HC Deb 19 October 1976 vol 917 cc1245-80

'.—(1) Every company shall at each general meeting of the company at which there are complied with—

  1. (a) the requirements of subsection (6) of section 1 above, or
  2. (b) in relation to any time before the coming into operation of that section, the requirements of section 148 of the Act of 1948 (profit and loss account and balance sheet to be laid before company in general meeting),
appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next general meeting of the company at which those requirements are complied with.

(2) Where at any general meeting of a company at which the requirements mentioned in subsection (1) above are complied with no auditors are appointed or reappointed, the Secretary of State may appoint a person to fill the vacancy; and the company shall, within one week of the Secretary of State's power under this subsection becoming exerciseable, give the Secretary of State notice of that fact.

(3) The first auditors of a company may be appointed by the directors at any time before the first general meeting of the company at which the requirements mentioned in subsection (1) above are complied with, and auditors so appointed shall hold office until the conclusion of that meeting.

(4) If the directors fail to exercise their powers under subsection (3) above, those powers may be exercised by the company in general meeting.

(5) The directors, or the company in general meeting, may fill any casual vacancy in the office of auditor, but while any such vacancy continues, the surviving or continuing auditor or auditors, if any, may act.

(6) A company may by ordinary resolution remove an auditor before the expiration of his term of office, notwithstanding anything in any agreement between it and him; and where a resolution removing an auditor is passed at a general meeting of a company, the company shall within fourteen days give notice of that fact in the prescribed form to the registrar of companies.

(7) If a company fails to give any such notice as is mentioned in subsections (2) or (6) above, the company and every officer of the company who is in default shall be guilty of an offence and liable, on summary conviction, to a default fine.

(8) The remuneration of the auditor of a company—

  1. (a) in the case of an auditor appointed by the directors or by the Secretary of State, may be fixed by the directors or by the Secretary of State, as the case may be;
  2. 1246
  3. (b) subject to paragraph (a) above, shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine.
For the purpose of this subsection "remuneration" includes any sums paid by the company in respect of the auditor's expenses.

(9) Where a company's auditor or auditors are holding office at the date of the coming into operation of this section, nothing in subsection (1) above shall be taken as terminating their appointment, or as requiring either their reappointment or the appointment of other auditors, before the conclusion of the annual general meeting of the company held next after that date; and subsections (1) and (2) above shall apply in relation to that meeting as if it were a general meeting of the company at which the requirements mentioned in subsection (1) above were complied with (whether it is such a meeting or not).

(10) Nothing in subsection (6) above shall be taken as depriving a person removed there-under of compensation or damages payable to him in respect of the termination of his appointment as auditor or of any appointment terminating with that as auditor.

(11) Section 159 of the Act of 1948 (which is superseded by this section) shall cease to have effect.

(12) The repeal by this Act of subsection (2) of the said section 159 (existing auditors of company normally to be treated as reappointed without the passing of any resolution) shall not affect its operation in relation to any meeting of a company commencing within two months of the coming into operation of this section; and in relation to any such meeting section (Supplementary provisions relating to appointment and removal of auditors) (1) below shall apply also to a resolution providing expressly that a retiring auditor shall not be reappointed.'.—[Mr. Clinton Davis.]

Brought up, and read the First time.

10.18 p.m.

The Under-Secretary of State for Trade (Mr. Clinton Davis)

I beg to move, That the clause be read a Second time.

In Committee the Government undertook, in reply to a number of probing amendments, to reshape the provisions dealing with the appointment and resignation of auditors and to bring forward on Report a coherent set of provisions which avoided the loopholes apparent in the original drafting. This we have done in these new clauses and related amendments. New Clauses 1 and 2 replace Clause 14 and repeal in their entirety Sections 159 and 160 of the 1948 Act, thus consolidating, for convenience, all the relevant provisions on this subject.

