August 1999; and on 13 August 1999 the Society told the applicants that :
By the very nature of the process, and as was made clear by these letters, there was bound to be a first meeting at which, no doubt, the Investigation Committee would have discussed with the applicants what it was they wished to look at, in the first instance at any rate; and at which initial meeting (or meetings) the applicants would have raised such problems, logistic or otherwise, or make such request for further particulars, as they thought appropriate. I do not think that the applicants can reasonably complain that at the very initial stage of that which was in itself an initiating process, they did not have more information than was given. In any event, the applicants were asserting at all times before these judicial review proceedings were initiated that the Investigation Committee had not been lawfully engaged. It is then perhaps a little odd to say, at the same time, that they were entitled to documentation to enable them to tackle the investigation, the validity of which they were challenging. 38. As for the contention that the applicants ought to have been told that the Council had, as is alleged to be evidenced by the minutes of the meeting, confined itself to one sub-section of section 34, that is a contention that is based, for reasons I have given, on an erroneous reading of the minutes. 39. The phrase "related areas" is vague but, in the circumstances and context, necessarily so. It was, I think, a reasonable and understandable caveat to insert at that early stage; the intent of which was explained by Mr Wong in a letter dated 13 August 1999 :
That was in my judgment sufficient explanation at the time. 3. LEGITIMATE EXPECTATION 40. It is accepted by the respondent that the policy statement published in the January 1995 edition of "The Hong Kong Accountant" imparted to members of the Society in Hong Kong a legitimate expectation that they would, should the circumstances arise, be treated in accordance with the policy. The respondent in this case asserts that it followed the policy. The applicants say that the Council did not. 41. There is no suggestion that the applicants have ever been other than co-operative with the Society in answering such questions as may have been put in the past, even though, as we shall see, in past cases there were difficulties where clients felt unable to permit the disclosure of documents. So, say the applicants, they were entitled to expect, and did expect, that they would be given an opportunity to put forward their case before there arose any question of appointing an Investigation Committee. Yet there was no approach by the respondent which sought the co-operation of the applicants. There was given to the applicants, before the decision to appoint the Committee, no opportunity to show that the cause for concern was, or might be, quite unfounded. The applicants were presented, rather, with a fait accompli, on 22 July 1999, when they were informed by the Council of the decision already taken to constitute the Committee. They had had some strong hint of the matter when the press was awash with reports of the decision in mid-June 1999. But that was the first that they had heard of the matter. There had been a leak of the Council's decision; by whom, one knows not. Between 1 June, when the decision was taken, and 22 July, when the Society wrote to the applicants telling them of the decision, there was simply no communication between the Council and the applicants. 42. What the applicants say is that the policy as announced required that the Council was bound, in all cases, first to travel the co-operation route, and only if that proved unsuccessful should there be any statutory investigation, unless it was apparent from the outset that the accountant or firm was not going to co-operate. The applicants say that on its face the meaning of the policy is clear : that the Society has first to exhaust all voluntary avenues until such time as those avenues are demonstrably not working. The effect of that contention is to place emphasis on the word "will" in the phrase "it will require more than the voluntary co-operation ....," and to suggest that an informed, experienced view that the voluntary route was most unlikely to achieve the objective was not good enough. The Council had first to be sure that the voluntary path was simply not going to work. 43. Now if the applicants wish to insist upon a literal interpretation of the policy statement, then, in my judgment, they hoist themselves by their own petard, because a literal approach to paragraph 2a of the policy statement suggests that the moment there is shown the need for co-operation by anyone other than, or in addition to, the Society's member - in other words any third party, including a client - then the Council is at liberty to appoint an Investigation Committee. One would then be entitled to say that in a case, of which the present is a clear example, where it is obvious that the consent and co-operation of an auditor's client will be required for the disclosure by the auditor of information about the client's affairs, then it follows that more than the voluntary co-operation "of the member concerned" is required. It could not in this case with any force be argued that the Council was wrong to take the view that this was a case in which co-operation from persons other than the applicants themselves would be required. That being so, this was a case in which more than the voluntary co-operation of the member was necessary. 