Power and Russo v. The Institute of Chartered Accountants of Ontario, 2010 ONSC 338

DIVISIONAL COURT FILE NO.: 149/09, 152/09

DATE: 20100322

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

J. WILSON, LEDERMAN AND SWINTON JJ.

B E T W E E N :

COURT FILE NO.: 149/09

J. DOUGLAS BARRINGTON, FCA

Applicant

• and -

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF ONTARIO

Respondent

A N D B E T W E E N:

ANTHONY POWER, F.C.A. and CLAUDIO RUSSO, C.A.

Applicants

• and -

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF ONTARIO

Respondent

Peter H. Griffin, Kris Borg-Olivier, and Jamie J.W. Spotswood, for the Applicant

Brian P. Bellmore and Paul F. Farley, for the Respondent

COURT FILE NO.: 152/09

J.L. McDougall, Q.C. and Brian R. Leonard, for the Applicants

Brian P. Bellmore and Paul F. Farley, for the Respondent

HEARD AT TORONTO: November 16, 17 and 18, 2009

TABLE OF CONTENTS

I. Overview.. 4

II. Background Facts. 4

III. The Charges. 6

IV. The Discipline Committee’s Decisions. 7

a) The Hearing. 7

b) The Put Agreement 8

c) The Approach of the Discipline Committee. 11

d) The Penalty Decision. 13

V. The Appeal Committee’s Decision. 14

VI. The Issues Raised in these Applications. 14

VII. The Standard of Review.. 15

VIII. Were the Applicants denied procedural fairness because of lack of notice respecting charges 1(i) and (iii)?. 16

a) The Charges. 16

b) The Case Disclosed and the Evidence Presented. 18

c) The Discipline Committee's Conclusions. 20

d) The Appeal Committee's Conclusions. 21

e) The Legal Principles. 22

f) Analysis of the Discipline Committee’s Conclusions. 23

g) Analysis of the Appeal Committee's Conclusions …………………………………25

IX. Did the Discipline Committee and the Appeal Committee reach a reasonable decision on charges 2(ii), (iii), (iv) and (v)?. 26

a) Introduction. 27

b) Did the Discipline Committe and Appeal Committe act reasonably in the test of professional misconduct applied?. 27

c) The Significance of a Body of Professional Opinion. 29

d) Level of Professional Scepticism and Charge 2 …………………………………...30

e) Charge 2(ii) – The Reliability of Management Prepared Budgets. 33

f) Charge 2(iii) – The $27.5 million Write-Down. 34

g) Charge 2(iv) - Accounts Payable Testing ………………………………………….35

h) Charge 2(v) – Fixed Assets – Additions Testing. 36

i) Was the finding of professional misconduct on charge 2 based on particulars (ii), (iii), (iv) and (v) reasonable?. 37

j) The Appeal Committee’s Decision. 39

X. Did the Discipline Committee and the Appeal Committee reach a reasonable decision on charges 1(iv) and 2(viii): the First Treasury Transaction?. 39

XI. Did the Discipline Committee have jurisdiction to order costs?. 44

XII. Disposition of the Applications. 48

Schedule A – The Charges. 50

REASONS FOR JUDGMENT

The Court:

I. Overview

[1] J. Douglas Barrington, F.C.A., Anthony Power, F.C.A. and Claudio Russo, C.A. ("the applicants") are all chartered accountants who have brought applications for judicial review to quash three decisions of the Institute of Chartered Accountants of Ontario ("ICAO"):

1. the decision of the Discipline Committee ("DC") dated February 11, 2007,

2. the penalty decision of the DC dated September 27, 2007 and

3. the Appeal Committee ("AC") decision dated February 13, 2009 upholding the DC decisions.

[2] The DC concluded that the three applicants were guilty of professional misconduct with respect to two particulars alleging failure to ensure that financial statements complied with Generally Accepted Accounting Principles ("GAAP"). Anthony Power (“Power”) and Claudio Russo (“Russo”) were also convicted on a third particular with respect to another breach of GAAP, and they were convicted of five particulars for failing to perform an audit in conformity with the standards of the profession as stipulated in Generally Accepted Auditing Standards ("GAAS").

[3] In the penalty decision, the DC reprimanded the applicants, required them to post notices of its decision and fined each of them $100,000.00. The DC also ordered them to pay costs in the amount of $1,251,000.00, apportioned equally.

[4] These decisions were upheld on appeal to the AC.

[5] The applicants now challenge these decisions on a number of grounds, including a denial of procedural fairness, errors in law relating to the standard of professional misconduct adopted and the treatment of the expert evidence, and a lack of jurisdiction to order costs.

[6] Although the applicants, in their facta, also asserted a reasonable apprehension of bias on the part of certain members of the AC, they abandoned this ground at the hearing before us.

II. Background Facts

[7] These proceedings arose out of the audit of the 1997 financial statements of Livent Inc. (“Livent”) by Deloitte & Touche ("Deloitte").

[8] Livent was a public company with its head office in Toronto, registered with both the United States Securities and Exchange Commission and the Ontario Securities Commission. It began as a division of the motion picture exhibitor Cineplex Odeon and quickly became a leading promoter of live musical entertainment and musical theatre in Canada and the United States. As a consequence of its involvement in the construction and management of theatres, Livent was a significant real estate developer and facilities manager. Before it became a public company in 1993, it was a private partnership co-founded by Garth Drabinsky (“Drabinsky”) and Myron Gottlieb (“Gottlieb”). As of December 31, 1997, they remained Livent's largest shareholders and its two most senior officers.

[9] Deloitte served as auditor for Livent for the fiscal years 1989 through 1997. It was the responsibility of Livent to prepare its financial statements in accordance with GAAP. Deloitte, as auditor, was then responsible to gather and review audit evidence to be satisfied that it could express the opinion that the financial statements were prepared in accordance with GAAP.

[10] The applicants were all involved in the audit of the 1997 financial statements, although with differing roles. J. Douglas Barrington (“Barrington”), a chartered accountant since 1967 and a partner in Deloitte or its predecessor from 1973 to 2006, acted as advisory partner on the Livent engagement.

[11] Power, then a senior partner of Deloitte, acted as the lead client services partner, while Russo acted as audit client service provider or engagement partner, reporting to Power. In addition, Peter Chant, F.C.A. (“Chant”) acted as a senior advisory partner.

[12] Power and Russo were part of a new audit team for the 1997 financial statements. The previous year’s team had been led by Robert Wardell (“Wardell”) with support from Chant and others. At the request of Livent management and the Chair of Livent’s Audit Committee, Wardell was replaced as lead client services partner.

[13] Within Deloitte, Livent was understood to be a tough, demanding and aggressive client. It had a high public profile and, as noted in the working papers for the 1997 audit, its management was "extremely sensitive to the market's perception of the Company's published earning targets and report results." It had a history of aggressive revenue reporting.

[14] Deloitte clearly identified Livent as a high-risk engagement in their 1994 and 1995 planning memoranda. The 1997 audit working papers confirmed that the auditors considered the engagement risk with Livent to be greater than normal. The working papers state,

Our most important response to increased engagement risk that is pervasive to the audit engagement as a whole is an increase in the professional scepticism of all personnel involved in the audit engagement.

[15] In his testimony , Power confirmed that the client risk associated with Livent was "sky high". Russo also stated at one time that he considered the risk to be higher than normal on the Livent engagement.

[16] In assessing the overall engagement risk, the Audit Plan prepared by Deloitte identified the following risk areas:

• Livent was a public company in both Canada and the United States.
• It had a high level of indebtedness and leverage.
• It had substantial production costs.
• Management adopted aggressive revenue recognition policies.

The Audit Plan identified proposed responses to the known risks: a high level of partner and management involvement, an increased focus on accounting and disclosure issues, a focused control reliance strategy and the utilization of specialized resources.

[17] Deloitte identified four key areas of audit focus: the valuation of pre-production and deferred costs, revenue recognition, income and other taxes, and financial reporting, both Canadian and U.S.

[18] In April 1998, Deloitte released an unqualified audit opinion approving the 1997 Canadian financial statements of Livent. The 1997 financial statements were not signed by the chief financial officer, but rather were signed by Gottlieb and Drabinsky two weeks after the audited financial statements were released by Deloitte.

[19] Livent was sold in 1998, and serious irregularities were quickly discovered in its books. The new management commenced an internal investigation, which resulted in the restatement of Livent's 1996 and 1997 financial statements. Criminal charges also resulted against Drabinsky and Gottlieb, and they were later convicted of fraud.

[20] The Professional Conduct Committee ("the PCC") is the investigating and prosecuting arm of the ICAO. It began investigations in this case after the reports of fraud emerged. In 2004, the PCC laid charges against the applicants, alleging breaches of GAAP because of the release of an unqualified opinion in the 1997 Livent financial statements, as well as breaches of GAAS in the conduct of the 1997 audit. No allegation was made in the charges that the applicants should have known about or discovered the fraud.

III. The Charges

[21] The formal charges against the applicants are attached as Schedule A to these reasons. Charge 1 has been referred to as the “GAAP charge”. It states that the applicants failed to perform their professional services in accordance with generally accepted standards of practice of the profession, including the recommendations set out in the CICA Handbook, contrary to Rule 206 of the ICAO Rules of Professional Conduct.

[22] Rule 206 provides:

206 Compliance with professional standards

206.1

A member or firm engaged in the practice of public accounting shall perform professional services in accordance with generally accepted standards of practice of the profession.

206.2

A member who has responsibility for the preparation or approval of the general purpose financial statements of an entity shall ensure those financial statements are presented fairly in accordance with generally accepted accounting principles or such other accounting principles as may be required in the circumstances.

[23] The allegations particularized in charge 1 against Barrington, Chant, Power and Russo were that certain revenues should not have been recognized in the financial statements. With respect to particulars (i), (ii) and (iii), it was alleged that revenue should not have been recognized on the sale of certain assets by Livent to third parties, since all significant acts under the agreement had not been completed. These allegations relate to

1. the sale to AT&T Canada Enterprises Inc. of the naming rights to the Pantages Place Theatre and a new theatre to be built in Toronto ("the AT&T Transaction") (charge 1(i)),

2. the sale of the naming rights to the Oriental Theatre in Chicago to Ford Motor Company ("the Ford Transaction") (charge 1(ii)) and

3. the sale to Dundee Realty Corporation of the excess density rights over the existing Pantages Theatre (“the Dundee Transaction") (charge 1(iii)).

[24] Charge 1(iv) alleges that recognition of a loss of $1.2 million arising out of the transfer by Livent of certain Ford receivables to First Treasury Financial Inc. ("the First Treasury Transaction") did not accord with GAAP. Specifically, the transaction should not have been accounted as a sale in the financial statements "when all the conditions required to account for the transaction as a sale were not met".

[25] Charge 2, referred to throughout the proceeding as the “GAAS charge”, begins with the allegation that Power and Russo had not complied with generally accepted standards of the profession contrary to Rule 206 of the Rules of Professional Conduct. In essence, the particulars of the GAAS charge allege that the auditors failed to comply with generally accepted auditing standards, as they did not have sufficient or appropriate audit evidence on which to release an unqualified audit opinion for the 1997 Livent financial statements.

IV. The Discipline Committee’s Decisions

a) The Hearing

[26] The DC is a committee composed of four chartered accountants and a lay member. It heard 34 days of evidence between January 11, 2005 and March 8, 2006. This disciplinary proceeding is the longest in the one hundred year history of the ICAO.

[27] The PCC called only one witness, Allan Wiener (“Wiener”), who was one of the two investigators on the file. He gave evidence about the investigation, adopting the contents of the Investigators' Report which he had prepared with another chartered accountant. It was filed as an exhibit. He was also qualified to provide expert evidence on behalf of the PCC.

[28] At the hearing, four experts filed reports and testified on behalf of the applicants: Frank Kelly (“Kelly”), an assurance and advisory services partner of Grant Thornton LLP; David Yule (“Yule”), a retired partner of Ernst & Young; Keith Vance (“Vance”), National Risk Management Director of BDO Dunwoody LLP; and Dr. R.J. Hanna (“Hanna”), a retired university professor of accounting. Each of the members testified, along with several other Deloitte partners and the Chair of Livent's audit committee, Garfield Emerson, Q.C. (“Emerson”).

[29] All parties filed extensive written submissions as to whether the charges had been proved, supplemented by three days of oral argument in May 2006. The DC released its 77-page decision on February 11, 2007.

b) The Put Agreement

[30] During the course of the hearing, an issue arose with respect to the treatment of the “Put agreement” in the Dundee Transaction. In its reasons, the DC described the actions of the auditors with respect to the Put agreement in April 1998 as "fundamentally important" to its decision (at para. 79). Therefore, it is necessary to set out a brief description of this issue.

[31] The Put was an element of Livent's arrangement with Dundee Realty for the development of the Pantages Place lands. On May 22, 1997, Dundee and Livent had entered into an agreement to transfer density rights over the Pantages Theatre complex to a proposed hotel and condominium tower to be built. They also agreed to create a jointly-owned corporation for the development of the hotel and condominium. The agreement was scheduled to close in August 1997.

[32] As originally proposed, the agreement included a Put, which provided Dundee with a limited right to exit its investment by transferring its shares and debentures back to the development corporation, the entity created to develop the project. Livent would then be the majority shareholder of the development corporation, and Dundee’s involvement in the project would end.

[33] Livent wished to recognize the revenue it would receive under the Dundee/Livent agreement in the second quarter ending June 30, 1997 (“Q2”). The 1996 audit team at Deloitte, including Chant and Wardell, advised Livent management that it would not be appropriate to recognize the revenue for this transaction in the financial statements for two reasons. First, as long as the Put was in existence, recognition would not be in accordance with GAAP. The existence of the Put affected whether a transfer of ownership, and therefore a sale, had actually taken place. Second, it was inappropriate to recognize the revenue in Q2 as the agreement had closed in August, 1997 – that is, in Q3.

