CITATION: Wall v. Chartered Professional Accountants of Ontario, 2021 ONSC 6440
DIVISIONAL COURT FILE NO.: 120/20
DATE: 20211007
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
MATHESON, FAVREAU AND O’BONSAWIN JJ.
BETWEEN:
STEPHEN W.A. WALL
Applicant
– and –
CHARTERED PROFESSIONAL ACCOUNTANTS OF ONTARIO
Respondent
Gerald L.R. Ranking and Kimberly E. Potter, for the Applicant
Linda Rothstein, Denise Cooney and Paul F. Farley, for the Respondent
HEARD at Toronto (by videoconference): September 14, 2021
MATHESON J.:
[1] The Applicant seeks judicial review of the July 19, 2019 decision of a panel of the Appeal Committee of the Chartered Professional Accountants of Ontario (the “Appeal Committee”) and the underlying decision of a panel of the Discipline Committee (the “Discipline Committee”) dated March 20, 2017. The Appeal Committee dismissed the Applicant’s appeal from the Discipline Committee’s finding that he was guilty of professional misconduct.
[2] The Applicant was alleged to have contravened Rule 206.1 of the Chartered Professional Accountants of Ontario (“CPAO”) Rules of Professional Conduct. That Rule requires a member engaged in the practice of public accounting to “perform professional services in accordance with generally accepted standards of practice of the profession.”
[3] The Applicant submits that both the Discipline Committee and the Appeal Committee erred by applying the wrong professional standard to the conduct at issue and by reversing the onus of proof. The Applicant therefore submits that the decisions are unreasonable and should be quashed.
[4] Given that there was a statutory appeal, this is an Application for Judicial Review of the Appeal Committee decision. However, the Applicant’s submissions target the Discipline Committee decision, submitting that the Appeal Committee essentially rubber-stamped that decision.
[5] For the reasons set out below, this Application is dismissed.
Brief background
[6] The allegations against the Applicant related to audits performed by PricewaterhouseCoopers (“PwC”) on the financial statements of Fairfield Sentry Limited (“FS”) for the years ended 2006 and 2007. FS is an international company incorporated under the laws of the British Virgin Islands. In both 2006 and 2007, 95% of FS’s assets were held by Bernard L. Madoff Investment Securities LLC (“BLMIS”).
[7] The PwC engagement letters stated that PwC would perform the FS audits in accordance with generally accepted auditing standards in the United States of America (“U.S. GAAS”).
[8] The Applicant was the PwC partner responsible for the audit and the release of the 2006 and 2007 Audit Reports regarding FS. Those audits were conducted under the Applicant’s supervision and direction. In both years, the Applicant released an unqualified audit opinion that FS’s financial statements presented fairly, in all material respects, the financial position of FS. The opinions further confirmed that the audits were conducted in accordance with U.S. GAAS.
[9] As it turned out, the financial statements for each year were materially misstated and the opinion expressed each year, that the accompanying balance sheet and related income statement and the statements of changes in net assets present fairly, in all material respects, the financial position of FS, was wrong. Billions of dollars in assets of FS did not exist. Those assets either never existed or had been misappropriated by Bernard Madoff or by BLMIS.
Discipline proceedings
[10] After an investigation into complaints made by two FS shareholders, the CPAO’s Professional Conduct Committee (“PCC”) referred allegations of professional misconduct to the Discipline Committee with respect to the two audits. The PCC alleged that the Applicant had not performed his professional services in accordance with generally accepted standards of practice of the profession, contrary to Rule 206.1. Among other particulars, it was alleged that the Applicant failed to obtain sufficient and appropriate audit evidence for each of the above audits.
[11] The Applicant denied the allegations on the basis that he did have sufficient audit evidence, that he had met the standards of practice of the profession and that his conduct did not rise to the level of professional misconduct.
Discipline Committee decision
[12] The discipline hearing proceeded before a five-member panel of the Discipline Committee for 43 days. The panel included three Fellows of the Chartered Professional Accountants/ Chartered Accountants, one CPA, CA member and a public representative.
[13] As set out in their reasons for decision, the Discipline Committee recognized that the burden of proof was on the PCC to satisfy the Discipline Committee, on a balance of probabilities, that the allegations of professional misconduct had been proved.