44. However, it is not necessary or desirable to give a policy statement of this kind a literal construction, or to construe it as a statutory instrument, although it is necessary to bear in mind that it is drawn in the context of, and in relation to, statutory duties on the part of the Council. What should be done is to give a reasonable interpretation that accords with the court's view of what the policy statement must have been intended to mean "bearing in mind [its] authorship, [its] purpose, ... the readership to which [it was] addressed" (a passage I have taken from Jacques v. Amalgamated Union Engineering Workers [1987] 1 All ER 621, 628 - a case with a somewhat different factual context), and the statutory backdrop against which it was drawn. Further, if a construction has been placed upon a policy statement by the decision-maker, then unless the court is driven to say that that construction flies in the face of the ordinary and natural meaning of the words in their true context, the court should not interfere (see R. v. Ministry of Defence Ex p Walker [1999] 1 WLR 1209, 1216 - 1217; and Northavon District Council v. Secretary of State for Environment [1993] JPL 761). The policy's background 45. So what is the true context? For the genesis of this policy statement, we need to travel back to 1994. The main purpose of the 1994 amendments to the Ordinance, according to the Legislative Council member who introduced the Bill, was to strengthen the Society's self-regulatory framework through the introduction of the Investigation Committee. There were gaps in the system as it then operated - gaps in the efficacy of that system; difficulties in presenting evidence to the Disciplinary Committee; a lack of power to compel accountants to respond to inquiries; and there were cases where no formal complaint had been made but where there was public concern, or representations by a regulatory authority, but where there was insufficient evidence in the hands of the Council to enable a referral to the Disciplinary Committee. "The institution of an Investigation Committee quite separate from its disciplinary machinery would enable the Society to be proactive in its regulation of the profession and demonstrate its determination to self-regulate," the member said, adding that : "Checks have been built into the provisions of the Bill restricting the powers of the Investigation Committee to prevent abuse of the system. Moreover the Council of the Society will lay down guidelines to define the circumstances under which investigations can be initiated." 46. At a meeting on 1 June 1994, the Council had acknowledged the need to be proactive in self-regulation but said that : "within this framework and exercising its powers the Council should only react to defined circumstances such that it could be demonstrated to the Society members and legislators that the Council would not abuse the system and go for fishing expeditions." (The emphasis is added.) It was in that context that the policy to circumscribe investigations was proposed, and in that context that it was agreed by the Council that an investigation would be instituted only when, for example, there had been a representation from a regulatory authority, or when conduct had become a matter of public concern, or there had been a complaint, and when the matter could not be resolved through the co-operation of the individual accountant or firm concerned. 47. In September 1994, the members of the Legislative Council were informed of the terms of the proposed policy. In doing so, the Council told the Legislative Council that it believed that :
Analysis 48. There were a number of strands to this approach, strands that should in my view have been apparent to any member who actively turned his mind to the policy statement and its context. The Investigation Committee was not there as a tool for intrusive prying without good cause. There had to be a real trigger for an investigation and not some whim, and not if a matter could readily and efficiently be resolved informally. The speed and efficiency required would depend on all the circumstances. But, at the same time, the policy did not have some life of its own. The Council, representing the profession, had, in putting forward the legislation, held out something not just to its members but to the public at large, namely, that it would be proactive in self-regulation. That was not an adjunct to the policy; the policy was an adjunct to that central plank. That had to mean that when genuine circumstances arose which called for an investigation, it was not for the professional accountant or firm to dictate the method of inquiry, or its scope or, in particular, its pace. What was envisaged was that there would be cases in which a question or issue was, by its nature, readily amenable to effective and expeditious resolution by an informal process - and it is all too easy to forget, when deeply immersed in the facts of the particular case, that the range of circumstances that might trigger an inquiry into possible professional default encompasses a very broad spectrum, from the very simple to the very complex. So, on the other hand, there would be cases in which a question or issue would self-evidently not be amenable to effective and suitably expeditious resolution by the informal route. And there would be cases that came before the Council which bore all the hallmarks of a rocky and difficult road. In such cases, even where the Council could not with certainty say how the twists and turns of an investigation might reveal and resolve themselves, the Council might quite reasonably say that it did not believe that an investigation would (even assuming goodwill by the accountants) progress satisfactorily - that is, with the speed or efficiency demanded by the circumstances - unless the formal route were taken. The phrase "in order to conclude the matter satisfactorily" does not in my judgment mean "so that at the end of the day - no matter how long it takes - we will get the answer". It refers to the satisfactory conduct and resolution of the inquiry at hand, and satisfactory