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Lord McKenzie of Luton moved Amendment No. 317BZA:
Page 233, line 26, leave out from first "be" to end of line 27 and insert "eligible for appointment as auditor of the company in question (see Chapter 2 of Part 33 of this Act)"
The noble Lord said: The amendment brings the wording of Clause 492 into line with Part 33 of the Bill, which refers to eligibility not qualification for appointment as an auditor. I beg to move.
On Question, amendment agreed to.
Baroness Noakes moved Amendment No. 317BA:
The noble Baroness said: This is a probing amendment. The Bill introduces for the first time the signature of an audit report by an individual rather than a firm. Clause 492(3) is helpful in making it clear that there is no additional civil liability attaching to signing an audit report in the auditor's own name, but the Bill is silent with regard to Clause 493, which requires the naming of a senior statutory auditor. Amendment No. 317BA was suggested to us by some corporate lawyers in the City as a way in which to provide absolute certainty that there are no circumstances, in signing or naming, that will lead to a civil liability on the individual. I hope that the Minister will see that as a helpful amendment. I beg to move.
Lord Sharman: I rise to speak to Amendment No. 317BB, which is in my name and that of my noble friend Lord Razzall. This is in a similar vein to the noble Baroness's amendment; it is designed to clarify the civil liability position of the senior statutory auditor. It is clear from Clause 492(3) that the auditor's position is not altered by reason of his signing the audit report. But what is the liability of an individual by virtue of being designated the senior statutory auditor? For example, does he owe a special duty of care to the audit client? The legislation needs to be very clear in that regard.
Lord McKenzie of Luton: For an accountant involved in an audit, being identified by his firm as senior statutory auditor will not of itself be an onerous role. The only responsibility that comes with the title is to sign the auditor's report. Clause 492(2) provides that signing the report does not affect his individual liability. The amendments would broaden this to say that no other aspect of being senior statutory auditor will affect his liability and Amendment No. 317BA refers to "being named" in the auditor's report.
There is no way in which being named in a report can in itself make someone subject to a civil liability that he would otherwise not have been subject to. Nor is there anything else about the senior statutory auditor's role that will affect his liability. The existing wording of Clause 492(3) therefore seems to us to say
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all that it is necessary to say about the potential liability of the senior statutory auditor. I am grateful for the opportunity to put that clearly on the record.
Baroness Noakes: I thank the Minister for his response. I understand what he is saying but it is curious that Clause 492(3) refers specifically to the civil liability position in relation to signing the auditor's report and yet the Bill is silent in respect of anything else. This could lead to the conclusion that being named—or something else—could lead to liability. It is because of the specificity about signing that people have raised the concern that there may be some other way of being dragged into civil liability. That is why the two amendments in this group—both mine and the one in the name of the noble Lord, Lord Sharman—seek to broaden Clause 492(3) to reflect that concern. The way in which the subsection refers only to signing is unsatisfactory.
Lord McKenzie of Luton: I can only reiterate what I have said: we believe that there is no other liability which comes with it or could come with it. I hope that that is sufficient. As ever, we will reflect on this discussion, but we do not see that it is necessary to add to the Bill.
Lord Sharman: When the Minister reflects on this, will he take into account that, as the noble Baroness said, the Bill deals only with the liability issue arising as a result of signing the report. In the process of being a supervisor of the audit, a named senior statutory auditor will do many other things in addition to signing the report. We are seeking to clarify that that does not attract any special duty of care. We are not in any way seeking to put into the Bill anything which detracts from the normal duty of care required. We are concerned whether there is a special duty of care as a result of being named, and signing a report is only one aspect of that.
Lord McKenzie of Luton: I am happy to try to clarify that point. We do not see the position as bringing with it any special duty of care. That is why we do not think it is necessary to say anything beyond that which we have said about liability. I hope that helps matters.
Baroness Noakes: The Minister has set out the view of the DTI and its advisers on this matter, but if you put yourself in the position of an audit firm, would you, as an audit partner, want to take on the uncertainty relating to this without clear words? That is the point. A number of audit firms have already reported to us that the effect of the Bill is leading some within their firms to consider giving up responsible individual status. We shall come on in a moment to the specific offence, but this is another part of the whole picture. It may be very nice to have an auditor sign the report, but if there is any suggestion that additional personal liability might attach to that, people will walk away in droves.
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3.45 pm
Lord Clinton-Davis: Does the noble Baroness really contend that a duty of care arises only where it is specifically mentioned? I do not think so. A duty of care is determined by the common law.
Baroness Noakes: I am entirely happy to accept that position, but this Bill changes the nature of the role of individuals within an audit firm. To date, the audit firm has been the auditor, and it has been very clear that any cause of action lay against the firm. By putting the senior statutory auditor out in the open, there is a possibility that a duty of care may go along with that. That is the nature of the uncertainty. The Minister says the Government do not think it is like that, but I have to tell him that is not good enough if you are sitting in an audit firm potentially building up personal liabilities on top of the bit you share as part of an audit firm.
Lord Sharman: I am afraid I am not satisfied with this. Essentially we are talking about an enhanced duty of care. That is the concern. The Government say they are anxious to clarify that there is no enhanced duty of care as a result of signing the report. That demonstrates a lack of understanding about the process of an audit, how it happens and what people do. A senior statutory auditor may well turn up to an audit committee. He may make an oral statement. Does he have an enhanced duty of care that you are seeking to clarify by virtue of signing the report because of an oral statement at an audit committee? That is the issue. If it is necessary to clarify it in terms of signing the audit report, why not clarify it on the broader ground?
Lord Razzall: Before the Minister rises, I would like to turn to the point raised by the noble Lord, Lord Clinton-Davis. No doubt in his references to "common law" he was contemplating the effects of Merritt v Babb and Williams v Natural Life Health Foods Limited. The Minister ought to indicate in his answer whether he believes that those two common law cases affect the issue being discussed.
Lord McKenzie of Luton: I am grateful for that last specific question. I will look at the record and revert on those two cases quoted, but I am sure the noble Lord will understand that I do not have a detailed response to that at my fingertips.
To be clear: we do not see that any enhanced duty of care comes from the role, but we will study the record of this debate, and, if there are specific concerns that can be identified by the profession that we are not taking seriously, we will be happy to look at them. The Bill does not change the role of a senior statutory auditor, except to require him or her to be identified. The role of the engagement partner or the senior partner on the audit does not change thereby. The Bill does not bring in any special duties because of that.
Lord Clinton-Davis: Is there any example known to the law of an enhanced duty of care? I am not sure, but
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I do not think there is, and for that reason the remarks that have been made—intended to be helpful, I'm sure—are not very helpful at all.
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