[34] Despite the clear instruction from the auditors with respect to this transaction, Livent management announced its second quarter financial results in an August 13, 1997 press release, and included the revenue from the Dundee density rights transaction, contrary to the auditors' advice.

[35] Deloitte took the position that Livent's second quarter financial statements were materially misstated. The Deloitte audit team took a firm position, refused to be associated with these statements and threatened to resign from the audit unless the Q2 statements were corrected.

[36] There were two meetings between Livent’s Audit Committee and Deloitte, on August 26 and 29, 1997, to resolve these issues. At these meetings, Deloitte was represented by Barrington, Chant and Wardell.

[37] Barrington testified that he had been told directly by Gottlieb on August 22 that the Put had been removed from the agreement. The removal of the Put from the master agreement was also confirmed by letters dated August 27, 1997 from Rodney Seyffert (“Seyffert”), legal counsel for Livent, and Michael Cooper (“Cooper”), the Chief Executive Officer of Dundee.

[38] Deloitte further advised Livent that, in order for the revenue to be appropriately recognized under U.S. GAAP, the transaction should be recognized in the third quarter, not the second quarter. Livent issued a news release on September 2, 1997, stating that it would be adjusting its second quarter results, so that the Dundee/Livent agreement revenue would be recognized in Q3 instead of Q2.

[39] Shortly after the events in August 1997, Gottlieb and Emerson requested a change in the audit team from Deloitte. Wardell and another individual left the Livent engagement. The only remaining member of the audit team with extensive prior familiarity with the Livent file and Livent management was Chant.

[40] On April 3, 1998, as the audit of the 1997 financial statements was nearing completion, it came to light that the Put may not, in fact, have been rescinded. A Deloitte partner working on the audit of Dundee Realty discovered a document dated August 15, 1997, signed by Gottlieb and Cooper granting Dundee the right to put its shares and debentures to the development corporation ("the Put side agreement"). This document had not been disclosed in the Livent audit.

[41] Deloitte held an emergency internal meeting on April 3, 1998, with legal counsel present, to address this issue and to decide whether its relationship with Livent should continue. All of those present, including Barrington, Russo and Power, agreed that if Deloitte had been lied to about the Put, it would have to resign from the audit.

[42] Chant felt that Deloitte should withdraw from its relationship with Livent immediately, as he was of the view that Deloitte had been lied to three times by Livent management. He left the April 3 meeting in anger and withdrew from the process of investigating the Put.

[43] Deloitte then took a number of steps to ascertain whether the Put agreement had been rescinded by the end of the third quarter of 1997. On April 3, Barrington and Power met with Drabinsky, who denied any knowledge of the Put. Gottlieb was called in, and he indicated that the Put side agreement had been in place temporarily, but had been cancelled.

[44] Barrington prepared speaking notes, with the assistance of Power and Russo, to ensure that he would make clear to Livent the terms and conditions under which Deloitte would continue the audit engagement. He listed four conditions that Livent would have to meet to demonstrate the Put had been cancelled by the end of the third quarter:

1. Be provided with a copy of the Put agreement signed August 15, 1997.

2. Receive directly a confirmation in writing that the Put agreement was cancelled by the parties in the third quarter and a copy of this must be provided to Dundee's auditor.

3. Receive an opinion from the company's legal counsel that this document does in fact constitute an effective cancellation of the Put agreement in the third quarter. Counsel may want to re-issue its letter to you, and provided to us, as part of the second quarter debate.

4. Have full disclosure of all these facts to the Audit Committee in our presence.

These notes were used in a meeting with Drabinsky on April 4.

[45] Deloitte confirmed the cancellation of the Put with Cooper, President of Dundee, and obtained written confirmation from Seyffert, Livent’s legal counsel, and Ned Goodman (“Goodman”), Chairman of the Board of Dundee, that the Put was cancelled. They also informed Emerson, Chair of the Livent Audit Committee, who carried out his own investigation.

[46] Ultimately, Deloitte concluded that the August 15, 1997 document had been cancelled shortly after that date. They took the view that the Put side agreement was not in place, and so it did not affect the recognition of the revenue from the density rights transaction in Q3.

[47] None of the experts who testified at the DC hearing, including the PCC investigator, Wiener, raised any issues respecting the appropriateness of the steps taken by Deloitte to confirm that the Put side agreement had been rescinded by December 31, 1997.

[48] Representations made to the investigators prior to the charges being laid were that the decisions of the audit team were made “very much as a matter of consensus”. A letter of November 28, 2003 from Power and Russo’s counsel, in answer to questions from the PCC before charges were laid, states:

Mr. Power was the ultimate decision maker in respect of each of these decisions. In making those decisions Mr. Power consulted with Mr. Barrington and Mr. Russo. In addition, Mr. Chant was consulted in respect of each of these decisions, except the decision to accept the write-down of pre-production costs. In each case, notwithstanding Mr. Power’s ultimate responsibility, the decisions reached by the client services team were very much a matter of consensus. Mr. Power would not have made the decisions he made without the concurrence of the other partners. (emphasis added)

[49] The internal disagreement on April 3, 1998 was disclosed for the first time during Chant’s evidence at the hearing. Chant did not learn about the November 28, 2003 letter until 2005. He testified that he strongly disagreed with the view of his partners that Deloitte could or should continue to act on behalf of Livent after he learned of the existence of the Put side agreement, and he made this clear at the April 3, 1998 meeting.

c) The Approach of the Discipline Committee

[50] There is no question that the DC had a formidable task before it to consider all the evidence heard over the course of a very long hearing and to determine whether the PCC had met its onus to prove, on a balance of probabilities, that the members had committed professional misconduct as charged.

[51] In writing its reasons, the DC did not summarize the different evidence, nor did it deal in detail with the expert evidence. The following quotation shows how it decided to deal with the evidence and also illustrates the important role of the Put issue to its decision:

The panel sets out hereafter the facts which it finds to be relevant. It follows that the panel did not accept the evidence which differs from the facts set out, or did not find such evidence relevant. Many of the facts are not in dispute. For the most part, the dispute related to the appropriateness of the conclusions which the auditors reached on the evidence they had. A most significant issue was whether or not the auditors were entitled to conclude that they had sufficient appropriate audit evidence to dispel their suspicions about what was referred to as the "put" in April 1998. As this issue is fundamentally important to the panel's decision with respect to guilt or innocence, the relevant evidence and the standards of the profession are set out in some detail (at para. 79).

[52] The reasons contain a very detailed discussion of the background surrounding the charges, including the Put agreement issue that surfaced first in August 1997 with respect to the density rights transaction. They described the audit plan and the field work and then gave detailed consideration to the disclosure of a possible Put side agreement on April 3, 1998 and what followed thereafter (pp. 35-46).

[53] At p. 50, the DC began its section on analysis and conclusions, covering the role and importance of the good faith of management and professional scepticism, the audit plan and the audit team. From pp. 54 to 65, there is a detailed discussion of the Put issue. Ultimately, the DC concluded that the auditors did not have sufficient appropriate audit evidence to conclude that the Put was not in place as of December 31, 1997 and, therefore, they should not have released an unqualified audit opinion of the 1997 financial statements (at para. 230). The DC also found that Barrington's four points, outlined in the April 4, 1998 meeting with Livent, were an audit plan to deal with the Put, and they had not been followed (at para. 247).

[54] The PCC had taken the position that Deloitte management yielded to client pressure by changing the audit team and accepting overly aggressive accounting policies. The DC rejected this position (see paras. 209, 213), concluding that Deloitte made the change in the audit team to assure Emerson, Chair of the Livent Audit Committee, that he would have a strong, independent lead client services partner.

[55] In the course of the reasons, the DC was critical of the applicants’ failure to reveal Chant's dissenting views in the April 3, 1998 meeting and his role thereafter. While the DC noted that the investigators had failed to ask appropriate follow-up questions (at para. 255), it was also very critical of the letter from counsel dated November 28, 2003 (referred to above in para. 48 of these reasons), which it found to be false and misleading as to the role of Chant (at para. 258).

[56] The DC, in addressing the proper approach to GAAP, rejected the approach of the PCC and accepted that of the applicants and their experts (at para. 267). Then from pp. 66 to 74, it came to its conclusions about the particular charges, finding that particulars 1(i), (iii) and (iv) and 2(ii), (iii), (iv), (v) and (viii) were proven. In coming to its conclusions on the particulars, the DC made limited or no analysis of the expert evidence before it.

[57] The DC found that charges 1(i) and (iii) had been proved because of the Put agreement. They found charge 1(ii), the naming rights for the Ford Theatre, was not proved.

[58] Charge 1(iv) concerned the transfer to First Treasury of amounts receivable from Ford for the naming rights transactions. Livent recognized this transfer as a sale, but the PCC took the position that it should have been recognized as a financing. The DC accepted this argument.

[59] There were eight particulars of charge 2 made against Power and Russo. Charge 2(i) concerned a failure to identify a change in accounting policy and the effect it would have on the financial statements. The DC dismissed this particular at the request of the PCC, at the conclusion of the evidence.

[60] Charge 2(ii) alleged that the members failed to ascertain the reliability of management-prepared budgets, particularly regarding the recoverability of pre-production costs. The DC concluded that the auditors did not have sufficient appropriate audit evidence to assess the recoverability of pre-production costs and found this particular was proven.

[61] Charge 2(iii) concerned a write-down of $27.5 million of pre-production costs, after the draft financial statements were prepared and shortly after the Put side agreement had been discovered. The PCC alleged that the members should have reassessed the reliability of management's representations given the timing of the request for the write- down and its magnitude. The DC found Power and Russo failed to meet the standards of the profession on this particular.

[62] Charge 2(iv) concerned the testing of accounts payable. After errors were discovered during testing, the auditors did not reassess the sample size or extrapolate the sample to the entire population. Power and Russo were found guilty on this particular.

[63] Charge 2(v), concerning fixed asset testing, alleged that Power and Russo failed to obtain sufficient audit evidence of unsupported transactions and additions to Livent’s fixed asset accounts. They were found guilty on this particular.

[64] Particulars (vi) and (vii) were found not to have been proved. These particulars concerned the amortization of pre-production costs and the financial statements of foreign subsidiaries, respectively.

[65] Charge 2(viii) dealt with the transfer to First Treasury of receivables owed to Livent by Ford. This particular alleged that Power and Russo failed to ensure that the financial statements disclosed the contingency that First Treasury had under certain circumstances against Livent. The DC concluded that this particular was proven against them.

[66] The DC then asked whether the breaches constituted professional misconduct. It concluded (at para. 329):

As these departures individually constitute professional misconduct, it follows that collectively, they constitute professional misconduct. Also, collectively, they reveal the essential nature of the misconduct, namely an improper exercise of professional judgment with respect to the reasonable suspicions about the Put and the failure to reconsider their planned auditing procedures. The auditors said that their scepticism was "sky high". However, with respect to the impugned conduct, the evidence disclosed that the auditors failed to exercise the professional scepticism required in the circumstances.

[67] The DC then determined who was responsible. It found Chant not guilty of any charges. It found Barrington, Power and Russo guilty of charges 1(i) and (iii), and Power and Russo guilty of charges 1(iv) and 2(ii), (iii), (iv), (v) and (viii).

d) The Penalty Decision

[68] The DC concluded that each of the applicants was responsible for the misconduct and ordered a substantial fine of $100,000 against each one. In addition, it imposed a reprimand.

[69] The DC was of the view that it had jurisdiction to order costs, given the 2006 amendment to s. 8(1)(g)(ii) of the Chartered Accountants Act, 1956, S.O. 4-5 Elizabeth II, c. 7 (the “CA Act”) and ICAO By-law 530(3)(c), including the costs of the investigation and the hearing. Therefore, each applicant was ordered to pay $417,000 in costs.

V. The Appeal Committee’s Decision

[70] The AC, composed of four chartered accountants and a lay member, heard this appeal over the course of six days. It issued a decision dismissing the appeal on February 13, 2009.

[71] After rejecting a motion alleging reasonable apprehension of bias because of the composition of the panel, the AC rejected the applicants' arguments based on denial of natural justice. In considering the applicants' argument that the DC failed to consider the expert evidence from the defence, the AC canvassed that evidence in some detail. The AC noted that “Certainly, a written assessment [of the expert evidence] would have helped” (at para. 124), but concluded that the DC’s reasons were sufficient.

[72] The AC concluded (at para. 130):

The members of the Discipline Committee had a job to do, based in part upon their own expertise, and it is the Appeal Committee’s role to check whether this has been done reasonably. The Appeal panel believes that the Discipline Committee has done so by accepting the concept of professional skepticism appropriate to the circumstances and then in examining those circumstances. Its approach did not constitute an error in law. The Appeal Committee accepts the Discipline Committee’s findings of fact.

[73] Ultimately, the AC accepted the DC's findings of fact and conclusions about professional misconduct as reasonable. The AC also concluded that the DC had jurisdiction to order costs.

VI. The Issues Raised in these Applications

[74] The applicants assert that the DC made the following errors of law:

1. It misunderstood and misapplied the test of professional misconduct.

2. With respect to the GAAP charges 1(i) and 1(iii), the applicants were denied procedural fairness because they were convicted of a matter that was not the subject matter of the charges as particularized and disclosed, and hence was not the case they had prepared to meet.

3. Expert evidence of a breach is a prerequisite for finding professional misconduct in a professional standards case. On charges 1(i) and 1(iii), no expert witness testified that the applicants' conduct breached the professional standard.