[14] There was no issue of amoral behaviour in this case. The Discipline Committee accepted that neither the Applicant nor anyone at PwC knew about the Madoff fraud or took part in any way in the fraud.
[15] There was also no issue that the FS audits required that the Applicant comply with U.S. GAAS. Further, there was agreement on the governing standards, set out in the reasons for decision as follows:
- The Auditing Standards Board (“ASB”) of the American Institute of Certified Public Accountants (“AICPA”) promulgated the professional practice standards (GAAS) for auditors of US entities (AU 150). The standards were categorized as General Standards; Standards of Field Work; and Standards of Reporting. At the relevant time, the Standards of Field Work required the auditor: (first) to adequately plan the audit; (second) to have a sufficient understanding of internal control to plan the audit and determine the nature, timing and extent of tests to be performed; and (third) to obtain sufficient competent evidential matter through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion. [Underline emphasis added; notes regarding document locations omitted.]
[16] The parties agreed generally on the relevant provisions of U.S. GAAS, the AUs, and the provisions of the Audit Guide that were applicable, but not on what they required or whether they had been complied with in this case.
[17] The Discipline Committee heard evidence from a number of witnesses, including expert evidence and evidence from the Applicant and other direct participants in the events. Three experts testified about the standards of practice required of the Applicant in relation to the FS audits. The PCC called two expert witnesses regarding the auditing standards issues that arise in this case, Mr. Devor and Dr. Holstrum. The Applicant called Mr. DeAngelis.
[18] The Applicant challenged the weight to be given to the evidence of Mr. Devor based on lack of experience and expertise in the relevant field and challenged Dr. Holstrum based on lack of experience and an overly academic approach. The Discipline Committee considered these challenges and rejected them. The Discipline Committee also chose not to accept Mr. DeAngelis’s opinion. They found that he was the least objective and credible of the experts and appeared more like an advocate than an unbiased objective expert witness.
[19] The central issue before the Discipline Committee was whether the Applicant had sufficient and appropriate audit evidence of the existence of the assets purportedly held by BLMIS for FS and the income purportedly generated at BLMIS for FS. The PCC alleged that the Applicant did not have sufficient and appropriate audit evidence (called evidential matter in the above standards) to accept the representations made by BLMIS.
[20] The Applicant had received information from BLMIS. For 2006, the Applicant received a reporting memo about a site visit by PwC members from another office. For 2007, there was a phone call to determine if there had been any significant change at BLMIS from the previous year. The Applicant intended to rely on a blind confirmation – PwC asked BLMIS to tell PwC the assets and income of FS without first setting out what PwC understood the information to be and asking BLMIS to confirm it.
[21] BLMIS’s role had an impact on what audit evidence was needed. BLMIS performed three critical functions of FS: it held substantially all of FS’s billions of dollars of assets as a sub-custodian, it provided investment management and advisory functions by which it decided when to buy and sell securities on FS’s behalf and it executed the trades as FS’s primary broker-dealer.
[22] BLMIS was therefore a “service organization” within the meaning of U.S. GAAS. The Discipline Committee found that as a service organization, BLMIS was a vital part of FS’s information system, not an independent third party. As a result, PwC could not rely on information supplied or processed by BLMIS without also having sufficient and appropriate evidence about BLMIS’s internal controls.
[23] Before relying on BLMIS’s confirmations, the U.S. GAAS codified standard required that the Applicant obtain sufficient and appropriate audit evidence that the internal controls of BLMIS were operating effectively. The dispute before the Discipline Committee was focused on whether or not he had that audit evidence.
[24] The Applicant testified that to satisfy the requirement for sufficient and appropriate audit evidence he relied on two SEC 17a-5 Reports on BLMIS, one for each audit year. However, this testimony was inconsistent with statements he and other members of the PwC team had made in their investigation interviews. The Discipline Committee rejected the Applicant’s testimony on this point, finding as a fact that when the Audit Reports were released, the Applicant did not intend to rely on the 17a-5 Reports as evidential matter supporting the conclusion that the internal controls at BLMIS operated effectively. On this Application for Judicial Review, the Applicant does not challenge that finding of fact.
[25] Although the Discipline Committee found that the Applicant did not rely on the above 17a-5 Reports, they also considered whether he could rely upon them, finding that he could not do so. They reached this conclusion because the reports contained an exclusion clause that restricted the use of those reports to parties that did not include the Applicant, because inquiries that had not been made here were required before an auditor could rely on the reports, and because those brief reports did not provide sufficient and appropriate audit evidence.
[26] Mr. DeAngelis testified in favour of reliance on 17a-5 Reports. However, his evidence was inconsistent with the acceptance, by the Applicant, that BLMIS was a service organization. Mr. DeAngelis was of the view that BLMIS was not a service organization. The Discipline Committee concluded that his evidence and opinion on service organizations and on the 17a-5 Reports was untenable and rejected that evidence.
[27] There was no other information or document that the Applicant claimed to rely upon as evidential matter supporting the operating effectiveness of the BLMIS internal controls. As found by the Discipline Committee, he had no audit evidence to fulfill that requirement.
[28] The Discipline Committee therefore concluded that BLMIS was not an independent third party in relation to FS and that the Applicant had failed to obtain the sufficient and appropriate audit evidence that was required—pursuant to U.S. GAAS—for the Applicant to be able to rely on information provided by BLMIS.
[29] The Applicant brought forward a defence based on common practice. He submitted that there was a responsible body of professional opinion that supported his conduct. His position was that, as a result, a finding of professional misconduct could not be made. The Discipline Committee disagreed with that proposition but went on to say that such a defence would fail due to insufficient evidence. Mr. DeAngelis had put forward evidence on this topic, which had an inadequate foundation. The Discipline Committee concluded that his evidence was speculation and deserved no weight. The Applicant also put forward other cases involving the Madoff fraud, but the Discipline Committee was not persuaded that those cases were based on the same evidence.
[30] The Discipline Committee considered whether or not the Applicant’s departure from professional standards was significant enough to amount to professional misconduct, finding that it was.
[31] The Discipline Committee concluded that the Applicant was guilty of professional misconduct. The Discipline Committee imposed a fine and made a costs order against the Applicant.
Appeal Committee decision
[32] The Applicant exercised his statutory right of appeal from the Discipline Committee decision: Chartered Professional Accountants of Ontario Act, 2017, S.O. 2017, c. 8 (“CPAO Act”), s. 37(1). He appealed the liability decision only. He did not challenge the penalty or costs, and those decisions are also not challenged on this Application for Judicial Review.
[33] The statutory appeal imposes a reasonableness threshold. To interfere with the Discipline Committee decision on appeal, the Appeal Committee must have first found that the decision appealed from was “unreasonable”: CPAO Act, s. 37(5). The Appeal Committee did not find that the Discipline Committee decision was unreasonable.
[34] The appeal was heard by a five-member panel over five and a half days. The panel included one Fellow of the CPA and CA, two CPA, CA members and two public representatives. As shown in the lengthy reasons for decision, the Appeal Committee did not rubberstamp the decision of the Discipline Committee. The reasons for decision show that the Appeal Committee confronted the issues raised on the appeal and carefully considered the matter.
[35] On the appeal, the issues were still focused on whether, on the evidence, the Applicant had complied with the applicable standards when he accepted the information from BLMIS regarding FS for the two audits. The Applicant argued that the Discipline Committee decision was unreasonable because neither PCC expert had the requisite experience and their opinions were faulty for other reasons as well, because the panel had not appropriately considered the Applicant’s evidence and the evidence of the common practice of other audit professionals in similar circumstances, because the panel had misinterpreted and misapplied U.S. GAAS, and because the Discipline Committee found that the conduct was sufficient to support a finding of professional misconduct.
[36] On the appeal, the PCC relied on a number of the Discipline Committee’s factual findings, as follows:
(1) that BLMIS was a service organization under U.S. GAAS;
(2) that, therefore, the Applicant could not rely on the BLMIS’s confirmations because BLMIS was not independent of FS;
(3) that the Applicant and the audit team failed to make an appropriate audit response to BLMIS being a service organization at the time the Audit Reports were released;
(4) that the Applicant did not rely on the 17a-5 Reports at the time the Audit Reports were released; and,
(5) that, in the alternative, if the Applicant did use the 17a-5 Reports as audit evidence, those 17a-5 Reports could not provide sufficient evidence to support the operating effectiveness of internal controls at BLMIS to comply with U.S. GAAS.
[37] The Appeal Committee concluded that at the core of the Discipline Committee’s decision was the Applicant’s acknowledgement that BLMIS was a service organization. BLMIS should therefore have been treated as an integral part of the FS information systems. The Applicant was required under U.S. GAAS to conduct the audit on that basis. It was insufficient to rely on confirmations provided by BLMIS without also obtaining the necessary understanding of the internal controls and sufficient audit evidence as to their effectiveness.
[38] The Appeal Committee noted that the Discipline Committee’s finding that the 17a-5 Reports were not sufficient and appropriate audit evidence was a key finding and was reasonable.
[39] The Appeal Committee also found that the Discipline Committee reasonably rejected the Applicant’s defence that he had acted consistently with common practice, which was based on the evidence of Mr. DeAngelis, on the evidence of the Applicant and on other cases.
[40] The Appeal Committee further found that the Discipline Committee carefully considered what constituted professional misconduct and addressed both how and why the Applicant’s audit failures rose to the level of professional misconduct. The Appeal Committee agreed that the Applicant’s conduct was not a mere error in judgment.
[41] The Appeal Committee dismissed the appeal.
Standard of review
[42] There is no dispute that the standard of review on this Application for Judicial Review is reasonableness. The Applicant must show that the above Appeal Committee decision is not reasonable.
[43] The Applicant must therefore show that “there are sufficiently serious shortcomings in the decision such that it cannot be said to exhibit the requisite degree of justification, intelligibility and transparency”: Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, at para. 100.
Issues
[44] The Applicant submits that the decision of the Discipline Committee is unreasonable because:
(i) they applied the wrong standard of practice; and,
(ii) they reversed the onus of proof.
[45] It does not appear that these issues were put before the Appeal Committee, at least in the same way. Further, the positions taken (or not taken) by the parties before the Appeal Committee are relevant to our consideration of whether the decision of the Appeal Committee was reasonable: Vavilov, at para. 94. However, it was apparent during oral argument before us that, in large part, the above issues are still founded on challenges to the evidentiary findings of the Discipline Committee including the weight given to the evidence of the various experts. Those arguments were considered and rejected by the Appeal Committee.
Standard of practice
[46] There is no dispute that the applicable standard is set out in Rule 206.1, which provides that a member shall perform professional services “in accordance with the generally accepted standards of practice of the profession.” Both the Discipline Committee and the Appeal Committee properly set out that Rule and standard.
[47] The Applicant first submits that the Discipline Committee wrongly applied a pure negligence standard by focusing on the “reasonable auditor.”
[48] The reasons for decision do not support this argument. The Discipline Committee expressly noted that issues of negligence are a “matter for the courts, not the Discipline Committee, a professional discipline tribunal.” There is a single reference to a reasonable auditor in the reasons for decision of the Discipline Committee, in the discussion about the lack of evidence to support Mr. DeAngelis’s speculation about what other auditors did. A fair reading of the reasons for decision shows that both Committees focused on the standard in Rule 206.1 and did not apply a pure negligence standard. This case is not comparable to Novick v. Ontario College of Teachers, 2016 ONSC 508, 346 O.A.C. 69 (Div. Ct.), in which the tribunal repeatedly referred to the “standard of care” or “duty of care” in their reasons for decision.
[49] The Applicant next distinguishes between the words that comprise U.S. GAAS, specifically “generally accepted auditing standards”, and the words of Rule 206.1, which refers to “generally accepted standards of practice”. The Applicant submits that the wording difference means that the rule narrowly focuses on “standards that members of the profession actually adhere to and apply in practice” (as put in the Applicant’s submissions before this Court). In turn, the Applicant submits that the PCC was required to and did not put forward evidence of what other auditors actually did in similar circumstances and challenges the background and experience of the PCC experts on that basis.
[50] It does not appear that this wording argument was put to either Committee. Those tribunals ought to have been asked to consider the wording difference, applying their substantial expertise, rather than raising it for the first time on this Application for Judicial Review. Further, this wording argument does not bear scrutiny.