conduct includes such actual and perceived progress as is necessary in the particular context. Faced with the decision whether to appoint an Investigation Committee or to go the voluntary road, the Council is necessarily looking to the future and may well be possessed of not a great deal of information. It must then do the best it honestly can. Based on its collective professional experience and taking into account the history of investigations in similar cases, it should be able to assess, without too much ado, the kind of problems that are likely to arise. If such a Council reasonably takes the stance that the case is one that must progress with all due expedition and with such certainty of progress as can reasonably be expected in such a case, the Council then asks itself what it is that is necessary to achieve that aim. If it then sees that the voluntary highway is littered with the real likelihood of difficulties and unnecessary delays, then it is entitled to say that, in the context of that case, the voluntary route is not a satisfactory way of concluding the matter, and that it wishes, therefore, to choose the formal route. The policy as framed accords with, or at the least allows for, that interpretation. The professional accountant reading this policy statement, and aware of the setting in which it was promulgated and the promise to the public that self-regulation would be proactive, would not, I think, reasonably conclude that in such circumstances the policy required the voluntary route willy-nilly. This case 49. So what happened in this particular case? There are two sources from which I am invited to decide that - the minutes of the meeting of 1 June 1999; and the evidence of Mr Wong and Mr Kam, both of whom were at the meeting. I am invited to say that it is to the minutes that I am confined, for the minutes, so it is argued, constitute the best evidence, and that they do not reflect the depth of deliberation suggested by the affidavit of Mr Wong and by the affirmation of Mr Kam. I do not see why I am restricted to the minutes. They are, by definition, a summary of what is said to have transpired, and I have no basis upon which I could properly conclude that the affidavit and affirmation are untrue. The minutes, in their material part, read as follows :
50. In his affidavit, Mr Louis Wong notes the factors that led to the decision to appoint the Investigation Committee in this case. This, in part, is what he says :
51. I have seen the correspondence between the Association and the applicants relevant to the audit of the other publicly listed company referred to in that affidavit. The correspondence I have seen starts in December 1998 and goes on to 11 June 1999. There are a number of features of this correspondence to which my attention has been directed. At one stage, some months after the informal inquiry began, it became evident that the informal monitoring committee wanted to see working papers, but at that stage matters broke down because the applicants took the view that they could not do so and they gave reasons, which included a hint that further co-operation from clients would be difficult to secure, and expressed the view that, generally, there should be established "a confidential expeditious process which obliges members to produce relevant information while protecting their client confidentiality and other considerations." That was said on 11 May 1999. (One notes that the fears hinted at, about the refusal of the client to co-operate further, were shown to be justified for there is a letter (after 1 June 1999) in which the applicants say that one request could not be satisfied "because our client has declined to allow the release of the letter".) 52. This background, so close to the time at which the Council came to make its decision - and I ignore of course such correspondence that took place after 1 June 1999 - was but one of the factors operating on the mind of the Council. In the round, the Council was faced with a complex and high profile case which it wished to resolve as soon as reasonably practicable; and in which it concluded that it would need information from parties other than the accountants, or information about parties other than the accountants; that there needed to be a framework to ensure co-operation by all, and freedom for the applicants to divulge information without the need to worry about questions of client confidentiality, or privilege, or discovery of documents. The Council was in my judgment perfectly entitled to entertain these concerns, and to say that in the light of these anticipated difficulties, the matter could not be concluded satisfactorily without the early use of an Investigation Committee and the tools that such a Committee would have at its disposal. Client confidentiality : a reasonable excuse? 53. It has been suggested in argument that the appointment of an Investigation Committee does not absolve the professional accountant from the need to obtain his client's consent to the release of documents and information about the client's affairs, so that that suggested benefit is illusory. The argument goes like this : that, by reason of section 34(1)(a)(vii) of the Ordinance, it is a disciplinary offence to fail, without reasonable excuse, to comply with a requirement made under section 42D by an Investigation Committee; but, it is contended, the absence of a client's consent is a reasonable excuse. I think not. "What we are concerned with here is the contractual duty of confidence generally implied though sometimes expressed between a solicitor and client. Such a duty exists not only between a solicitor and client but for example between banker and customer, doctor and patient and accountant and client. Such a duty of confidence is subject to, and overridden by, the duty of any party to that contract