The auditing regulator’s new powers have been tested for the first time after the High Court cleared the way for the production of back-dated financial documents for the purposes of an investigation.
It was revealed this week that the High Court gave permission to the Financial Reporting Council (FRC) to recover documents from Sports Direct, relating to its probe into the retailer’s 2016 accounts.
The landmark decision implies that the “production of documents to a regulator by a regulated person – solely for the purposes of a confidential investigation the by the regulator into the conduct of the regulated person – is not an infringement of the legal professional privilege of a client of the regulated person in respect of those documents”.
The High Court ruling stated: “The FRC contends that, even if all of the 40 documents in question are covered by legal advice privilege and even if SDI has not waived privilege in any of those documents by sending them to GT, production of the documents to the FRC for the purposes of the investigation would not infringe SDI’s privilege.”
The investigation related to whether Sports Direct’s auditor had failed to reveal that one of the retailer’s businesses had hired Barlin Delivery, a company run by the brother of Sports Direct owner, Mike Ashley.
The retailer had argued that it had “legal privilege” in respect of the documents. However, the High Court said the firm had been “verging on obstruction” in failing to comply with the demands for around 40 documents.
It is the first time a High Court has issued orders to use the FRC’s powers under the Statutory Auditors and Third Country Auditors Regulations 2016.
The FRC said the case concerns its “first application to the High Court for an order against an audit client in respect of the client’s failure to comply with a statutory notice requiring the production of documents, pursuant to SATCAR and the FRC’s Audit Enforcement Procedure”.