[51] Both Committees proceeded on the basis that the detailed code set out in U.S. GAAS comprised standards of practice of the profession and were applicable standards under Rule 206.1. This approach was consistent with the evidence and the law. It was certainly reasonable.
[52] The Applicant submits that the presence of a detailed code of standards (here, U.S. GAAS) did not determine the standard unless it was actually followed in practice. The Applicant further characterized U.S. GAAS as only a guideline. However, in oral submissions, Applicant’s counsel agreed that the detailed code, U.S. GAAS, was relevant to the standards of practice under Rule 206.1.
[53] Further, the Applicant admitted in his evidence that the standards in U.S. GAAS were the standards that applied to both audits. The undisputed facts were that the audit engagements required that the FS audit be done in accordance with U.S. GAAS, that the opinions had to comply with those generally accepted auditing standards and that the FS audit opinions that the Applicant released said that the opinions did conform with those generally accepted audit standards.
[54] There was ultimately no dispute that under U.S. GAAS, BLMIS was a service organization and that reliance on information from BLMIS was therefore insufficient to meet the applicable generally accepted auditing standards. The factual finding was that the Applicant had no other audit evidence that he was entitled to or did rely on.
[55] The Applicant’s position is based on challenges to the weight that ought (or ought not) to have been given to the evidence of the two PCC experts. The Applicant challenged their background and experience before both Committees, submitting that their opinions were mere theoretical interpretations of U.S. GAAS. The Applicant submits that the experience of those experts was insufficient. However, the Discipline Committee accepted their evidence on the applicable standards and the Appeal Committee’s decision not to interfere with those factual findings was reasonable. The Applicant has not put forward a basis for this Court to interfere with the factual findings of the Discipline Committee, which was best placed to weigh the expert and other evidence and did so.
[56] The Applicant relies on the Divisional Court decision in Brett v. Ontario (Board of Directors of Physiotherapy) (1991), 1991 8286 (ON SCDC), 77 D.L.R. (4th) 144 (Gen. Div. (Div. Ct.)), aff’d on other grounds, 1993 9390 (ON CA), 64 OAC 152, in support of the position that there must be evidence of the actual conduct of other professionals in the field. However, Brett arose in a counter-factual situation. In that case, the regulator had conducted a survey of members, asking about their ratio of auxiliary staff. The survey results were adopted as the recommended standard for practitioners. Brett employed more than the recommended number of auxiliary staff and was subject to a finding of professional misconduct for having done so. In response to the prosecution evidence, Brett put forward evidence from physicians, not physiotherapists, who supported her ratio of auxiliary staff.
[57] The Applicant relies on the following statement in Brett, at p. 152:
Where the alleged misconduct does not infringe a specific law and relates to the conduct or judgment of the member in performing his professional work, then the member cannot be found guilty of professional misconduct if there exists a responsible and competent body of professional opinion that supports that conduct or judgment. [Emphasis added.]
[58] In Brett, the responsible body of professional opinion in favour of Brett’s approach came from the evidence of the physicians called by Brett in her defence.
[59] The Divisional Court concluded that despite the opinion of the great majority of physiotherapists, the Board was not entitled to find that Brett failed to maintain the standards of practice of her profession, at p. 153:
… It is not sufficient for a conviction that the disciplinary panel prefer the opinion of the vast majority over that of the smaller though equally competent and responsible body of opinion that supports the member in his conduct or judgment. [Emphasis added.]
[60] Thus, in Brett, the common practice was rejected as the foundation for the professional misconduct finding. This does not assist the Applicant.
[61] The Applicant also relies on Barrington v. The Institute of Chartered Accountants of Ontario, 2010 ONSC 338, 260 O.A.C. 199 (Div. Ct.), at para. 156, rev’d on other grounds, 2011 ONCA 409, leave to appeal refused, [2011] S.C.C.A. No. 367, in which the above passage about a “responsible body of professional opinion” from Brett was adopted by the Divisional Court.
[62] The Discipline Committee disagreed with the Applicant’s position that a finding of professional conduct could not be made where there was a responsible body of opinion supporting the conduct of the Applicant. However, as noted by the Discipline Committee, a responsible body of opinion supporting the Applicant’s conduct had not been established on the evidence in any event. The Applicant was relying on Mr. DeAngelis for expert evidence about what was described as common practice. The Discipline Committee had several difficulties with Mr. DeAngelis’s opinion evidence, finding that it was essentially speculation.