to comply with the law of the land. If it is the duty of such a party to a contract, whether at common law or under statute, to disclose in defined circumstances confidential information, then he must do so, and any express contract to the contrary would be illegal and void." (per Diplock LJ in Parry Jones v. Law Society [1969] 1 Ch 1, 9). So it is in the context of section 42 of this Ordinance. The duty of confidentiality between client and accountant is overridden by the power of the Investigation Committee to require the production of documents. Were it otherwise, Part VA of the Ordinance would be significantly denuded of effect. It is not necessary to canvass the type of rare situation in which there might be a reasonable excuse to refuse to comply with an order for production of documents, but client confidentiality is not one of them. Section 42D(3) makes it clear that the accountant who complies with such an order would not thereby incur liability by reason of compliance; and guidance issued by the profession expressly states that members of the Society must disclose information if compelled by law. The policy statement : Conclusion 54. Accordingly, I find that the policy statement upon which the applicants rely does not bear the meaning which they seek to attribute to that statement, and that it did not give to them a legitimate expectation that, in the circumstances of this case, the respondent would first engage an informal and voluntary procedure. The interpretation of the policy adopted by the Council was a reasonable one, and I am satisfied that the policy was applied in this case. It follows that this ground of attack fails. SECRECY - THE THIRD DECISION 55. The third decision which it is sought to impugn in these proceedings is "the decision of one of the members of the Council .... to publish to a third party the decision of the Council to constitute an Investigation Committee ...." to investigate the conduct of the audit. The phrase "one of the members" is deliberate, for it is accepted that the Council as a whole did not decide to make any announcement. The minutes say that the Council resolved that there would be no formal announcement. After the press publicity, there was distributed a memorandum by the Registrar to members of the Council, which asserted that there had been a leak to the press, the implication being that it was something that ought not to have happened. I do not know whether at the Council meeting of 1 June the members were told or agreed that there should be no information passed informally, if questions were asked : if that was intended, it ought perhaps to have been clearly reflected in the minutes to serve as a record, and also as a reminder to members of the Council. In what circumstances the information came to be leaked has not been established. What steps have been taken to identify the source of the leak, I do not know. That is not relevant to my task. 56. The relief sought in relation to this leak is a declaration, the effect of which is to say that the leak contravenes the provisions of section 42G of the Ordinance. Although Mr Dykes accepts that the horse has bolted, in the sense that the information has been imparted, and that there is therefore nothing to quash or prevent, the issue is nonetheless not moot, he says, because there has been a breach, and the breach has affected the applicants, and the question of the width of section 42G is a matter of real relevance to the Council's function. Section 42G is the secrecy section :
57. Mr Dykes argued that the scope of the section was such that it precluded not only the revelation of information coming into the hands of the Council or of the Investigation Committee as an inquiry progresses, but that it extended to preclude disclosure of the very fact that an Investigation Committee had been appointed. He says that his stand is buttressed by the fact that in the case of mere voluntary co-operation, there is no question of divulging the fact of inquiries made by the Council from a firm of accountants. Why, he asks, should there be any difference in the case of a statutory investigation? 58. It has, in the event, been unnecessary for me to decide the point. The concern of the applicants arose not merely from the fact of the leak but, as importantly, from an internal memorandum to Council members by which was disclosed legal advice, apparently to the effect that there was no impediment in law to disclosure of the fact of a decision to appoint an Investigation Committee. Mr Huggins warned, however, against assuming that that was the full advice, or that the full context of that advice was before the court. In his skeleton argument, Mr Huggins stated that :
Given that statement, and given that the applicants are not in a position to prove that the person who published the information had come by the information in the performance of his or her function under the Ordinance, Mr Dykes is content not to press for the declaration sought. It is in the circumstances unnecessary for me to determine the issue. CONCLUSION 59. It follows that the applicants have not established that the decision to appoint the Investigation Committee is, on any of the grounds advanced, impeachable; or that the applicants were entitled to any information or documents relevant to that decision beyond the information provided in the letter of 22 July 1999. This application for judicial review is, accordingly, dismissed. 60. There will be an order nisi that the applicants pay to the respondent its costs of and occasioned by this motion, such costs to be taxed, if not agreed.
Representation: Mr Philip Dykes, SC, instructed by Messrs Clifford Chance, for the Applicants Mr Adrian Huggins, SC, instructed by Messrs Johnson, Stokes & Master, for the Respondent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment