Each week, Wise Law Blog reviews recent decisions from the Ontario Court of Appeal. It was a bit of a slow week at the Court, so we've highlighted only once case.
Barrington v. Institute of Chartered Accountants of Ontario. Mr. Barrington, along with two other accountants, Mr. Power and Mr. Russo, working for Deloitte and Touche LLP, were responsible for the 1997 audit of Livent Inc., which was later found to be improperly managed and its financial statements fraudulent. The ICAO brought charges of professional misconduct against Mr. Barrington and the other accountants: specifically, they charged them with failure to comply with generally accepted accounting principles ("GAAP") and generally accepted auditing standards ("GAAS").
The main issue in the charges was the nature of the Put agreement between Livent and a realty corporation regarding development of the property that would eventually become the Pantages Theatre complex. Livent sought to recognize revenue under the agreement when it was not allowed to do so. The Deloitte accountants informed the company that this was contrary to GAAP but Livent did so anyway.
The main issue in the charges was the nature of the Put agreement between Livent and a realty corporation regarding development of the property that would eventually become the Pantages Theatre complex. Livent sought to recognize revenue under the agreement when it was not allowed to do so. The Deloitte accountants informed the company that this was contrary to GAAP but Livent did so anyway.
Deloitte threatened to resign until Livent agreed to remove the Put clauses from the overall agreement between Livent and the realty corporation. Livent then re-established the Put clauses in a side agreement with the realty corporation without Deloitte's knowledge; the Deloitte accountants had a meeting and decided that the Put side agreement had been rescinded. The Discipline Committee of the Institute subsquently charged them and found them in violation of professional standards. Mr. Barrington and his colleagues appealed to Divisional Court, who quashed all of the charges against Mr. Barrington and some of the charges laid against Mr. Power and Mr. Russo on the grounds that they violated procedural fairness and natural justice. Mr. Power and Mr. Russo appealed the remaining charges to the Court of Appeal; the ICAO also appealed, seeking reinstatement of the charges against all three accountants.
The Court of Appeal divided the appeals into three issues: whether Mr. Barrington et al had had sufficient notice as regards those charges that the Divisional Court had not quashed, whether the Disciplinary Committee provided adequate reasoning for finding misconduct for other charges against Mr. Power and Mr. Russo, and whether the legislative amendments subsequent to the Divisional Court's decision could retroactively validate the Committee's costs award.
The Court of Appeal first ruled that the Divisional Court had mischaracterized the charges related to the Put agreements. The Divisional Court had stated that the Put-related allegations were effectively a new charge upon the accountants; the accountants themselves agreed and argued before the Court of Appeal that neither the charges nor disclosure nor submissions had put them on notice that the Put would be in issue, and that they therefore did not know the case they had to meet. The ICAO submitted that the Put was relevant to their argument that they had reasonable assurances that the revenues realized would be properly received.
The Court was sympathetic to the ICAO's argument, also adding that the Put was not a new allegation and that the accountants would have to recognize that any investigation into potential disciplinary action would take it into account, that the accountants were not surprised or prejudiced by the the Committee relying on the Put and that the Committee ultimately did not find the accountants guilty of breaching GAAP standards in relation to the Put, but instead of recognizing income that they should not have recognized.
The Court of Appeal then considered the additional charges against Mr. Powers and Mr. Russo which were quashed by the Divisional Court. These charges were in relation to a pair of transactions where Livent transferred receivables owing to another party and which were recorded as sales by Mr. Power and Mr. Russo after some deliberation, but should not have been recorded as sales. The Divisional Court felt that the Committee's charges were unreasonable due to a lack of explanation as to why Mr. Powers and Mr. Russo's actions were an error of judgement, as well as a lack of explanation as to why if there was a breach of the standard, that there was also no explanation as to why it was so great a breach as to constitute professional misconduct.
