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10.33 pm
The Minister of State, Department of Trade and Industry (Mr. Ian McCartney): I thank my hon. Friend the Member for Great Grimsby (Mr. Mitchell) for an animated, enthusiastic and provocative presentation of his case. Over the years, he has led the debate about the regulation of auditors, and his contribution has always been made from the point of view of the public interest. In that respect, my views are the same as his: the availability of reliable, audited accounts is a fundamental matter of public interest, and the proper regulation of auditors is an important aspect of maintaining confidence in the environment for doing business in the United Kingdom.
My hon. Friend will also be aware that the Government are committed, through our business manifesto, to ensuring that there is a framework of independent regulation for the
accountancy profession, of which statutory auditors are a part. He will appreciate that, in view of time constraints, I shall confine myself to the general criteria that must guide us in the matter. The criteria are effectiveness, independence and transparency.
My hon. Friend also referred to various proposals for changes to audit regulation and to the liability of auditors. Let me make it absolutely clear that we shall give a full and fair hearing to all proposals. We shall also give full consideration to the views expressed by all interested parties. As the Government, our fundamental responsibility is to come to a view on how to strike a fair overall balance, in the public interest. I assure my hon. Friend that we shall consider all proposals fully and rigorously from that standpoint.
An extensive framework for the regulation of auditing, derived ultimately from European Union legislation, was put in place by the Companies Act 1989. What particularly interests me is its effectiveness, and how we improve any aspects of the system that are in need of improvement. Under the Act, the Secretary of State for Trade and Industry is responsible for recognising appropriately qualified bodies to maintain standards of qualification and supervision within the profession. The bodies are required to submit annual reports to the Secretary of State on their reporting functions.
The qualifying and supervising bodies must ensure, for example, that auditors have undergone an appropriate period of theoretical study and of professional experience; that rules are in place to ensure that standards are maintained; and that auditors are fit and proper people, with the necessary standards of professional integrity. They also have systems of discipline, appeals systems and procedures for dealing with complaints.
In addition, the standards to which auditors work are set by a body, the Auditing Practices Board, half of whose members are practising auditors, the other half being business people, lawyers, academics and others with wide business experience--the stakeholders to whom my hon. Friend referred.
Whenever there is a company collapse, there is a rush to blame the auditors. Often, aggrieved parties will seek to sue the auditors for alleged negligence. I should like to consider two aspects of that: are there effective procedures for dealing with problems when something goes wrong; and is there an effective system of monitoring and feedback to raise general standards, so that problems are less likely to occur in the first place?
For major public interest cases, the joint disciplinary scheme operates as an independent investigator on behalf of the three main professional bodies and, after investigation, makes recommendations to them. The sponsoring bodies are currently reviewing the operation of the scheme and I shall, of course, take the closest interest in the proposals that they develop to improve its effectiveness.
I cannot comment on individual cases that are before the courts or under investigation, but I strongly agree with my hon. Friend's view that the system of investigation, for cases of major public interest and for all other cases, should be subject to continuing independent review.
That is an aspect which I shall certainly bear in mind when I receive the profession's own proposals for independent scrutiny of its regulatory activities. Underpinning that, there is, of course, the system of
monitoring of auditors set up by the 1989 Act, refined in the light of an extensive review in 1994, and overseen by the Secretary of State.
I want to talk about certain aspects of improving the system as a whole. My hon. Friend will be aware that the present system of annual reporting is transparent, in that the supervisory bodies' annual reports are published and laid before the House. As he will have seen, those reports provide a valuable pen picture of the way in which the bodies fulfil the requirements placed on them and highlight areas for improvement. The fifth set of reports has recently been submitted to the Department. I intend to scrutinise them and I am sure that my hon. Friend will do so, too. I look forward to hearing his views.
The audit monitoring process was the subject of extensive scrutiny by Peter Moizer, professor of accounting at Leeds university, at the request of my Department. His report was published in 1994. Professor Moizer considered in detail the monitoring arrangements put in place by the supervisory bodies. He concluded:
The report also made a number of recommendations for improvements to the audit monitoring processes. Many of the recommendations, which included an increase in the frequency of visits, to ensure that all firms would be visited over a five-year period, and greater co-ordination among the monitoring bodies, have been implemented by the bodies.
A recommendation for greater public scrutiny of the audit monitoring process is picked up by the professional bodies' current work on proposals for the creation of an independent oversight body. My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) has written to my Department on that matter. I can assure him that I shall meet him and his colleagues at a later date to discuss the issues that he has put before me and my officials.