4. In all of the particulars in charges 1 and 2, the DC failed to adequately address the expert evidence called by the defence. The reasons of the DC were inadequate.

[75] The applicants assert that the AC compounded the errors in the DC decision in that:

1. The AC adopted the analysis of the DC that had misapplied the proper legal test to prove professional misconduct.

2. The AC attempted to rationalize and justify the DC decision, and did not perform its appellate function of an independent review of the DC decision.

3. The AC erred in its conclusion that the DC had jurisdiction to award costs against the applicants pursuant to ICAO By-law 530(3)(c) in light of s. 17.1 of the Statutory Powers Procedure Act, R.S.O. 1990, c. S.22, as amended ("the SPPA").

VII. The Standard of Review

[76] The applicants argue that many of the questions of law or jurisdiction raised engage the standard of correctness, whereas questions of fact or mixed fact and law engage the standard of reasonableness. The respondent argues that all issues raised by the applicants engage the standard of reasonableness.

[77] In Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, 2008 SCC 9, the Supreme Court of Canada held that a reasonableness standard will usually apply to questions of fact, discretion, mixed fact and law, or policy (at para. 53). The Court noted that if the appropriate degree of deference has already been determined for a particular category of question, there is no need to re-evaluate it (at para. 62).

[78] Prior to Dunsmuir, the standard of review for a disciplinary decision of the Appeal Committee of the ICAO had been considered in a penalty case, John Doe v. ICAO (2005), 200 O.A.C. 293 (Div. Ct.). The standard was held to be reasonableness. Although penalty decisions may be distinguished from a decision based on a breach of professional standards, the principles outlined in the John Doe decision are helpful. The Divisional Court applied the pragmatic and functional approach and canvassed the AC’s expertise and the self-governing role of the ICAO as follows:

[14] In this case, there is no privative clause nor a statutory right of appeal from the Appeal Committee contained in The Chartered Accountants Act, 1956, S.O. 4-5 Elizabeth II, c. 7. However, the ICAO Bylaws state that the Appeal Committee’s orders are final, binding and conclusive (Bylaw 601(7)).

[15] The Appeal Committee is comprised of members of the profession plus one lay member. In matters of professional regulation, they have greater expertise than this Court. In addition, the ICAO has developed a body of jurisprudence which guides its committees in their decision-making.

[16] The purpose of The Chartered Accountants Act, 1956 is to give the ICAO the jurisdiction to discipline and regulate the profession of chartered accountancy in the public interest. Finally, the question before the Appeal Committee – the appropriate sanction for professional misconduct – is a question of mixed fact and law.

[17] Given the expertise of the Appeal Committee in dealing with issues of professional misconduct, the role of the ICAO and the nature of the question before the Appeal Committee, the appropriate standard for review is reasonableness. This standard has been applied by this Court in Silverman v. Institute of Chartered Accountants of Ontario, [1997] O.J. No. 411 at para. 3; Moore v. College of Physicians and Surgeons of Ontario, [2003] O.J. No. 5200 at para. 8.

[79] Deference is generally accorded to the disciplinary bodies of self-governing professions on issues within their area of expertise, including what constitutes professional misconduct and the determination of appropriate penalties: Kalin v. Ontario College of Teachers (2005), 75 O.R. (3d) 523 (Div. Ct.) at paras. 7-9; Law Society of New Brunswick v. Ryan, 2003 SCC 20, [2003] 1 S.C.R. 247 at paras. 30-34; Association of Professional Engineers of Ontario v. Caskanette, [2009] O.J. No. 3591 (Div. Ct.) at paras. 19-21.

[80] Therefore, we conclude that the standard of reasonableness applies to the decisions of the DC and the AC with respect to the enunciation and application of the test for professional misconduct. Correctness applies, on the other hand, to general questions of law outside of the Committees' expertise.

[81] The applicants challenge the AC's conclusion that the DC had jurisdiction to award costs in light of s. 17.1 of the SPPA. This is a true question of jurisdiction that is reviewable on a correctness standard: Dunsmuir at para. 59.

[82] The applicants also raise issues of procedural fairness and natural justice. For matters of procedural fairness, it is not necessary to engage in a standard of review analysis: London (City) v. Ayerswood Development Corp. (2002), 167 O.A.C. 120 (C.A.) at para. 10; Ontario (Commissioner, Provincial Police) v. MacDonald, 2009 ONCA 805, [2009] O.J. No. 4834 (C.A.) at para. 37. The issue for the Court is to determine whether the appropriate level of procedural fairness has been accorded.

[83] In the following section, we turn to the merits of the applications for judicial review. We begin by addressing the second issue raised by the applicants – that is, whether there was a breach of natural justice or procedural fairness with respect to charges 1(i) and (iii). Following this, we will address the reasonableness of the DC and AC decisions on charges 2(ii), (iii), (iv) and (v). We then turn to the reasonableness of the decisions on the charges related to the First Treasury Transaction, charges 1(iv) and 2(viii), and finish with the question of the DC’s jurisdiction to award costs.

VIII. Were the Applicants denied procedural fairness because of lack of notice respecting charges 1(i) and (iii)?

a) The Charges

[84] The applicants were all found to have committed professional misconduct based on charges 1(i) and (iii). They argue that they were denied natural justice or procedural fairness because they were convicted of matters that did not form part of the charges against them, as disclosed by the words of the charges, the Investigators' Report, and the evidence presented by the PCC at the discipline hearing. They also argued that there was no evidence from any witness that the GAAP standard, as articulated by the DC, had not been met because of the applicants' treatment of the Put side agreement.

[85] The applicants were charged with having breached Rule 206 of the Rules of Professional Conduct by failing to perform their professional services in accordance with generally accepted standards of practice of the profession, including the recommendations set out in the CICA Handbook.

[86] Section 3400.07 of the CICA Handbook allows for the recognition of revenue as follows:

In a transaction involving the sale of goods, performance should be regarded as having been achieved when the following conditions have been fulfilled:

(a) the seller of the goods has transferred to the buyer the significant risks and rewards of ownership, in that all significant acts have been completed and the seller retains no continuing managerial involvement in, or effective control of, the goods transferred to a degree usually associated with ownership; and

(b) reasonable assurance exists regarding the measurement of the consideration that will be derived from the sale of goods, and the extent to which goods may be returned.

[87] The applicants were provided with specific particulars as to four separate transactions under charge 1. Charge 1(i), the AT&T Transaction, alleged that the $9.2 million from the sale to AT&T Canada Enterprises Inc. of the naming rights of the Pantages Theatre and a new theatre to be built should not have been recognized as revenue "since all significant acts under the agreement had not been completed". Therefore, the applicants had failed to ensure that the financial statements complied with GAAP.

[88] Charge 1(ii) related to the sale of the naming rights for the Oriental Theatre in Chicago to the Ford Motor Company. Again, it was alleged that significant acts remained to be completed, and the revenue from the sale should not have been recognized in the financial statements.

[89] Charge 1(iii), the Dundee Transaction, alleged that $5.6 million from the sale of density rights over the existing Pantages Theatre to Dundee Realty Corporation should not have been recognized as revenue. In accepting the clients' recognition of this revenue, the applicants failed to ensure the financial statements complied with GAAP, since all significant acts under the agreement had not been completed.

[90] The applicants argue that the DC, on its own initiative, concluded that they were guilty of professional misconduct for charges 1(i) and 1(iii) because they had made insufficient inquiries into the continued existence of the Put side agreement. They submitted that this conclusion of the DC contradicts the evidence of all the experts, including the expert called on behalf of the PCC. The fact that Chant dissented from the position taken by the applicants changed the direction and tone of the DC hearing. However, neither the PCC nor the DC took the appropriate step of amending the particulars of charges 1(i) or 1(iii) when these new facts came to light.

b) The Case Disclosed and the Evidence Presented

[91] Prior to the DC hearing, the PCC made disclosure of its case against the applicants. It consisted of a comprehensive report prepared by Wiener and Stephen Held, the two investigators retained by the PCC, dated January 19, 2004, as well as supporting documentation.

[92] The applicants sought further disclosure in a motion brought prior to the hearing, resulting in a ruling from the then Chair of the DC as follows:

The members know what the professional conduct committee alleges about their work, why the prosecution says it is deficient and how the prosecution intends to prove it. The members have all the information on which the investigators base their report and the report itself. (Reasons, March 9, 2005 at para. 54)

[93] Wiener was the only witness called by the PCC at the disciplinary hearing. He was called as an investigator and qualified, as well, as an expert. The Investigators' Report was filed as an exhibit, and he adopted its contents.

[94] With respect to the AT&T Transaction, the Investigators' Report concluded that "all significant acts" had not been completed with respect to the sale of the naming rights for the Pantages Theatre and the new theatre until the new theatre was built. As it had not been built by December 31, 1997, and Livent had not installed signage for the existing and new theatres by that date, it was inappropriate to recognize all of the $9.2 million for the sale of the naming rights.

[95] The Investigators also took the view in their Report that significant acts remained to be done with respect to the sale of the density rights over the Pantages Theatre to Dundee, including the completion of the expansion of the existing theatre and the construction of the Pantages Place project. Therefore, it was inappropriate to recognize this revenue in 1997.

[96] There was only a brief reference to the Put agreement dated August 15, 1997 in the Investigators' Report. The Investigators referred to the material that Deloitte had prior to the issuance of the 1997 financial statements confirming rescission of the Put agreement: the Seyffert letter of August 27, 1997; the Cooper letter dated August 27, 1997; and the Goodman letter dated April 4, 1998. In the report, the Investigators opined"Based on the forgoing, Deloitte had sufficient evidence to satisfy themselves that the Put Agreement had been rescinded" (p. 12).

[97] The Report went on to make reference to an April 6, 1998 letter from Drabinsky and Gottlieb to Cooper stating that the Put agreement remained in effect. This letter came to light after the audit was completed. The Report referred, as well, as to a further letter from Cooper dated October 20, 1998. However, at no point in the Investigators’ Report is there any suggestion that Deloitte should have acted differently in relation to the density rights and naming issues in April 1998 because of the Put side agreement.

[98] At the hearing before the DC, Wiener gave evidence about these transactions and maintained the position set out in the Investigators' Report. Moreover, when he was recalled to give reply evidence, having heard all the evidence throughout the hearing, he again confirmed his opinions expressed orally and in the Report, with one qualification that does not relate to charges 1(i) and (iii).

[99] According to the evidence, Deloitte had treated the revenue as it did in reliance on a memo from Chant in May 1997. Chant had concluded that in theatre naming rights transactions, it was the right to name the building and the site that was sold. Power and Russo adopted this analysis in the 1997 audit with respect to the AT&T Transaction, concluding that the right to name the Pantages Place Theatre and new theatre had been sold, and no significant acts remained to be completed. It was not necessary to wait until the theatres were built.

[100] All of the defence experts were of the view that the applicants met GAAP standards in accepting the treatment of the revenue for the sale of the naming rights and the sale of density rights as they did.

[101] Kelly made reference to the Put agreement in relation to the Dundee density rights sale, saying the Put agreement would be a consideration in relation to whether there was assurance the consideration would be received. He also noted in his report, when dealing with the AT&T Transaction, that the risk the Pantages Project would not be completed was very low, given the significant investment by Livent in the project and the development agreement with Dundee in place (at p. 23). He concluded that Deloitte had taken appropriate steps to ensure the Put was not in place (Report, p. 27).

[102] Vance also mentioned the Put in relation to Dundee but not AT&T, concluding that the Put agreement was appropriately dealt with (Report, p. 2.3). In his testimony in chief, he opined that the steps taken with respect to the discovery of the Put side agreement were appropriate (Transcript, p. 5198).

[103] In its written submissions after the hearing, the PCC discussed the Put agreement only in relation to charge 2(iii), the additional write-down of pre-production costs. With respect to the charge 1 particulars concerning revenue recognition, the PCC again argued that it was unreasonable to recognize the revenue on the signing of the agreement for the sale of the naming rights of the theatres, as it was essential that the theatres be open before one could conclude that significant acts had been completed. The PCC also argued that the application of s. 3400 of the CICA Handbook did not require an auditor to make an assessment of the probability or likelihood of a significant act being completed.

[104] With respect to Dundee and the sale of the density rights, again the PCC relied on Wiener's evidence that significant acts remained to be done in relation to the development and construction process: for example, the obligation of Livent to fund $24 million in costs to complete the extension of the Pantages Theatre and complete retail space and mechanical infrastructure. As well, Livent was required to manage the development and construction of the Phase 1 and Phase 2A developments. Again, no reference was made to the Put agreement in this part of the PCC’s written submissions relating to charge 1(iii).

[105] In the written submissions for Power and Russo, counsel argued that the DC did not need to address the Put, because it was not the subject of any of the charges and was outside the relevant time period in the charges. As well, the PCC position directly contradicted the evidence of its investigators that Deloitte had sufficient evidence to satisfy itself that the Put agreement had been rescinded.

[106] Similarly, the written submissions for Barrington stated"Charge One (iii) respecting the Dundee transaction does not mention the put – the put forms no part of Charge One" (para. 193). In any event, all of the experts, including Wiener, were of the view that satisfactory audit evidence existed to confirm the cancellation of the Put.

[107] In reply submissions, the PCC did not challenge the arguments made by the applicants that the Put was not the subject of charge 1(iii). The PCC maintained its position with respect to the AT&T and Dundee transactions – the significant acts identified by Wiener remained uncompleted when the revenue was recognized.

[108] The PCC made reference to the Put agreement in reply only in relation to the GAAS charges (charge 2), arguing that the disclosure of the Put side agreement and Gottlieb's contradictory explanations should have caused the auditors to reassess the reliability of management's accounting and representations and do additional audit work.

c) The Discipline Committee's Conclusions

[109] The DC rejected the PCC's position that revenue could be recognized only when the theatres were built and open to the public. Instead, it agreed with the position put forth by the applicants and their experts (at para. 267):

It was the position of the members that the revenue from the naming rights contracts could be recognized when the right to name the building had been sold, provided that there was reasonable assurance that the theatre would be built and open to the public. The members submitted that CICA Handbook s. 3400.07 did not preclude the concept of reasonable assurance. The panel agreed with the members and the experts for the members.

[110] Nevertheless, the DC held that charge 1(i) was proven, because it concluded that the suspicions about the Put agreement had not been dispelled. Therefore, it was not appropriate to recognize all the revenue from the AT&T naming rights agreement, as there was not reasonable assurance that all significant acts under the arrangement to build the new theatre would be completed (at paras. 272-73). Earlier in the reasons, the DC had concluded that the representations of management with respect to the existence of the Put side agreement in April 1998 were not sufficient under generally accepted auditing standards to dispel concerns that the Put continued to exist (at paras. 228, 230 and 234).

[111] With respect to the revenue from the Dundee transaction, the DC made no reference to the PCC arguments on density rights. Again, it looked to the Put side agreement, saying that as long as the Put agreement was in effect, effective ownership rights had not been transferred.

[112] Wiener, the PCC expert, had concluded in the Investigators' Report that there was sufficient appropriate audit evidence concerning the cancellation of the Put agreement. The DC stated that if the only evidence it had heard was Wiener’s, it might have come to the same conclusion. However, it stated (at para. 251):

The parties have agreed, however, that all of the evidence was before the Panel for consideration. As is set out above, on the basis of all the evidence the panel considered, the members did not have sufficient appropriate audit evidence to dispel their suspicions of the continued existence of the Put.

[113] The DC also considered the fairness of considering the Put agreement and stated (at para. 264):

The members knew that the sufficiency and appropriateness of the evidence accepted to dispel their suspicions about the Put, and the implications which followed, were issues they would have to face, and did face, at this hearing. They were not prejudiced by any failure of the Professional Conduct Committee to identify this issue as part of the case they had to meet.

d) The Appeal Committee's Conclusions

[114] Before the AC, the applicants argued that they were improperly convicted on charges 1(i) and (iii) because the DC ignored the particularization of these charges. The AC responded (at para. 111):

Charge 1 states that the members "failed to perform their professional services in accordance with generally accepted standards of practice in the profession…". The wording of the charge is not restricted to matters of accounting, but includes all "professional services" respecting the practice of the profession, including auditing and accounting. Further, all evidence which came to light during the discipline hearing is pertinent to both charges.

Thus, the AC focussed on the broad opening words of the charges. It did not directly address the argument put forth by the applicants that they did not have adequate notice of the case to be met, given the particulars and the disclosure and the way in which the PCC case was presented.

[115] The AC concluded that the DC could rely on all the evidence before it. When discussing the DC's treatment of the expert evidence, the AC concluded that the expert evidence led on behalf of the applicants was faulty. For example, it stated (at para. 128):

The [DC] panel did accept the application of different alternatives within GAAP that were presented for the sale of naming rights to a theatre that was not yet constructed. However, it was the existence of the Put side agreement with Dundee Realty for some period of undetermined length after August 27, 2007 [sic] that undermined whether there had been a transfer of the significant risks and rewards of ownership.

[116] The AC addressed the Put side agreement again at para. 147:

The "standards" responsibility to ensure that all significant acts are completed before recognizing revenue was a central charge, although the other large issue – recognition of revenue from naming rights for theatre construction – was the one detailed. The broad areas of concern had certainly been signalled, and the application of professional scepticism was central to the case. The Put side agreement emerged during the evidence, and then was pursued by Mr. Bellmore, both to elicit more specific information and to examine opinions and roles. The Appeal Committee concludes that the Discipline Committee's detailed examination of the Put side agreement was essentially about facts and credibility. This also raises the issue of the fairness of the allegation or charge versus that of the evidence that was heard. In this panel's view, the Put side agreement and its implications were new evidence arising from the defence.

e) The Legal Principles

[117] It is a fundamental principle of natural justice that when an individual is alleged to have committed professional misconduct, he or she must be given the opportunity to respond to the allegations made. In order to do so, individuals must have sufficient notice of the case to be met so that they can fairly answer the allegations and defend themselves (Venneri v. College of Chiropractors of Ontario (2008), 238 O.A.C. 143, [2008] O.J. No. 2278 (Div. Ct.) at para. 8).

[118] As the Divisional Court stated in Golumb v. College of Physicians and Surgeons of Ontario (1976), 12 O.R. (2d) 73 (at pp. 82-83):

It follows from the requirement that the charge must be particularized to that extent that an accused must not be tried on a charge of which he has not been notified. It also follows that evidence ought to be confined to the charge against him. Evidence relating to other suggestions of misconduct should not be presented because it could have a very serious prejudicial effect upon the tribunal and it is evidence relating to conduct which he is not prepared to defend.

[119] Administrative tribunals are not bound by the technical rules that govern the drafting of indictments and informations (Re Stevens v. Law Society of Upper Canada (1979), 55 O.R. (2d) 405 (Div. Ct.) at p. 4 (Quicklaw version). Nevertheless, an individual subject to a professional disciplinary hearing can only be found guilty of charges of misconduct of which he or she has received adequate notice. As the Saskatchewan Court of Appeal stated in Kapoor v. Law Society of Saskatchewan, [1986] S.J. No. 804 (C.A.) at p. 6 (Quicklaw version):

Such freedom … does not extend to charging a member of the Law Society with conduct unbecoming by contravening the rules in a particular fashion, discovering that there was other conduct which could have constituted conduct unbecoming on the facts discovered and proved at the hearing, which do not conform to the charge as particularized.

[120] Ultimately, as this Court stated in Re Cwinn and Law Society of Upper Canada (1980), 28 O.R. (2d) 61"what must be considered in professional disciplinary proceedings is the fairness of the hearing, including the element of surprise" (at para. 13).

f) Analysis of the Discipline Committee’s Conclusions

[121] The applicants argue that they were found guilty of charges of which they did not have adequate notice, given the lack of any concern expressed by the Investigators and the PCC with respect to the Put side agreement when addressing the GAAP charges. They submit that the sufficiency of the audit evidence relating to the Put was not a subject of charges 1(i) and (iii), nor part of the case led by the PCC against them, yet they were convicted on the basis of their actions related to the Put.

[122] In contrast, the PCC argues that the Put side agreement was relevant to the charge that all significant acts were not completed prior to the recognition of revenue. Even if the DC concluded that revenue could be recognized if there was reasonable assurance of completion, the applicants had not met that standard, given their failure to obtain sufficient appropriate audit evidence to show the Put side agreement had been cancelled in 1997. Moreover, there was no surprise to the applicants when the DC considered whether there was reasonable assurance of completion of significant acts, given the revelation of the Put side agreement in early April 1998.

[123] We agree with the submissions of the applicants that the DC found them guilty on charges 1(i) and (iii) on a basis that did not form part of the charges and the case disclosed and led against them. As a result, the DC breached the rules of natural justice and procedural fairness.

[124] When one looks at the words of the charges and the disclosure, it is evident that the allegation against the applicants was the following: that they failed to comply with GAAP because significant acts remained to be completed in relation to the AT&T and Dundee transactions. Charges 1(i) and (iii) alleged that the applicants had not performed their professional services within generally accepted standards of the profession. The particulars stated that recognition of the revenue on the AT&T and Dundee transactions did not comply with GAAP because all significant acts under the agreements had not been completed.

[125] In the disclosure and in the evidence it led, the PCC took the position that it was contrary to GAAP to recognize the revenue with respect to these transactions because significant acts remained to be done. In the case of AT&T, the concern was the failure to build the new theatre; in the case of Dundee, the initial concern was the sale of the density rights without completion of the project and then the ongoing obligations of Livent on the project. No issue was ever raised in the evidence led by the PCC or in its written submissions concerning the treatment of the Put agreement and its significance for charges 1(i) and (iii).

[126] The applicants and their expert witnesses responded to those charges, putting forth an alternative argument as to what GAAP compliance required – namely, reasonable assurance that significant acts would be completed. All the defence experts opined that this standard had been met in the treatment of the revenue from the sales of the naming rights and density rights.

[127] The DC accepted the evidence of the applicants and their experts as to the appropriate articulation of the standard. The DC then considered whether the applicants had met this standard with respect to the various transactions referred to in charges 1(i) through (iii), finding that there was not reasonable assurance that the significant acts would be completed, because "the suspicions about the likely existence of the Put had not been dispelled" (at para. 273).

[128] The DC erred in finding that charges 1(i) and (iii) had been proven. The PCC never alleged that the applicants breached the GAAP standard because of their actions respecting the Put. The PCC made no submissions that the applicants did not have reasonable assurance that significant acts remained to be completed because of the Put. This was not part of the case disclosed, nor the charges laid, nor even the argument made.

[129] The PCC now argues that the DC can look at all the evidence before it, and the evidence respecting the treatment of the Put was properly considered. The PCC argues that the applicants raised a defence that they had reasonable assurance significant acts would be completed, and the PCC could respond to rebut their defence.

[130] However, that is not what occurred here. The defence of the applicants was not that they had reasonable assurance that the Put was cancelled. The defence was that the standard was not as Wiener described it, and they did not err in recognizing the revenue from the naming rights and the density rights before construction occurred.

[131] The onus was on the PCC to prove, on a balance of probabilities, that the applicants committed the acts of professional misconduct charged. The PCC did not allege that the applicants failed to have sufficient appropriate audit evidence with respect to the Put and that therefore, they had failed to comply with GAAP because there was not reasonable assurance significant acts would be completed. Nor did the PCC lead evidence to prove such a charge. The PCC's case rested on an interpretation of the standard requiring actual completion of significant acts, and the DC rejected that argument.

[132] All counsel agreed that the DC could consider all the evidence. However, the DC could fairly rely on evidence only if it was relevant to the charges as laid and particularized. Therefore, the DC erred in applying the evidence about the Put to charges 1(i) and (iii) without regard to the particulars of those charges, as disclosed, and the evidence relevant thereto. More precisely, the DC erred in relying on evidence of the Put agreement in relation to charges 1(i) and (iii), because the applicants' actions taken respecting the Put did not form part of those charges.

[133] The allegation with respect to the treatment of the Put, in relation to these charges, is a new allegation that arose during the hearing and because of the DC's own conclusions about what should have been charged. The applicants point out that the DC had the option to amend the charges, given its concern about the variance of the evidence and the charges and Investigators' Report. ICAO By-law 564(2) states,

Where there is a variance between the wording of a charge and the evidence presented in support thereof, and where, in the opinion of the discipline committee, the member, student or firm charged has not been prejudiced by lack of notice, the discipline committee may direct an amendment of the charge so as to make it conform to the evidence and proceed with hearing the charge.

[134] The DC was clearly dissatisfied with the approach of the PCC and the investigators to this case. For example, it stated (at para. 69):

Whether the investigators did make up their minds too early may be a matter for debate. During the course of the hearing it became apparent that the investigation had not been wide ranging nor, did the investigators fully appreciate all of the issues which became apparent to the panel as the members presented their case.

[135] It appears, as well, that the DC realized that the Put issue was not part of the case the applicants had to meet, as the DC stated (at para. 264):

The members knew that the sufficiency and appropriateness of the evidence accepted to dispel their suspicions about the Put, and the implications which followed, were issues they would have to face, and did face, at this hearing. They were not prejudiced by any failure of the Professional Conduct Committee to identify this issue as part of the case they had to meet. (emphasis added)

[136] With all due respect, the applicants were prejudiced by the DC's focus on the Put issue in relation to charges 1(i) and (iii). They had formulated a defence, obtained expert evidence and presented their case in response to the PCC's framing of the case. With respect to charges 1(i) and (iii), they were not given notice that their conduct respecting the Put agreement was allegedly a breach of GAAP. If the DC or the PCC wished to include in the charge allegations relating to the Put, the proper course was to seek an amendment to the charges and allow the applicants to respond. Alternatively, if there was a concern with respect to some of the applicants' conduct during the investigation, it may be open to the PCC to consider other charges. However, it was a denial of natural justice by the DC to proceed as it did.

g) Analysis of the Appeal Committee’s Conclusions

[137] The AC found no error on the part of the DC with respect to its consideration of the Put agreement in relation to charges 1(i) and (iii). It noted that the Put side agreement emerged during evidence arising from the defence (at para. 147).

[138] The AC erred in failing to recognize that the DC had breached the rules of natural justice. The AC concluded that the wording of the charges to include "all professional services" respecting the practice of the profession encompassed matters of both auditing and accounting. They also concluded that all the evidence was relevant to both charges (at para. 111).

[139] The AC does not appear to have understood the applicants' argument – namely, that they did not have proper notice of the case against them, given the particulars, the disclosure, and the case led by the PCC. As we have said above, in addition to the opening words of the charge, the particulars are very important, as they give notice of the basis of the charges, a fact that the AC did not consider.

[140] The AC was advised by its independent counsel, Richard Steinecke, of the importance of notice in the proceedings. He advised them as follows:

What you should do on each matter is look at the wording of the allegation and the disclosure made, for example, the report of Allan Wiener, and ask yourselves whether the members knew in essence what the case against them was and what the allegation truly was.

The AC did not follow this advice.

[141] The AC acknowledged that the Put side agreement emerged during the evidence. It then concluded that the DC's detailed examination of the Put "was essentially about facts and credibility" (at para. 147). Again, the AC failed to examine the charges and the case led against the applicants to which they responded – a case in which the Put agreement was never raised as an issue by the PCC with respect to the GAAP charges.

[142] The AC was told by its counsel that the PCC could rebut any defence that was raised. The AC noted that the evidence about the Put was new evidence arising from the defence (at para. 147).

[143] Again, the AC erred. The applicants never raised any defence with respect to the Put agreement. Their defence was that they had reasonable assurance of completion with respect to the acts of which the PCC and its investigators complained. No witness said they failed to meet the reasonable assurance standard, and Wiener confirmed his opinion regarding the revenue recognition charges when called to give evidence in reply.

[144] Like the DC, the AC erred in law in ignoring the particulars of the charge and the case disclosed and led. The applicants were denied natural justice by the DC, and the AC failed to recognize this. Therefore, the convictions on these charges must be set aside.

IX. Did the Discipline Committee and the Appeal Committee reach a reasonable decision on charges 2(ii), (iii), (iv) and (v)?

[145] We now turn to the review of the reasonableness of the remaining convictions. In addition to being found guilty on charges 1(i) and 1(iii), Power and Russo were also convicted of charges 1(iv), 2(ii), 2(iii), 2(iv), 2(v) and 2(viii). In this section, we address charges 2(ii) through (v).

a) Introduction

[146] As stated earlier in these reasons, the standard of review is whether the DC and AC were reasonable in their articulation of the test for professional misconduct and the application of the test in finding professional misconduct on the part of Power and Russo with respect to these charges.

[147] Before considering this issue, we wish to reiterate the distinction between our findings on these charges and our findings on charges 1(i) and 1(iii). On charges 1(i) and 1(iii), we considered whether the DC convicted the applicants based upon the case led against them. We found that they did not. The Put issue did not form part of the particulars or the case led against the applicants and therefore, the reasonableness of the DC’s analysis of the Put issue in relation to those charges is irrelevant.

[148] On the charges that follow, the applicants do not allege that there has been a breach of procedural fairness. We are concerned, rather, with whether the DC’s findings were reasonable, given the evidence before it. The DC was entitled to consider the Put issue, as it went to the issue of professional scepticism, an integral part of the PCC’s case on these particulars.

b) Did the Discipline Committee and Appeal Committee act reasonably in the test of professional misconduct applied?

[149] The DC stated in its reasons that the onus was on the PCC to establish the members failed to meet the standards of the profession, and that the departures from the standards, either individually or collectively, were so significant as to constitute professional misconduct (at para. 54).

[150] The DC stated that the test for professional misconduct in the context of the ICAO is

1. whether a member has failed to perform his or her professional services in accordance with the standards of the profession; and

2. whether the failure is "significant" (para. 145) or "more than minor" (para. 152).

[151] The applicants allege that the DC and AC are in error in their articulation of the proper legal test for professional misconduct. They argue that in order to make out a case of professional misconduct in a standards case like this one, it had to be proved that

1. the member's conduct departed from the generally accepted standards of the profession (in this case GAAP and/or GAAS);

2. no reasonable professional would have acted as the member did; and

3. the departure from the standards of the profession must be so blatant as to constitute professional misconduct.

(Huerto v. College of Physicians and Surgeons of Saskatchewan, [1994] S.J. No. 390 at para. 71 (Q.B.))

[152] The applicants submit that the DC failed to conduct the critical second part of the analysis, that is, whether a "reasonable professional" would have acted as the members did. They submit that the DC did not distinguish between errors of judgment and professional misconduct – namely, the DC failed to ask whether the impugned conduct was "outside the range of possible courses of action that a reasonably competent [auditor] might choose to take."

[153] Power and Russo argue that their conduct must be assessed on an objective standard. The question the DC should have asked itself was "what would a responsible and honest auditor acting with reasonable competence have done in the circumstances?"

[154] The ICAO test as enunciated by the DC and adopted by the AC has not been confirmed in any court decision, but this test has been applied consistently, although at times implicitly, in the ICAO internal case law: see Wedgbury (Re), 2005 LNICAO 20 at para. 21; Blair (Re), 2005 LNICAO 3 at paras. 29-30; Enstrom (Re), 2005 LNICAO 8 at paras. 18-20; Arlen (Re), 2002 LNICAO 17 at paras. 18, 20-22; Howe (Re), 1996 LNICAO 12 at para. 14; Woodsford (Re), 2008 LNICAO 18 at para. 31; Davies (Re), 2006 LNICAO 10 at para. 9; Miller (Re), 2005 LNICAO 13 at para. 12.

[155] We see no legal error in the way the test was articulated, in the abstract, by the DC. The more significant question is whether the DC understood the inquiry that it was then required to make. As in Huerto, it had to determine what the standard of practice was – for example, with respect to revenue recognition - and it had then to determine whether there was a breach of the standard.

[156] In coming to its conclusions, the DC had to determine what reasonable and competent members of the profession would understand to be the standard and conduct departing from the standard, since Rule 206 requires it to determine whether a member has departed from the “generally accepted standards of practice”. While the CICA Handbook provides extensive guidance on the standards of practice of the profession, some of its guidelines are open to interpretation, such as when it is appropriate to recognize revenue from a sale transaction. If a "responsible body of professional opinion" would support the members' conduct, then they can not be found to have departed from generally accepted standards of the profession (Re Brett and Board of Directors of Physiotherapy (1991), 77 D.L.R.(4th) 144 (Div. Ct.) at 152; quoted with approval in Hallam v. College of Physicians and Surgeons of Ontario, [1993] O.J. No. 459 (Div. Ct.) at p. 13 (Quicklaw)).

[157] Another important consideration for the DC in this case was the role of professional judgment. The applicants were exercising professional judgment throughout the audit, including in their accounting decisions about revenue recognition and their assessment of management representations.

[158] Case law has long recognized that an error of judgment does not necessarily equate with professional misconduct. As this Court stated in Hallam, supra"the honest and intelligent exercise of judgment has long been recognized as satisfying the professional obligation" (at p. 14). The Saskatchewan Court of Queen Bench in Huerto also drew the distinction between misconduct and bad judgment (at para. 66).

[159] The applicants submit that the DC did not understand its role because of its reference to the necessity for the auditors to reach a correct conclusion. At para. 237, under the heading "Professional Judgement", the DC stated,

The panel heard considerable evidence about the exercise of professional judgment and what it entailed. One fundamentally important exercise of professional judgment at issue in this hearing related to the reasonable suspicions about the Put and the proper procedures, analysis and conclusions reached by the auditors to dispel these suspicions. The proper exercise of professional judgment requires the auditor to reach a correct conclusion. It is not enough for the auditor to have an appropriate process, to identify the issues and to correctly set out what should be done. (emphasis added)

[160] It continued (at para. 238):

In the paragraphs above, the panel has set out its reasons as to why the audit evidence obtained ought not to have been accepted as sufficient appropriate audit evidence to dispel the suspicions.

From this paragraph, it seems that the DC concluded that there was only one correct conclusion: the suspicions about the Put had not been dispelled.

[161] The AC attempted to distinguish between "a correct conclusion" and "the correct conclusion" to justify the DC's results (at para. 140):

What then is this standard of correctness? The Appeal panellists note that there is an ability among accountants when exercising professional judgment to reach a correct conclusion. That, however, does not mean that only one answer exists. The Discipline Committee’s Reasons refers to a correct conclusion, not the correct conclusion. The contrary argument about this text submitted by the appellants removes it from its context.

[162] In our view, in the quotation from para. 237 of the DC’s reasons above, the DC appears to have misstated the concept of professional judgment by focussing on the correctness of the conclusion. In Hallam, supra, the Court held that the honest and intelligent exercise of judgment is not misconduct, even if the conclusion is wrong. We shall return to this issue in our discussion of charges 1(iv) and 2(viii).

c) The Significance of a Body of Professional Opinion

[163] The applicants, relying on the case of Hallam, supra, argued that the expert evidence that they called represented a "competent body of professional opinion that supports the conduct or judgment". The four expert witnesses who testified about the quality of the audit work of Power and Russo and the role of Barrington concluded that reasonable professional standards had been met, and counsel submitted that evidence constituted "a body of expert testimony" that was sufficient to justify a dismissal of all the charges.

[164] As noted earlier in these reasons, the DC did not review the expert evidence in any detail. This has made our task on this application for judicial review much more difficult. However, we would not characterize the reasons as so inadequate as to result in procedural unfairness, as it is possible to see the line of analysis with respect to charges 2(ii) through (v).

[165] In contrast, the AC did review the evidence of the expert witnesses in some detail and pointed out that the DC accepted the experts' opinions on some issues where an acceptable range of options existed - for example, the steps required before a naming rights transaction might be considered to be complete.

[166] However, the AC stated what the real issue before the DC was (at para. 114):

All of the experts spoke about professional skepticism appropriate to the circumstances as being the accepted standard. The Discipline Committee accepted that opinion. The real issue was whether the circumstances of this case called for the exercise of greater skepticism. On that assessment of the evidence the Discipline Committee was not bound by the expert opinions, and was in the best position to make a comprehensive determination. The theme within the Reasons was that there was a basis to doubt or to reject the opinions called by the appellants.

[167] The AC pointed out that the professional assessment by the defence expert witnesses was not "fully informed", although this was not a conclusion clearly articulated by the DC. At para. 129 of its decision, the AC stated,

An expert’s opinion that is based upon a faulty factual foundation can properly be disregarded. The Discipline Committee spent a considerable portion of its Reasons analyzing the faulty factual foundation for these opinions.

[168] In particular, the AC noted that the experts did not have the benefit of Chant’s evidence. Nor did they know that there was not a consensus within the audit team. Accordingly, the DC was entitled to conclude that, as the AC stated"there was a basis to doubt or reject the opinions called by the appellants" (para. 114). The AC concluded that it was reasonable for the DC, engaging its own expertise in reviewing all of the facts before it, to assess the credibility of witnesses and to determine whether the level of professional scepticism that was exercised in the audit process was appropriate to the circumstances.

[169] We conclude that this was a reasonable conclusion with respect to charges 2(ii) through (v), for the reasons which follow.

d) Level of Professional Scepticism and Charge 2

[170] We now turn to charges 2(ii), 2(iii), 2(iv) and 2(v), which relate to the auditors’ assessment of the reliability of management's representations and the integrity of management with respect to the accounting treatment of certain matters in the financial statements. As the DC pointed out at para. 53 of its reasons,

The essence of [Charge 2], referred to throughout this hearing as the GAAS charge is that the auditors did not have sufficient appropriate audit evidence on which to base the release of the unqualified audit opinion on the financial statements.

This resulted from the failure by the auditors to exercise the appropriate level of scepticism in all of the facts and circumstances in accepting the representations of management.

[171] The principle of professional scepticism plays a key role in this aspect of the case. Was it appropriate, given the facts facing the auditors, for the auditors to continue to rely on the representations of management to the extent that they did?

[172] The DC discussed the requirement and principles of professional scepticism as follows, citing lengthy excerpts from the CICA Handbook (at para. 203):

203. The role and importance of the good faith of management and the professional scepticism of the auditor is set out in the “Introduction to the audit of financial statements” set out in section 5090 of the CICA Handbook. At the relevant time, sections 5090.04, 5090.05 and 5090.06 read as follows:

The auditor performs the audit with an attitude of professional scepticism, and seeks high, though not absolute assurance, hereinafter referred to as reasonable assurance, whether the financial statements are free of material misstatement. The auditor normally designs auditing procedures on the assumption of management’s good faith, and exercises professional judgment in determining the nature, extent and timing of those procedures, in evaluating their results and in assessing determinations made by management. Absolute assurance and auditing is not attainable as a result of such factors as the use of judgment, the use of testing, the inherent limitations of internal control and the fact that much of the evidence available to the auditor is persuasive rather than conclusive in nature.

The assumption of management's good faith is a fundamental auditing postulate. This assumption is normally necessary for an audit to be economically and operationally feasible. This assumption means, in the absence of evidence to the contrary, the auditor can accept accounting records and documentation as genuine and representations as complete and truthful. The assumption of management’s good faith is not a source of audit evidence, nor a substitute for the requirement to obtain sufficient appropriate audit evidence to afford a reasonable basis to support the content of the auditor's report.

An attitude of professional scepticism means the auditor assesses the validity of evidence obtained and is alert to evidence which contradicts the assumption of management’s good faith. For example, the auditor is alert to evidence which may indicate accounting records and documents have been altered or representations are false. It does not mean the auditor is excessively sceptical or suspicious. Without an attitude of professional scepticism, the auditor may not be alert to circumstances which should lead to him or her to be suspicious and he or she may then draw inappropriate conclusions from the evidence gathered.

[173] Early in the engagement, the auditors had determined they had to exercise a high level of professional scepticism. Apart from Chant, this was a new audit team, replacing the prior audit team at the request of management and the Chair of the Audit Committee, and beginning their involvement in a complex audit.

[174] In their 1997 audit working papers, the auditors noted that management tended to interpret accounting standards aggressively, place undue emphasis on achieving results and was willing to accept unusually high levels of risk. They acknowledged that the approach should entail “an increase in the professional scepticism of all personnel involved in the audit engagement.”

[175] The auditors identified the trouble areas in the audit that ultimately became the subject of the charges before the DC. Specifically, they identified the evaluation of pre-production costs and their amortization and/or write-offs, as well as unique revenue generating transactions, all of which were subject to management estimation and representation.

[176] On several occasions, the auditors were required to exercise their professional judgment as to whether further investigation was necessary or whether to accept the representations of Livent management, given the history of misrepresentation and failure to follow advice. The DC concluded that the auditors did not exercise the appropriate level of “professional scepticism” in the circumstances of the case: see paras. 245, 247-250 and 329 of the DC Decision. The DC found as a fact that the auditors showed a remarkable lack of professional scepticism in accepting the Seyffert letter of April 5, 1998 (at para. 228).

[177] Chant, who had first-hand knowledge and the longest involvement with Livent of the four partners charged, told the audit team that Livent had lied to Deloitte three times and the firm should resign. Before they released their audit opinion in April 1998, the auditors knew that senior management, Gottlieb, had deceived them in August 1997 with respect to the existence of the Put on the Dundee transaction.

[178] The DC pointed out that “it is not sufficient for auditors to identify the risks and make appropriate plans to deal with them … the auditor must be ‘alert to evidence which contradicts the assumption of management’s good faith’” (at para. 214). In such a case, s. 5135 of the CICA Handbook provides that “the auditor may encounter circumstances which make him or her suspect that the financial statements are materially misstated. In that event, the auditor should perform procedures to confirm or dispel that suspicion.” (at para. 215).

[179] In addition to the particular concerns or red flags specific to the particulars of each GAAS charge, critical to the DC's findings of professional misconduct was the fact that Gottlieb deliberately misled the auditors about the Put. In the view of the DC, this deceit on the part of Livent management should have elevated Power and Russo's scepticism to the very highest level with respect to accepting management's representations and estimates with respect to the specific matters in question. More fundamentally, the auditors' failure to consider the broader implications of the admitted deception resulted in a breakdown in their obligation to professionally and critically assess the reliability of representations made by management throughout the audit.

[180] These were reasonable findings of fact for the DC to make (and for the AC to uphold), given the evidence. The members of the DC appropriately drew on their professional expertise to evaluate the evidence respecting the conduct of the audit.

e) Charge 2(ii) – The Reliability of Management Prepared Budgets

[181] The basis of this charge is that Power and Russo failed to obtain sufficient appropriate audit evidence to enable them to properly assess the recoverability of pre-production costs. Pre-production costs were subject to Livent management's representations and estimates. Specifically, it is alleged that the auditors did not ascertain the reliability of management's budgets and failed to compare the 1997 production budgets prepared by management in 1996 to actual results in 1997.

[182] Three of the defence expert witnesses (Kelly, Yule and Vance) were of the opinion that the approach adopted by the auditors was reasonable, and that sufficient appropriate audit evidence to assess the recoverability of pre-production costs was obtained. Even though the auditors were aware of actual results falling short of budgets, the process they followed of focussing on future expectations for the next year on a show-by-show basis was appropriate.

[183] Rather than comparing the budget to actual results in 1997, the auditors performed a comparison for only the first three quarters of 1997. Wiener’s evidence was that looking at nine months was not sufficient. He was of the opinion that the auditors did not comply with GAAS in respect of the audit of budget estimates. Section 5305 of the CICA Handbook, dealing with GAAS in respect of budgets, requires auditors to review the estimates’ sensitivity to variations and deviation from historical patterns, and Wiener testified that there was a critical failure to follow this procedure.

[184] In fact, the auditors themselves, in a memorandum found in the working papers, recommended that the actual results for 1997 be compared to management's budget for 1997.

[185] Russo testified that the comparison was only completed for the first nine months of 1997 because it was known that Livent's costs had increased and the business had changed significantly between 1996 and 1997, and it continued to change in 1997 (see para. 137 of the DC decision).

[186] However, there was evidence before the DC, particularly with respect to management's deliberate misrepresentations over the removal of the Put, that would place in question management's reliability, generally, with respect to the valuation of pre-production costs. The DC concluded that should have raised the auditors’ level of scepticism so as to warrant further audit enquiry.

[187] There was evidence upon which the DC could reasonably conclude that the audit enquiry to assess the reliability of management’s representations was insufficient, namely:

1. the valuation of pre-production costs was a matter of key concern to the Audit Committee and this concern was expressed to the auditors;

2. the events relating to the Put and the untrustworthiness of Gottlieb's representations in this regard should have raised suspicions about the reliability of management’s estimates and its good faith generally;

3. similarly, the last minute request for an additional $27.5 million write-down of pre-production costs in early 1998 should have raised serious questions about management's representations;

4. there were insufficient controls over purchases, payables and disbursements throughout 1997;

5. Power and Russo did not revisit their audit plan and procedures in the face of management’s misstatements;

6. the auditors did not exercise proper care to ensure that the Management Representation letter which contained specific references to the validity and valuation of pre-production costs was signed by the Chief Financial Officer (“CFO”) before the audit opinion was released; and

7. the Quality Assurance Review ("QAR") partner was not provided with all the information needed to complete the QAR in accordance with Deloitte’s policy.

f) Charge 2(iii) – The $27.5 million Write-Down

[188] The issue raised in this charge is whether the circumstances giving rise to an additional $27.5 million write-down, at a time when the auditors had virtually completed their audit and were about to release their report, were such as to require Power and Russo to re-assess all of management's representations made during the course of the audit.

[189] The defence position was that the write-down was precipitated by a new investor pushing for more "conservative" accounting, and throughout the relevant time, management remained of the view that the write-down was unnecessary. Accordingly, no concerns about management integrity were raised. The defence expert witnesses testified that the write-down of $27.5 million did not fall outside the "zone of reasonableness".

[190] However, the evidence before the DC demonstrated the following:

1. The minutes of the Audit Committee meeting of April 9, 1998 expressly stated that the write-down was not conditional on the proposed investment (see para. 195 of the DC decision). The Chair of the Audit Committee thought that there should be a write-down independent of and irrespective of the investment opportunity. These factors suggest the reason for management's recommendation for the write-down was solely to accommodate the potential investor was suspect.

2. At first, management insisted that a write-down was unnecessary and yet weeks later proposed a significant write-down. The about-face of management, i.e. first not wanting any write-down and now agreeing to a $27.5 million write-down, should have suggested that further investigation was necessary.

3. The discovery of the misrepresentations relating to the Put should have given the auditors the opportunity and, indeed, the necessity to reassess management's representations and to reconsider the extent and timing of audit procedures.

4. The write-down would amount to 13.75 times the amount of the materiality level determined by Deloitte for the audit.

[191] Wiener testified that faced with this last minute additional write-down of $27.5 million, the auditors' professional scepticism should have been raised to the highest level (as required by s. 5135 of the CICA Handbook), and they should have revisited all the significant representations of management to ensure their reliability.

[192] It was significant that most of the defence experts did not hear the evidence with respect to the events of April 1998 and the Put side agreement. Only Vance had read the transcripts when he testified, and it is apparent that the DC did not find his opinion on the treatment of the Put agreement persuasive.

[193] The DC heard all the evidence, including that of the experts. There were four chartered accountants on that committee, and they were entitled to draw on their own expertise in evaluating the evidence before them. The DC reasonably concluded that management representations should have been re-assessed with respect to a last minute write-down that was over 13 times materiality, and that there was a failure by Power and Russo to comply with GAAS in this respect.

g) Charge 2(iv) – Accounts Payable Testing

[194] As part of their audit work, Power and Russo selected a sample of 22 items with respect to accounts payable and accrued liabilities in their search for unrecorded liabilities. In so doing, they identified five errors in the sample selected for testing. The number of samples was not extended as a consequence of discovering these errors. There was no extrapolation performed of the five errors to determine the potential number of errors in the total population and no such extrapolation was taken to the Summary of Unrecorded Differences ("SUDs").

[195] The DC found this was not in accordance with GAAS because once the auditors found errors in their sample, they should have addressed that issue and re-evaluated the nature, extent and timing of planned audit procedures.

[196] The defence evidence had been to the effect that sufficient audit evidence was obtained so as to ensure that accounts payable were not materially understated as at December 31, 1997 and that no further audit procedures were necessary. In particular, Russo testified that Livent corrected the errors, and that he assessed the error rate to determine its overall significance, including performing a mental extrapolation of the errors.

[197] Moreover, the auditors argued that there was no dispute that the extrapolated amount was not material. Even Wiener acknowledged that the extrapolated amount would not have "busted SUDs" and therefore was not, in fact, material, either on its own or when combined with other known errors. He admitted that had the extrapolation been documented in the file (as opposed to a mental extrapolation), no further audit testing procedures would have been required because of the immateriality of the errors.

[198] As Wiener testified, the fact that the note in the auditors’ working papers showed adjustments by clients and, therefore, no actual errors, does not take away from the fact that they still are errors for accounting purposes and should have been extrapolated. The fact that they would have found the errors, even if extrapolated, to be immaterial is beside the point. Wiener's evidence was to the effect that when auditors identify errors, whether adjusted or not, the procedures required both under GAAS and s. 1902 of Deloitte's own audit manual come into play and require that the sample errors be extrapolated or the sample size revisited.

[199] The DC preferred the evidence of Wiener and concluded that the unexplained sample errors should have been extrapolated to determine the potential quantum of errors. Although the DC did not expressly engage the defence expert witnesses' evidence concerning immateriality in its decision, it is clear that it preferred Wiener's evidence that immateriality was not the relevant issue.

[200] As explained by the DC (at para. 313)"This extrapolated error should have been reflected in SUDs and should have been combined with other likely misstatements." Having regard to the failure to extrapolate, when combined with misstatements concerning the Put, it was reasonable for the DC to conclude on the evidence before it that the auditors' level of scepticism should have increased, and they should have re-evaluated their audit procedures and made greater enquiry.

h) Charge 2(v) – Fixed Assets – Additions Testing

[201] It is alleged that Power and Russo failed to obtain sufficient audit evidence of unsupported transactions and additions to Livent's fixed asset accounts. In order to check on the reliability of these additions, the auditors took a sample of 60 additions for testing purposes. They discovered that five additions were not supported by original invoices or documentation. Instead, the auditors relied upon representations by Gordon Eckstein (“Eckstein”), the Vice-President of Operations, for support for four of the five additions. The fifth was an allocation of costs incurred by Drabinsky in New York.

[202] Three of the items selected for testing were invoices from F & D Scene, a supplier and related party to Livent. The auditors did not contact F & D Scene to request copies of the invoices or work orders and evidence of payment. Instead, the auditors were assured by Livent's accounting staff that each of the items was properly classified.

[203] The defence expert witnesses testified that the procedures followed met the required standards. In particular, having regard to the totality of the work performed on fixed assets, the nature of the testing and the audit team's knowledge of Livent's business, their view was that the evidence obtained by the auditors was both sufficient and appropriate. They indicated that assurances from Livent's accounting staff and the corroborating representation of Eckstein were sufficient audit evidence to explain the capitalization of the three F & D Scene amounts.

[204] Wiener's evidence stands in contrast. The DC accepted Wiener's evidence that the representations from Eckstein were not sufficient and that it was necessary to extend the sample size to determine whether Livent's unsupported documentation was a prevalent issue or to extrapolate the samples or to enquire directly of the suppliers. Moreover, the DC found that related party transactions should sensitize the auditors’ scepticism.

[205] Sections 5300.21 and .26 of the CICA Handbook and s. 19.92 of Deloitte's own manual require the auditor to do more than simply accept the representations of management to address unsupported additions to fixed assets. The DC accepted Wiener's evidence and concluded that because of the concerns about management's good faith and the misstatements with respect to the Put, further audit work should have been undertaken. Having regard to the evidence before it, the DC's conclusion was reasonable.

i) Was the finding of professional misconduct on charge 2 based on particulars (ii), (iii), (iv) and (v) reasonable?

[206] Professional disciplinary bodies are owed deference in their determination of what constitutes professional misconduct (see for example, Davies v. Ontario College of Pharmacists (2003), 63 O.R. 3rd 122 (Div. Ct.) at para. 16). The DC found as a fact for each particular upon which they found the members in breach of Rule 206 that"the members' conduct departed from the generally accepted standards of the profession" (para. 326).

[207] The DC then addressed whether the departures from the required standards of the profession were significant. It noted that"in determining whether a departure is significant, both the nature of the conduct itself – the departure from the required standards – and the impact of the departure[s] are considered" (at para. 327). It held that the evidence in this case did not demonstrate a mere slip or error in judgment on the part of the members. It had stated that the auditors demonstrated "a remarkable lack of scepticism" in accepting Seyffert’s April 1998 letter (at para. 228). The DC found that these departures either individually or collectively constituted professional misconduct (at para. 329).

[208] Professional scepticism is one of the standards of the practice of the profession. In considering the nature and extent of the departure by the members from the required standards, the DC took into account factors including:

1. the type of client and the fact that the auditors identified the audit as a high risk one which required a high degree of professional scepticism;

2. the identification by the auditors of particular areas which required increased professional scepticism and the failure to exercise it;

3. the failure to appreciate the implications of the explanation (acknowledging an earlier lie) that Gottlieb gave with respect to the Put side agreement;

4. the fact that Chant thought that Deloitte should resign from the audit engagement; and

5. the failure to reassess the representations of management and the nature, extent and timing of audit procedures despite the warning signs relating to the dramatic change of position of management with respect to a write-down of pre-production costs of $27.5 million, the exceptions discovered during control testing and the existence of related party transactions.

[209] The DC may have misstated the test for professional misconduct in general terms when it referred to the necessity to reach “a correct conclusion” as to whether the Put agreement was or was not in existence as of December 31, 1997. However, that does not undermine its conclusion as to whether the auditors failed to demonstrate the adequate level of professional scepticism expected by the profession when conducting an audit. The important aspect of the Put issue is the fact that management was caught in deliberate lies and deceit in April 1998 and that, together with the other factors raised by the DC in their reasons, should have caused the auditors to revisit their entire audit process and their reliance on anything management said to them. The "correct conclusion" as to whether the Put was in existence on December 31, 1997 is beside the point. It is the fact that management lied to the auditors about the Put that should have elevated their scepticism to the highest level, given all the circumstances, and this fact underlies the charge 2 particulars which we are dealing with in this section of our reasons.

[210] It is within the area of expertise of the DC to make findings of fact based on the evidence relevant to the charges and then to determine if the facts so found constitute such a significant departure from the standards of practice of the profession that they amount to professional misconduct. Deference should be afforded to their decision, given their expertise.

j) The Appeal Committee’s Decision

[211] The AC did not review the DC's reasons charge by charge. It found that the DC's reasons were brief but adequate on what it considered to be "straightforward factual findings", such as charges 2(ii) and (v) (at para. 163). As examples, the AC pointed to the comparison of nine month results rather than full year results and the failure to obtain the signature of the CFO on the letter of representation of management as obviously being contrary to standards. The AC also indicated that in both instances an opportunity was lost as part of the auditing process to assess the reliability of management's statements.

[212] The AC examined in detail the primary grounds on which the auditors had appealed from these charge 2 convictions – the issues of professional scepticism, whether the auditors were required to reach a "correct" conclusion, the existence of a competent body of professional opinion and the appropriate test for professional misconduct.

[213] The over-arching concern stated by the DC and accepted by the AC is that with respect to these particulars of charge 2, in the face of blatant management lies, management's dramatic change of position on write-downs, and auditing failures with respect to budget to actual comparison and related party transactions, the auditors failed to reassess the reliability of management's representations. The DC concluded that these were breaches of the GAAS standards, and the AC, also a body with auditing expertise, concluded that the decision was reasonable.

[214] These were findings of fact which were reasonable for the DC to make (and for the AC to accept), given the evidence before it.

X. Did the Discipline Committee and the Appeal Committee reach a reasonable decision on charges 1(iv) and 2(viii): the First Treasury Transaction?

[215] These two charges are related and arise out of the same events. In charge 1(iv) it is alleged that Power and Russo failed to ensure that Livent's financial statements complied with GAAP because they accepted management's recognition of a loss of $1.2 million on a transaction with First Treasury.

[216] In 1997, Livent entered into an agreement with First Treasury to sell $7 million worth of receivables relating to the amounts owing from Ford Motor Company ("Ford") on the purchase of naming rights by Ford for certain theatres. It is alleged that Livent improperly treated this as a sale in the financial statements when all of the conditions required to account for the transaction as a sale were not met.

[217] EIC-9, “Transfers of Receivables”, provides the relevant guidance in accounting for these transactions. It provides in part:

The committee reached a consensus that for a transaction involving a transfer of receivables to be recognized as a sale, both the following conditions should exist:

(a) the transferor has transferred the significant risks and rewards of ownership of the receivables; and

(b) reasonable assurance exists regarding the measurement of the consideration derived from the transfer of the receivables.

The committee reached a consensus that for the transfer to be recognized as a sale, the recourse provided by the transferor must be reasonable in relation to the losses expected to be incurred on the receivables transferred. The actual level of recourse judged to be reasonable would be a matter of professional judgment …

[218] The DC held that the First Treasury transaction should not have been treated as a sale because of Livent's retention of the foreign exchange risk on the Ford receivables denominated in U.S. funds. The DC concluded that the transaction should have been treated as a financing, and if that were the case, the liabilities would have been increased by $3.7 million.

[219] In charge 2(viii), it is alleged that Power and Russo failed to ensure that the financial statements disclosed the contingent liability of Livent to First Treasury by which Livent would have to buy back the receivables under certain circumstances.

[220] Power and Russo led evidence to justify the treatment of the transaction in the financial statements as a sale rather than a financing, firstly, on the basis that Livent had transferred the risks and rewards of ownership of the receivables to First Treasury, and secondly, because the recourse provided by Livent was considered reasonable in relation to the losses expected to be incurred on the receivables.

[221] Power and Russo also argued that there was no loss of $1.2 million on the transaction because of that amount $274,000 should have been apportioned to the transaction. Accordingly, even if the transfer had been treated as a financing and not a sale, the actual loss in issue would have been only $274,000, and that loss would not have been material to the financial statements.

[222] During their testimony, they explained why they had changed their initial opinion, as set out in the March 26, 1998 audit summary memorandum, that the transaction should be treated as a financing. After further study of the contractual arrangements, they determined that the transaction was a sale, because as explained in their June 5, 1998 audit summary conclusion, they had come to appreciate the limits of First Treasury’s recourse against Livent.

[223] The issue before the DC was whether the likelihood of recourse against Livent would disqualify the transaction from being treated as a sale. The experts who testified on behalf of the applicants indicated that the possibility of recourse is a matter of professional judgment and that in the circumstances, the applicants’ assessment was reasonable that the likelihood of any loss on Livent's part arising from the limited recourse that it provided to First Treasury was remote and, thus, there was no requirement for disclosure.

[224] The DC acknowledged that opinion (at para. 287). However, the DC took into account the following evidence in concluding that there was a breach of GAAP in treating these transactions as a sale rather than a financing:

1. In their own memorandum dated March 26, 1998, Power and Russo, in fact, first concluded that there should be no loss recognized on the First Treasury transaction because Livent had retained sufficient recourse such that a sale had not taken place. That memorandum was in accord with an opinion previously given by Chant to Russo that Livent retained the foreign exchange risk on this transaction and that it should not be treated as a sale.

2. A mere two weeks later on, April 9, 1998, Power and Russo changed their conclusion in the report to the Audit Committee and agreed with Livent's treatment of the First Treasury transaction as a sale (see para. 285 of the DC decision). There was no support in the auditors' working papers for this change.

3. The DC preferred the evidence of Chant and Wiener to the effect that the transaction should not have been treated as a sale because of Livent's retention of the foreign exchange risk (at para. 288).

[225] Also, Wiener testified that even if it was a sale, the liability had to be removed from the balance sheet, and the auditors had to evaluate whether or not there was recourse within that liability that should be disclosed, and the members failed to consider that contingency at all.

[226] Moreover, the DC accepted Wiener's evidence that if the transaction was treated as a financing, the liabilities would have increased by $3.7 million and that would be material.

[227] Wiener admitted in cross-examination that it was a matter of professional judgment to assess whether or not losses are expected to occur in relation to the transfer of receivables (Transcript, p. 672). Chant, too, stated that he had a different view from Russo about the significance of the foreign exchange risk, but it was a matter of judgment as to whether the foreign exchange risk was immaterial. At pp. 4289-90 of the Transcript, he stated,

13417. Q. But as of April 8^th when you had your discussion with Mr. Russo about the matter, you were still expressing a view that that foreign exchange created a problem as far as you were concerned in terms of recognizing.

A. I didn’t like it, and Mr. Russo and I discussed the foreign exchange, as I recollect it, in terms of significance.

13418. Q. Significance?

A. It was, you know, a phrase I believe, materiality.

13419. Q. And did he persuade you to change your mind on it or were you remained of the view that you had expressed here today?

A. I don’t believe he persuaded me to change my view that I did not like it, but if it was in his judgment immaterial, it was not something that I would give further consideration to. If after a while you discuss something and come to the conclusion the matter you’re discussing is immaterial with the things on the table, you just – okay, fine, that’s immaterial. Move on to the next item.

[228] Earlier in his testimony, Chant testified that according to EIC-9, significant foreign exchange risk would not usually be borne by a vendor (Q. 12362, p. 4025). While he did not like characterizing the transaction as a sale to First Treasury, “I thought that the treatment recourse was correct in that the judgment as to significant was something that was the province of the audit team and Claudio had made his judgment and I was in no position to disagree with that” (Q. 12379, p. 4036).

[229] Notwithstanding the evidence that these were matters of professional judgment, the DC (and AC) concluded that the treatments of the First Treasury transaction were breaches of the required standards of the profession, constituting professional misconduct.

[230] In a conclusory way, the DC stated, at paras. 327-329, that the breaches that were proven by the particulars of charges 1(iv) and 2(viii) and those in the other charges, were "significant enough in and of themselves" to individually constitute professional misconduct.

[231] In conducting a review of the reasonableness of a decision, a court considers both the range of reasonable outcomes and the process of the tribunal’s reasoning. As the Supreme Court of Canada stated in Dunsmuir, supra at para. 47:

A court conducting a review for reasonableness inquires into the qualities that make a decision reasonable, referring both to the process of articulating the reasons and to outcomes. In judicial review, reasonableness is concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process. But it is also concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.

[232] The DC did not provide any explanation or line of reasoning as to why Power and Russo's characterization of the First Treasury transaction was an error of judgment amounting to a breach of the standard, given the expert evidence before it. As noted earlier, the honest and intelligent exercise of judgment is not misconduct, even if the conclusion is wrong (Hallam, supra at p. 14).

[233] However, even if the DC was of the view that there was a breach of the standard here, given their acceptance of Wiener and Chant’s evidence, it did not explain, in respect of charges 1(iv) and 2(viii), why the error in judgment was so significant as to constitute professional misconduct warranting disciplinary sanction. One may surmise that the DC was concerned about the impact of the error – that is, a failure to report a liability of $3.7 million, which was in excess of one percent of liabilities - but the DC did not expressly state that that was the basis for its finding.

[234] The DC did state that when viewed collectively with the other departures from required standards, these errors constituted professional misconduct.

As these departures individually constitute professional misconduct, it follows that collectively, they constitute professional misconduct. Also, collectively, they reveal the essential nature of the misconduct, namely an improper exercise of professional judgment with respect to the reasonable suspicions about the Put and the failure to reconsider their planned auditing procedures. The auditors said that their scepticism was "sky high". However, with respect to the impugned conduct, the evidence disclosed that the auditors failed to exercise the professional scepticism required in the circumstances (at para. 129).

[235] Therefore, as with the other GAAS charges, the DC stated that the essential nature of the misconduct was the improper exercise of professional judgment in failing to apply to the circumstances the required degree of professional scepticism.

[236] The issue of professional scepticism was central to the finding of professional misconduct in respect of charges 2(ii), 2(iii), 2(iv) and 2(v) because of its importance to the proper assessment of the reliability of management's representations and estimates. It was the failure to apply the appropriate level of scepticism in respect of those matters that made the errors so significant as to constitute professional misconduct.

[237] Unlike those charges, however, the DC did not provide sufficient reasons to explain how scepticism played a role in the errors found by the DC in charges 1(iv) and 2(viii). None of the particulars for those charges relates to a failure to properly assess the reliability of management's representations. The DC did not state that Power and Russo's consideration of whether the transaction in issue was properly characterized as a sale or financing (charge 1(iv)) or whether a contingent liability should have been disclosed in the financial statements (charge 2 (viii)) was based on accepting the reliability of management's representations or estimates or otherwise required increased professional scepticism on their part. The DC did not explain the relevance to charges 1(iv) and 2(viii) of any failure on the part of Power and Russo to demonstrate the appropriate level of scepticism towards management's representations.

[238] Nor did the DC make any reference to the expert evidence led by the applicants to the effect that the exercise of professional judgment by the applicants was reasonable. As well, there is no reference in the reasons to the fact that the treatment of the First Treasury transaction as a sale remained the same after the 1997 financial statements were restated following the discovery of the fraud. Martin Calpin, lead client services partner on the restatement, gave evidence that the initial accounting treatment was appropriate, and there was no need for a note about the contingency (Transcript, pp. 2098 and 2100). This treatment of the transaction seems to belie the DC’s conclusion that it was professional misconduct to have characterized the transaction as a sale.

[239] Accordingly, with charges 1(iv) and 2(viii), we are left with, at most, a finding of a mere error of professional judgment over which there was conflicting expert evidence. In these circumstances, there is no reasoning provided by the DC to explain why that conduct constituted such a significant departure from the standards of the profession as to constitute professional misconduct.

[240] Therefore, it was unreasonable for the DC to convict on these two charges, and for the AC to uphold these convictions. As a result, the convictions cannot stand.

XI. Did the Discipline Committee have jurisdiction to order costs?

[241] The applicants challenge the conclusion of the AC that the DC had jurisdiction to award the costs of the investigation and hearing against them. The issue of the interrelationship between the provisions of the SPPA and the authority of the DC to order costs pursuant to a by-law adopted under the CA Act was not pursued by the applicants in their arguments before the DC, where the primary issue was the appropriate quantum of costs. The parties had agreed not to argue the issue of the DC’s jurisdiction to award costs, because that issue was the subject of an appeal in another case under reserve at the time of the hearing. Ultimately, the issue was not resolved in that appeal.

[242] The costs provisions in s. 17.1 of the SPPA were enacted by the Red Tape Reduction Act, 1999, S.O. 1999, c. 12, Sched. B, s. 16 and proclaimed in force on February 14, 2000:

17.1 (1) Subject to subsection (2), a tribunal may, in the circumstances set out in a rule made under section 25.1, order a party to pay all or part of another party’s costs in a proceeding.

(2) A tribunal shall not make an order to pay costs under this section unless,

(a) the conduct or course of conduct of a party has been unreasonable, frivolous or vexatious or a party has acted in bad faith; and

(b) the tribunal has made rules under section 25.1 with respect to the ordering of costs which include the circumstances in which costs may be ordered and the amount of the costs or the manner in which the amount of the costs is to be determined.

(3) The amount of the costs ordered under this section shall be determined in accordance with the rules made under section 25.1.

(4) Despite section 32, nothing in this section shall prevent a tribunal from ordering a party to pay all or part of another party’s costs in a proceeding in circumstances other than those set out in, and without complying with, subsections (1) to (3) if the tribunal makes the order in accordance with the provisions of an Act that are in force on the day this section comes into force.