The Court of Appeal disagreed, pointing out that previously, even in the post-Dunsmuir era of administrative law appeal, the Court had made clear that an administrative tribunal did not have to explain its full decision so long as its "path" taken to reach its decision was clearly laid out, and the Court felt that the "path" in this case was clear.
Finally, the Court of Appeal also overturned the Divisional Court's decision to quash the costs the Committee ordered upon the accountants. The Divisional Court did so as regarded the relevant statutory law at the time, but since that decision the Chartered Accountants Act had been revised, allowing it to take precedence over the Statutory Powers Procedure Act, which had restricted when a tribunal could order costs. The accountants argued that Zadvorny v. Saskatchewan v. General Insurance distinguished between retroactively changing a law and "the extinguishment of a judgement," suggesting that it would take extremely clear language to deprive a respondent of his judgement. The Court of Appeal disagreed, pointing out that the accountants weren't being deprived of the award of a successful action, but instead had been subject to disciplinary proceedings and that therefore the precedent did not apply. Read-the-whole-case rating: 3.
The Court of Appeal divided the appeals into three issues: whether Mr. Barrington et al had had sufficient notice as regards those charges that the Divisional Court had not quashed, whether the Disciplinary Committee provided adequate reasoning for finding misconduct for other charges against Mr. Power and Mr. Russo, and whether the legislative amendments subsequent to the Divisional Court's decision could retroactively validate the Committee's costs award.
The Court of Appeal first ruled that the Divisional Court had mischaracterized the charges related to the Put agreements. The Divisional Court had stated that the Put-related allegations were effectively a new charge upon the accountants; the accountants themselves agreed and argued before the Court of Appeal that neither the charges nor disclosure nor submissions had put them on notice that the Put would be in issue, and that they therefore did not know the case they had to meet. The ICAO submitted that the Put was relevant to their argument that they had reasonable assurances that the revenues realized would be properly received.
The Court was sympathetic to the ICAO's argument, also adding that the Put was not a new allegation and that the accountants would have to recognize that any investigation into potential disciplinary action would take it into account, that the accountants were not surprised or prejudiced by the the Committee relying on the Put and that the Committee ultimately did not find the accountants guilty of breaching GAAP standards in relation to the Put, but instead of recognizing income that they should not have recognized.
The Court of Appeal then considered the additional charges against Mr. Powers and Mr. Russo which were quashed by the Divisional Court. These charges were in relation to a pair of transactions where Livent transferred receivables owing to another party and which were recorded as sales by Mr. Power and Mr. Russo after some deliberation, but should not have been recorded as sales. The Divisional Court felt that the Committee's charges were unreasonable due to a lack of explanation as to why Mr. Powers and Mr. Russo's actions were an error of judgement, as well as a lack of explanation as to why if there was a breach of the standard, that there was also no explanation as to why it was so great a breach as to constitute professional misconduct.
The Court of Appeal disagreed, pointing out that previously, even in the post-Dunsmuir era of administrative law appeal, the Court had made clear that an administrative tribunal did not have to explain its full decision so long as its "path" taken to reach its decision was clearly laid out, and the Court felt that the "path" in this case was clear.
Finally, the Court of Appeal also overturned the Divisional Court's decision to quash the costs the Committee ordered upon the accountants. The Divisional Court did so as regarded the relevant statutory law at the time, but since that decision the Chartered Accountants Act had been revised, allowing it to take precedence over the Statutory Powers Procedure Act, which had restricted when a tribunal could order costs. The accountants argued that Zadvorny v. Saskatchewan v. General Insurance distinguished between retroactively changing a law and "the extinguishment of a judgement," suggesting that it would take extremely clear language to deprive a respondent of his judgement. The Court of Appeal disagreed, pointing out that the accountants weren't being deprived of the award of a successful action, but instead had been subject to disciplinary proceedings and that therefore the precedent did not apply. Read-the-whole-case rating: 3.
- Christopher Bird, Toronto
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