Perhaps I should explain what the weaknesses of the present clauses are and then explain how the new clauses overcome them. Clause 15 requires an auditor who resigns in mid-term to make a statement about the circumstances connected with his resignation. The purpose of this requirement is to bring to light any relevant facts which may have led to the auditor's resignation and to prevent the auditor who comes across fraud or malpractice from taking the easy way out by resigning and remaining mute. The auditor who completes his term of office but then does not seek re-election is not required to make a statement. In the great majority of cases, there is no need for him to do so because he has completed his audit of the accounts and signed his audit report. If he is not satisfied with the accounts, he will have an opportunity to qualify his audit report. The audit report therefore achieves the same objectives in these circumstances as the resignation statement.

However, it is possible under the Bill as drafted for an auditor to retire without either completing his audit or making a resignation statement. This is a serious lacuna. The problem arises because at present an auditor's term of office runs until the end of the annual general meeting. Normally, audited accounts are laid before this meeting and, if this is done, no problem arises.

But accounts do not have to be laid at the annual general meeting; they can be laid at another meeting. If accounts are not laid at the AGM, the auditor can retire without completing his audit. This is clearly unsatisfactory. The clause therefore alters the auditor's term of appointment so that in future it will run until the end of the general meeting at which audited accounts are laid—that is until he has finished the job for which he was appointed. In most cases, the auditor will still retire at the AGM, but this amendment will close the loophole and will ensure that whenever an auditor ceases to hold office, he will either have completed his audit report or will have to make a resignation statement.

The second problem lay in the fact that a company has at present no power to remove an auditor before the end of his term of office. As a result, a company could find itself without an effective auditor if the auditor ceased to act as such but did not formally resign, perhaps because he was too ill or had disappeared or done a bunk. It is essential that a company should at all times have an auditor and companies are therefore given the power in New Clause 1 to remove an auditor by ordinary resolution.

We recognise that the new power of removal might appear to give the directors of a company the opportunity to remove an auditor who had uncovered fraud or malpractice. However, we are confident that as a result of the safeguards in New Clause 2 the power would not in practice be abused in that way.

Under the provisions of New Clause 2, special notice is required for a resolution to remove an auditor before the expiration of his term of office and the auditor proposed to be removed is given the right to make written representations, to have the representations sent to every member of the company and to attend and to speak at the meeting at which a successor is to be appointed and the meeting at which his term would have expired. These safeguards should be sufficient to deter abuse of the new Dower of removal.

Those are the main features of the new clauses. The essential aim of the clauses is to ensure that a company always has an auditor, and that the scope of an auditor to evade his responsibilities towards shareholders or to be influenced in that respect by directors should be reduced as far as possible. We are confident that the new clauses in conjunction with Clauses 15 and 16 as we shall seek to amend them meet those objectives.

New Clause 1 is complex. Subsection (1) provides that every company shall appoint an auditor at a general meeting at which accounts are laid, and the auditor's term of office shall last until the next such meeting. The general meeting at which an auditor shall be appointed is defined by reference to the Clause 1(6) obligation to lay accounts before the company or the equivalent requirement in the 1948 Act for the period before Clause 1 comes into operation.

Subsection (2) provides that the Secretary of State may appoint a company's auditor if one is not appointed in accordance with subsection (1) and requires the company to notify the Secretary of State of that fact within one week of the general meeting at which auditors should have been appointed.

Subsection (2) provides that the Secretary of State may appoint a company's auditor if one is not appointed in accordance with subsection (1) and requires the company to notify the Secretary of State of that fact within one week of the general meeting at which auditors should have been appointed.

Subsection (3) provides that a company's first auditors who hold office prior to the first of the general meetings referred to in subsection (1) may be appointed by the directors. This is equivalent to the present provision under Section 159 of the 1948 Act.

Subsection (4) provides that the company in general meeting may appoint the first auditors if the directors fail to do so. This also follows the equivalent provision of the 1948 Act.

Subsection (5) gives power to either the directors or the company in general meeting to fill a casual vacancy. This differs from the provision in the 1948 Act which gave this power to the directors only.