[63] The Applicant also sought to rely on another expert witness, Jennifer Hull, yet the Discipline Committee had restricted the scope of her expertise from the outset, finding that she was not qualified to testify about standards of practice. Finally, the Applicant sought to rely on other court decisions regarding the Madoff fraud, which the Discipline Committee found were not shown to arise from the same facts as the matter at hand.
[64] To prevail under Brett, the Applicant must show that the Discipline Committee’s findings regarding the weight (not) given to the above evidence should be disregarded. The Applicant did not do so before the Appeal Committee or before this Court.
[65] Therefore, Brett does not assist the Applicant. Further, its facts show that reliance on common practice can be problematic.
[66] The Applicant further submits that the evidence of the practice of other professionals takes precedence over the abstract U.S. GAAS standards, relying on the Divisional Court’s decision in Barrington, at para. 156. Yet Barrington goes no further than Brett.
[67] The Applicant also relies on the location of the discussion of common practice in the reasons for decision of the Discipline Committee. The discussion of common practice falls within a discussion of the Applicant’s defence evidence. The Applicant submits that the reasons amount to saying that common practice is irrelevant to the standard of practice and that the Discipline Committee had already decided the standards issue without addressing the defence. However, taking the reasons for decision as a whole, neither proposition is a fair reading of the decision.
[68] The Applicant further notes that even though it is a detailed code, U.S. GAAS is open to interpretation. That is so. Consistent with Barrington, the interpretation of U.S. GAAS was the subject of competing expert evidence before the Discipline Committee. The opinions of the PCC expert witnesses about U.S. GAAS were accepted, and the competing evidence of Mr. DeAngelis was not.
Onus of proof
[69] The Applicant also submits that the Discipline Committee reversed the onus of proof. This submission overlaps with the above position about the standard of practice. The Applicant submits that the PCC was required to prove the standard of practice and did not do so. The Applicant then relies on the Discipline Committee’s reasons for rejecting his defence evidence to submit that the Discipline Committee reversed the onus. The Discipline Committee said that the defence of common practice would fail because there was no evidence of what other auditors did. Again, this formed part of the analysis, and rejection, of Mr. DeAngelis’s evidence.
[70] There is no dispute that the onus to prove professional misconduct was on the PCC. This was accurately stated in the reasons for decision of the Discipline Committee. Read fairly, the Discipline Committee did not shift the onus. They did reject the Applicant’s defence.
Disposition
[71] Returning to the standard of review before this Court, the Applicant must show that the Appeal Committee’s decision was not reasonable. Further, the statutory appeal required that the Appeal Committee apply a reasonableness standard in their review of the Discipline Committee decision.
[72] Both Committees proceeded on the basis that the generally accepted auditing standards that applied here were codified in U.S. GAAS. They had and considered evidence about what was required to meet those generally accepted auditing standards. On now unchallenged facts, the Applicant failed to comply with U.S. GAAS.
[73] The Applicant was required to have sufficient audit evidence before relying on information from BLMIS. He had no audit evidence that he was entitled to rely upon. Considering this breach, and all of the other issues raised by the Applicant on this Application for Judicial Review, the decision of the Appeal Committee not to interfere with the Discipline Committee’s decision was within a range of reasonable outcomes. The Applicant has not shown that there are sufficiently serious shortcomings in the decision such that it cannot be said to show the requisite degree of justification, intelligibility and transparency.
[74] This Application is therefore dismissed. The Applicant shall pay the Respondent costs in the agreed upon amount of $80,000, all inclusive.
Matheson J.
I agree _______________________________
Favreau J.
I agree _______________________________
O’Bonsawin J.
Released: October 7, 2021
CITATION: Wall v. Chartered Professional Accountants of Ontario, 2021 ONSC 6440
DIVISIONAL COURT FILE NO.: 120/20
DATE: 20211007
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
MATHESON, FAVREAU AND O’BONSAWIN JJ.
STEPHEN W.A. WALL
Applicant
– and –
CHARTERED PROFESSIONAL ACCOUNTANTS OF Ontario
Respondent
REASONS FOR decision
Released: October 7, 2021