[243] The section was further amended in 2006 pursuant to the Good Government Act, 2006, S.O. 2006, c. 19, Sch. B, but the operative provision in these proceedings is the 2000 amendment (see s. 17.1(7) of the current SPPA).

[244] Essentially, s. 17.1(2) of the SPPA (both in 2000 and now) permits a tribunal to award costs against a party on two conditions: the conduct of the party has been unreasonable, frivolous or vexatious or the party has acted in bad faith, and the tribunal has made rules respecting the ordering of costs, the circumstances under which costs may be ordered and the amount of costs and the manner in which the amount is determined.

[245] Section 32 of the SPPA provides that in the case of conflict between the SPPA and another statutory regime, the SPPA prevails:

32. Unless it is expressly provided in any other Act that its provisions and regulations, rules or by-laws made under it apply despite anything in this Act, the provisions of this Act prevail over the provisions of such other Act and over regulations, rules or by-laws made under such other Act which conflict therewith.

[246] However, s. 17.1(4) (now s. 17.1(6) of the SPPA) acts as a grandfathering provision, confirming that the requirements of the SPPA do not govern if the tribunal had a statutory costs regime in place before February 14, 2000.

[247] Section 8(1)(g)(ii) of the CA Act was added by the Red Tape Reduction Act, 2000, S.O. 2000, c. 26, s. 3. It enables the council of the ICAO to pass by-laws allowing costs to be awarded in disciplinary proceedings. Prior to its enactment, the CA Act was silent on the question of costs. Section 8(1)(g)(ii) provides:

8(1) The council may pass by-laws to carry out the objects of the Institute, including, without limiting the generality of the foregoing,

(g) to provide for the exercise of disciplinary authority over members, students and firms, including the appointment of,

(ii) a committee with power to conduct the formal hearings of charges made under subclause (i), to expel, readmit, suspend, suspend on an interim basis, fine, charge the costs of investigation and hearing, impose conditions of practice or impose any other appropriate penalty on a member, student or firm found guilty of breaching a rule of professional conduct; … (emphasis added)

[248] The enabling ICAO By-law 530(3)(c) confers authority to award costs upon the DC. The by-law became effective February 15, 2001. It provides:

(3) Committee sanctions

After a hearing the discipline committee shall, subject to the provisions of clause (3.1), find the member, student, firm or professional corporation guilty or not guilty of a charge. If the member, student, firm or professional corporation is found guilty of a charge, the discipline committee may order one or more of the following, namely:

(c) that any such member, student, firm or professional corporation shall be charged such costs of the investigation and hearing as may be fixed by the discipline committee;… (emphasis added)

[249] Section 8 of the CA Act came into force on December 6, 2000. As it was enacted after February 14, 2000, it cannot be a grandfathered exception contemplated by then s. 17.1(4) (now s. 17.1(6)) of the SPPA. Section 8 contains no wording that it prevails in the event of conflict with the SPPA.

[250] When the applicants appealed the DC decision to the AC, they challenged the jurisdiction of the DC to order costs against them in light of s. 17.1 of the SPPA. They argued that the provisions of s. 17.1 of the SPPA prevail, as the DC is not one of the grandfathered tribunals with a costs regime in place at the time of the SPPA amendments. They argued the DC had no authority to award costs, since the by-law of the ICAO does not conform with the SPPA in that there are no DC rules respecting the amount of costs or the manner in which costs are to be determined. Moreover, the DC’s findings do not meet the SPPA requirement that there be a finding that the applicants acted in a manner that was unreasonable, frivolous, vexatious or in bad faith.

[251] The AC concluded that the DC had jurisdiction to order costs, as the specific amendments to the CA Act prevail over and trump the general provisions of the SPPA. The summary of the AC conclusions is found at paras. 195 to 198 of their reasons, as follows:

195. The panel is being asked to weigh amendments to the SPPA that likely were meant to affect all administrative tribunals (unless grandfathered) and the amendments to the CA Act that were proclaimed subsequently. On the one hand, the SPPA is intended to take general precedence. On the other hand, are the countervailing judicial indices that the CA Act is the specific legislation, that it is absolutely clear, that it is the most recent amendment, and that it is directly pertinent legislation. The Committee finds these principles of judicial review to be compelling corollaries to that already accepted by the panel: that legislation states the direct intention of its legislators.

196. The Committee is further persuaded by the combined issue of the quality of ministerial review and the clear indication of the legislature’s intent. It is unthinkable that the legislature intended for the CA Act other than what its amendments say. Legislatures enact; they also re-enact, or subsequently enact, and when doing so may or may not always thoroughly reference previous legislation that might thereby be affected.

197. The power to assess costs contained in the CA Act revisions cannot be disregarded as unintentional, erroneous and of no consequence. Whether a legislative misstep may have occurred or not, the intent of the legislators regarding the Institute is definitively stated in the revised CA Act.

198. The Appeal Committee therefore concludes that the province’s legislature fully intended the CA Act to confer this responsibility upon the Institute and its disciplinary panels. That statement then becomes determinative in the resolution of this conflict. Accordingly, the Appeal Committee holds that the Institute has the authority to assign costs upon a guilty member.

[252] The issue of the DC’s jurisdiction to award costs is reviewable on a standard of correctness, as it is a true question of jurisdiction.

[253] It is clear that the DC has been given the authority to award costs of the investigation and hearing in accordance with the by-law adopted pursuant to s. 8(1)(g)(ii) of the CA Act. However, the issue to be determined in this application is whether the DC’s jurisdiction is limited by the provisions of the SPPA, given that pursuant to s. 32, the SPPA prevails in case of conflict between its provisions and those in another act.

[254] The purpose of the SPPA is to ensure minimal safeguards as a default position with respect to the practice before the tribunals to which the SPPA applies. The costs provisions require two preconditions to the award of costs: a finding that the party’s conduct is unreasonable, frivolous, or vexatious or the party has acted in bad faith, and the tribunal has made rules governing the award of costs. The requirement for rules appears to be aimed at providing fairness to parties, by the adoption of criteria to give guidance for the award of costs in a tribunal’s hearings.

[255] Section 17.1(6) has exempted tribunals from those provisions if the tribunal had statutory authority to order costs prior to February 14, 2000. That subsection expressly provides that s. 32 does not operate in the case of conflict. In contrast, for tribunals like the DC of the ICAO, which received authority to award costs after the enactment of s. 17.1, there is no exemption from s. 32 unless there is an express provision in the legislation governing the tribunal.

[256] There is a conflict between s. 17.1(2) of the SPPA and the by-law of the ICAO, since the by-law places no restrictions on the award of costs by the DC. In particular, there is no requirement that the DC make a finding about the reasonableness or good faith of a member who is ordered to pay costs. Nor has the DC adopted any rules governing the award of costs. Therefore, there is conflict with the SPPA, and pursuant to s. 32, the SPPA provisions govern.

[257] The respondent argues that the amendment to the CA Act was enacted within a year of the enactment of the amendments to s. 17.1 of the SPPA. Therefore, it submits, the legislative intent is clear that the ICAO and its Discipline Committee should have jurisdiction to award costs of an investigation and hearing if a member is found guilty of professional misconduct. The Legislature is presumed to know the law, and there is a presumption of coherence between related statutes (Murphy v. Welsh, [1993] 2 S.C.R. 1069 at para. 10). The respondent submits that it is reasonable to expect the Legislature was aware of the generic provisions of the SPPA at the time that it enacted the specific provisions of the CA Act, and that it assumed there was no conflict because of their different purposes and application.

[258] We disagree. The Legislature has expressly provided that the SPPA prevails if there is conflict between the costs provisions in an Act enacted after February 14, 2000, unless the provisions enabling the tribunal to award costs are expressly said to prevail in case of conflict with the SPPA. As the Legislature did not include such a provision in the CA Act, the logical inference is that the SPPA was meant to prevail in the case of conflict between the costs regime contemplated by that Act and the costs regime adopted under the ICAO by-law.

[259] For these reasons, we conclude that the AC erred in law when it concluded that the DC had jurisdiction to make a costs award for the investigation and the hearing in this case. Therefore, the costs award must be quashed.

XII. Disposition of the Applications

[260] The Barrington application for judicial review is granted, and the decisions of the DC and AC respecting charge 1 and the penalty, including the costs award, are quashed.

[261] The Power/Russo application is granted in part. The decisions of the DC and AC finding them guilty of the particulars in charge 1(i), (iii) and (iv) and the particulars in charge 2(viii) are quashed, and the costs order is also quashed.

[262] In our view, this is not an appropriate case in which to remit any of these charges to the DC for a rehearing. In respect of charges 1(i) and (iii), the PCC failed to prove the case disclosed to the applicants. The GAAP charges raised no allegation, as framed and disclosed, with respect to their actions respecting the Put agreement, and the PCC has never sought an amendment to those charges. Moreover, the experts called by the applicants testified that the appellants did comply with GAAP, and none, including Wiener, said they lacked sufficient audit evidence to proceed as they did respecting the AT&T and Dundee transactions.

[263] In respect of charges 1(iv) and 2(viii), even if there was an error of judgment, there was no relevant evidence to justify the findings of professional misconduct. Therefore, these charges should be dismissed as well.

[264] Given that the basis for the finding of professional misconduct against Russo and Power has been significantly changed by our conclusions, the penalty decision must be reconsidered. Therefore, the penalty decision as against them is also set aside, and the matter is remitted to the DC to determine an appropriate penalty in light of this decision.

[265] If the parties can not agree on costs of the application, they may make written submissions within 30 days of the release of these reasons.

J. Wilson J.

Lederman J.

Swinton J.

Released: March 22, 2010

Schedule A – The Charges

1. THAT, the said Anthony Power, Claudio Russo, Peter Chant and Doug Barrington, in or about the period January 1, 1998 to March 27, 1998, while involved as “Lead Client Service” partner, “Audit Client Service” partner, “Advisory” partner and “Advisory” partner respectively with Deloitte & Touche in an engagement to perform an audit of the consolidated financial statements of Livent Inc. as at December 31, 1997 (“Financial Statements”), and having attached to the Financial Statements an unqualified audit opinion, failed to perform their professional services in accordance with generally accepted standards of practice of the profession, including the Recommendations set out in the CICA Handbook, contrary to Rule 206 of the Rules of Professional Conduct, in that:

i) In accepting the client’s recognition of $9.2 million as revenue on the sale of naming rights of the existing Pantages Theatre and a new theatre to be constructed to AT&T Canada Enterprises Inc., they failed to ensure that the Financial Statements complied with generally accepted accounting principles since all significant acts under the agreement had not been completed;

ii) In accepting the client’s recognition of $7.7 million as revenue on the sale of naming rights of the Oriental Theater in Chicago to Ford Motor Company, they failed to ensure that the Financial Statements complied with generally accepted accounting principles since all significant acts under the agreement had not been completed;

iii) In accepting the client’s recognition of $5.6 million as revenue on the sale of density rights over the existing Pantages Theatre to Dundee Realty Corporation, they failed to ensure that the Financial Statements complied with generally accepted accounting principles since all significant acts under the agreement had not been completed;

iv) In accepting the client’s recognition of a loss of $1.2 million on a transaction with First Treasury Financial Inc., they failed to ensure that the Financial statements complied with generally accepted accounting principles since the transaction should not have been accounted for as a sale when all the conditions required to account for the transaction as a sale were not met.

2. THAT, the said Anthony Power, FCA and Claudio Russo, CA, in or about the period January 1, 1998 to March 27, 1998, while involved as “Lead Client Service” partner and “Audit Client Service” partner respectively with Deloitte & Touche in an engagement to perform an audit of the consolidated financial statements of Livent Inc. as at December 31, 1997 (“Financial Statements”), and having attached to the Financial statement an unqualified audit opinion, failed to perform their professional services in accordance with generally accepted standards of practice of the profession, including the Recommendations set out in the CICA Handbook, contrary to Rule 206 of the Rules of Professional Conduct, in that:

i) They failed to identify a change in accounting policy with respect to the amortization of preproduction costs and failed to ensure that there was disclosure of the change in this policy and the effect of the change on the Financial Statements;

ii) In having failed to compare 1997 production budgets prepared by management in 1996 to actual results in 1997, they did not ascertain the reliability of management’s budgets and accordingly, failed to obtain sufficient appropriate audit evidence to enable them to properly assess the recoverability of preproduction costs;

iii) In accepting an additional write-down of preproduction costs of specific shows totalling $27.5 million after the audit was virtually complete, they failed to reassess management’s representations made throughout the audit and accordingly failed to obtain sufficient appropriate audit evidence to enable them to express an unqualified opinion on the Financial Statements;

iv) Having determined that a selection of 22 items was an appropriate sample size in their search for unrecorded liabilities, they found errors but failed to re-evaluate the nature, extent and timing of planned audit procedures;

v) Having decided on a sample based testing of additions to fixed assets, they failed to obtain sufficient appropriate audit evidence for unsupported transactions;

vi) They failed to identify that the amortization policy for preproduction costs as explained in the significant accounting policy note to the Financial Statements was not in conformity with the method followed by the Company in computing the amortization;

vii) They failed to disclose that the policy with respect to the translation of the foreign currency denominated financial statements of the subsidiary companies was not in accordance with generally accepted accounting principles in that the foreign subsidiaries were not financially and operationally independent as required to treat them as self-sustaining operations;

viii) They failed to ensure, in respect of a transaction with First Treasury Financial Inc., that the Financial Statements disclosed the contingency that First Treasury Financial Inc. had recourse against Livent under certain circumstances.