Subsection (6) gives the company in general meeting the right to remove an auditor before the end of his term of office. This is a new provision which is necessitated by the change in the appointment procedure.

Subsection (7) specifies the penalties to be imposed on a company and on every officer in default for failure either to notify the Secretary of State, under subsection (2), that an auditor has not been appointed at a general meeting at which one was required to be appointed, or to notify the Registrar, under subsection (6), of the passing of the resolution removing an auditor.

Subsection (8) specifies how an auditor's remuneration shall be determined. That is identical to the current provisions. Subsection (9) provides certain transitional arrangements which I do not think I need go into.

Subsection (10) provides that an auditor shall not be deprived of his right to compensation in the event of early termination of his office, even though subsection (6) enables a company to remove its auditor despite anything in any agreement with him.

The rest are fairly technical provisions.

I come to New Clause 2. Subsection (1) species the resolutions relating to the appointment and removal of auditors, for which special notice is required. It is required for any resolution proposing a change of auditor, including a resolution to remove an auditor, and also in the situation where an auditor appointed by the directors to fill a casual vacancy is to be reappointed. These are most important matters and it is clearly right that shareholders should have sufficient notice of them.

Subsection (2) requires that the company shall send copies of such resolutions to all the auditors concerned, both those proposed to be appointed and those retiring or to be removed.

Subsection (3) requires the company to circulate to members copies of any written representations which a retiring auditor or one proposed to be removed wishes to have circulated, provided that they are not received too late for it to do so, and provided that they are not unreasonably long.

Subsection (4) provides that the auditor may, in the event of his representations not being circulated, require the representations to be read out at the meeting.

Subsection (5) provides that the company or any other person claiming to be aggrieved may apply to the court and that the representations need not be circulated if the court is satisfied that needless publicity is being sought in the representations for defamatory matter. This proviso is equivalent to that in Clause 16 relating to a resignation statement.

Subsection (6) gives an auditor who has been removed the right to attend and speak at the meeting at which his replacement is appointed and at the general meeting at which his term would otherwise have expired.

Subsection (7) repeals Section 160, which is superseded by subsections (1) to (6) of this clause.

I turn to Amendment (c) to New Clause 1. This is otiose, as it is already implicit in the phrase "the auditor's expenses" that the expenses must be incurred by the auditor in his capacity as auditor.

Mr. Dafydd Wigley (Caernarvon)

Auditors often serve companies in more than one function. They may serve as consultants as well, and incur expenses in that capacity. The intention of the amendment was to make it clear that the expenses were identifiable with their function as auditors and no other function.

Mr. Davis

I understand the purpose, but I am advised that as a matter of law the amendment is redundant, because the phrase "the auditor's expenses" would be interpreted by the courts as expenses incurred by the auditor in that capacity.

I turn to Amendments (a) and (b) to New Clause 2. We shall no doubt have the benefit of hearing Opposition Members on the purpose and effect of those amendments. Let me say in anticipation, however, that New Clause 2(6) enables an auditor who has been removed to attend and speak at the general meeting at which his period of office would have expired if he had not been removed, and at any meeting at which the company proposed to fill the vacancy which arose as a result of the removal.

No provision is made for an agent of the removed auditor to attend these meetings on behalf of the auditor, and there is a very good reason for that. It would be undesirable to provide for a representative of an auditor who has been removed to attend the general meeting of the company. The right is a personal one and it is conferred upon the auditor to give him the opportunity of making a statement to members at the meeting concerning any part of the business which concerned him as the former auditor.

10.30 p.m.

The auditor is in the position of making such a statement because he has firsthand knowledge of the affairs of the company with which he has been dealing. If the auditor is unable or unwilling to speak at the meeting I do not think any purpose would be served by delegating that function to an agent, who would not necessarily have the same detailed knowledge of the affairs of the company. Therefore, I contend that the only appropriate person to attend and make that statement is the auditor himself. It will be the auditor who will have been removed. He has made the decision that he wants to make the statement. He carries the responsibility professionally, and it would be wholly inappropriate to delegate that particular function.