The annual reports to the Secretary of State include material on action taken against auditors who are found wanting and on the handling of complaints. I cannot pre-empt the contents of the reports for 1996, which have not yet been published, but I remind my hon. Friend the Member for Great Grimsby that in 1995, a total of 63 member firms of the Institute of Chartered Accountants in England and Wales had their registration withdrawn or surrendered, which is slightly more than the number to which my hon. Friend seemed to allude.
Mr. Mitchell:
I was talking about the auditing of the major plcs. All the sanctions and disciplinary procedures are exercised energetically against smaller firms. The weight of regulation falls on them. The real problem, however, is the debasement of audit by the big firms, which are largely unaccountable and which dominate the regulation process.
Mr. McCartney:
My hon. Friend has reiterated some of the issues that he has written to me about. I think that I have said that I am prepared to consider them as part of
Mr. Andrew Stunell (Hazel Grove):
When considering those matters, will the Minister take account of the experience in north America and in particular the regulatory structure in the United States, and perhaps apply some of the lessons that his hon. Friend drew to his attention, so that those structures can be applied in the United Kingdom?
Mr. McCartney:
At the outset, I said that I was open to consideration of a range of issues, including the contribution that my hon. Friend has made this evening and in writing on numerous occasions. I welcome the hon. Gentleman to the Front Bench, by the way. I am not sure whether this is a Liberal Democrat takeover of the Opposition Front Bench, but he is a welcome sight after some of the individuals whom I occasionally have to face across the Dispatch Box. I wish him well and hope to see him on many more occasions.
As I said, in 1995, a total of 63 member firms of the English institute had their registration withdrawn. Restrictions were also placed on the registration of a further 107 firms--that is out of a total of 1,115 matters that were pursued by the institute following monitoring visits.
The firms, the professional bodies and the Auditing Practices Board are increasingly looking to ensure that lessons from past failures are brought to practitioners' attention.
Obviously, it is easy to criticise any system of delegated regulation and to say that those closely involved are not best placed to form an independent view of the effectiveness of the system. The answer to such doubts is to ensure the transparency of the system, so that its independence can be seen by all.
That brings me back to the Government's commitment to ensuring that there is a framework of independent regulation. That is the standpoint from which I shall be considering the proposals for the independent external review of their regulatory activities that the professional bodies are now preparing. My hon. Friend will understand that I cannot commit myself in advance on the view that I shall take on those proposals. I can, however, assure him that I come to the issue with an open, but not empty, mind and that I shall take his views into full account in assessing the proposals and reaching a decision on the way forward.
I am grateful to my hon. Friend for raising limited liability partnership, which is a good example of a matter on which we must listen to all parties, and find a solution based on the balance of public interest. The professions have asked whether it is possible to establish a legal structure that would enable them to do business with limited liability, but with the organisational features of a partnership rather than a company. At present in the UK, they must choose between organising as a partnership, with unlimited personal liability and little public disclosure, or as a company, with limited liability and extensive public disclosure. The key difference from the point of view of the client is that any claim that he may have against a partnership is against each and all the
partners individually. With a company, his claim is against the assets of the company itself. That is why the Companies Acts require extensive public disclosure, particularly about the state of a company's finances.
It is absolutely right that any business entity with a limited liability should be required to disclose information. However, it does not necessarily follow that the internal organisation of all limited liability entities should be exactly the same as that of companies, with directors, share capital and shareholders. Many businesses prefer a partnership structure, particularly when many skilled people wish to join in the ownership of the firm on the basis of the skills that they bring to it, without having to make substantial capital contributions to the firm at the outset.
Many states in the United States of America have legislated in the past few years to make such business vehicles available, with the internal organisation of a partnership but the external obligations of a company. They are being copied by an increasing number of offshore centres such as Jersey, which was mentioned by my hon. Friend. No doubt they hope to attract registration from countries such as Britain whose partnership legislation has been unchanged for more than a century.
It was against that background that the Government announced on 22 May our intention to publish draft legislation on limited liability partnership. I emphasise the two basic principles of our approach. Legislation must provide appropriate safeguards for those dealing with the firm, and its details should be worked out in close consultation with all those affected.
"I believe that the monitoring units are working well and effectively and that self-regulation is being operated conscientiously."
Those are the views of an independent academic on the functioning of the monitoring process.
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