Mr. Terence Higgins (Worthing)

Am I to understand that the right is restricted to the individual member of the auditing firm and does not extend to other members of the firm who might stand in for him?

Mr. Davis

The provision concerns only the auditor who is appointed. The auditor does not necessarily carry out the details of the audit personally, but he carries the professional responsibility for determining that he wants to make a statement.

Mr. David Mitchell

If the company has appointed Price Waterhouse and Co. as its auditors, who must appear personally? Is it a partner of Price Waterhouse and Co.?

Mr. Davis

It will be the partner who has dealt with the audit. I clearly have not satisfied the hon. Member, and I shall listen carefully to his later argument. I shall endeavour to reply to any points he makes.

Amendment No. 36 is a paving amendment for New Clauses 1 and 2. A number of other amendments are consequential upon those.

Let me summarise briefly the position we are trying to achieve through the changes. Under Clause 13 we are seeking to tighten up the qualification requirements by providing that one year after the clause comes into effect no further authorisations shall be granted to people who are not members of one of the recognised professional bodies on the basis of adequate knowledge and experience.

New Clauses 1 and 2 seek to amend the law so that the appointment or reappointment of the auditors will have to be positively considered and voted upon by the shareholders every year.

Clause 15 seeks to provide that an auditor may resign only after he deposits with his notice of resignation either a statement of any circumstances connected with his resignation which should be brought to the attention of the shareholders or creditors, or a statement that there are no such circumstances. That is a positive development supported by the profession.

Clause 16 provides for the right of an auditor who resigns to requisition a meeting of the company.

Clause 17 seeks to require the directors and auditors of a subsidiary to provide the auditors of a holding company with any information they may require for the purposes of auditing the group accounts.

These measures have to be taken as a package and represent a radical change that will be for the benefit of shareholders, investors and creditors. They also have to be viewed against the background of criticism of auditors made in a number of inspectors' reports recently which have given rise to serious problems which I have no doubt the accountancy profession is taking seriously. They are problems affecting audit standards, discipline and the independence of auditors. They concern us vitally at the Department of Trade, and I have no doubt that the profession is seeking to find a way round these grave problems. It recognises that the standards applied require some revision.

A sub-committee of the Audit Practice Committee of the Consultative Committee on Accountancy Bodies has been set up to review the various aspects of the relationships between auditors and companies. The profession has undertaken to deal with this work urgently. My right hon. Friend the Secretary of State for Trade and I have held meetings recently with the recognised accountancy bodies and we have discussed the independence of auditors as well as the subject of professional standards. For the moment we are content to leave these matters in the hands of the profession, but I say that only for the time being. We shall follow the matter with close interest and shall consider in due course whether any further legislation is required.

All this forms a back-cloth against which these current changes have to be viewed, and I have no doubt that this will strengthen the position of auditors, which is a matter of vital concern to the House.

Mr. Higgins

I begin with what in other circles is called an "explanation of vote", because my colleagues and I felt it right to vote against the Ten o'clock motion. It is monstrous that the Government should seek to bring forward a proposal of this kind when Mr. Speaker has selected for discussion no fewer than 36 separate debates and when discussion on the Bill began at 10.18 p.m.

I wish to emphasise that this is not a partisan measure. We said in Committee that it deserved support. The Bill is certainly a great deal better than it was when it went upstairs into Committee.

The Bill contains a number of clauses with which we approve, and I am sure that nobody, least of all the Minister, regards it as a simple Bill. Indeed, it is a measure of great complexity, as was amply illustrated by the Minister's speech. The Minister spoke on the new clauses for a period of twenty minutes—or at least it seemed that long. If we are to spend that amount of time on each amendment, I can only say that the prospect before us is grim.

Mr. Clinton Davis

The hon. Gentleman realises that a substantial number of amendments are grouped. I do not think that I shall detain the House for quite as long on future amendments—or at least I hope not.

Mr. Higgins

The way in which the Government have handled this matter is nothing less than a disgrace. I hope the accountancy journals will give due publicity to the way in which the professional bodies who have made representations to the Government have been treated.

Mr. Clinton Davis

Did not the Conservative Opposition opt for the Bill to be taken second? They knew what the consequences would be.

Mr. Higgins

It is right that we said that this Bill should be taken second. We believed that the other measure was also extremely important, and the fact that it was debated as it was showed that to be so, but that is no reason for putting two full days business into one day.

Mr. Richard Wainwright (Colne Valley)

Whatever the hon. Gentleman's Whips and himself may have arranged with the Government, that is no consolation to the minority parties, which are even more hard pressed when such matters come on at this time of night, the two major parties having decided that it should come on second.

Mr. Higgins

It is my understanding that the Government obtained their majority virtually on the vote of the Opposition parties which wanted to continue tonight. I make no personal point against the hon. Gentleman or the hon. Member for Caernarvon (Mr. Wigley), but it will be rather interesting to see how many Members representing the parties which voted for continuing will be here when we eventually draw stumps at some time tomorrow morning.

I do not want to spend too long on this matter because we are anxious to make progress, but it reflects the lack of weight which Department of Trade Ministers carry with their Whips and those responsible for arranging Government business. This situation is in conflict with the view expressed by the Prime Minister a few days ago—namely, that priority should be given to the reform of company law. It cannot be pushed through in this manner.

The fact is that the Government are trying to get two lots of business through in one day. It was clear when the business was running late on the earlier affairs of the day that the Government should have taken a sensible decision. The fact is that their whole legislative programme is in a shambles, and they know it. As a result we are having to consider matters of this nature all through the night in a way that is not satisfactory. That applies to Ministers and to the House.

In Committee we debate the rôle of auditors at considerable length. The Minister was right to say that grave concern has been expressed by a number of those who have studied recent events, especially, of course, the Department of Trade inquiries, the reports of those inquiries and the comments that have been made in some of them about auditors.

The Under-Secretary of State says that two main points are covered by the new clauses. The first one covers the situation in which an auditor may have resigned and remained mute. On the other hand, he may disappear from the scene without completing the audit, making an audit report or supplying the reason for his resignation. We understand that there is a strong case for preventing that situation from arising. I ask the hon. Gentleman to elaborate on what in shorthand may be called the first problem. I am far from clear—it is a complicated matter—about the Bill being as watertight as he supposes.

The second problem to which he referred is that which arises when an auditor may be forced to resign. The company will take an ordinary resolution and get rid of the auditor in that way. The hon. Gentleman seemed to suppose that that was an adequate safeguard. The House should be wary of creating a situation in which a company can remove an auditor by ordinary resolution. We need to be assured that the safeguards are adequate.

The hon. Gentleman has said that the matter will arise at a general meeting and the auditor concerned can appear at it if he wishes. Whether he feels that it is entirely without disadvantage to appear is another matter. We must consider whether the publicity that such an event may get is adequate to ensure that suitable remedial action is taken.

We all know only too well—it is regrettable—that the number of people attending company annual general meetings is not necessarily very large. The auditor may appear and may make a speech in which he says that he should not be removed. When the matter is put to a vote it is a little more doubtful whether he will succeed in preventing himself from being removed. It may be that the matter will be taken up by the Press, but the Press is limited in the space that it has available. In any event, the affairs of some companies are not necessarily of widespread interest. Therefore, I have some doubts about what the Government are proposing in that respect.

10.45 p.m.

The other point is that raised in an intervention during the Minister's speech, namely which auditor should appear if there is a question of an auditor wishing to make a statement? The Minister says that it is a personal right. There are two points which worry us about that. The first is that in some of the more recent cases—London and County was a case in point, and I do not come down one way or the other on the merits of it—it was not the person responsible for signing the accounts who was personally responsible in that sense but one of his assistants. That is perhaps the most precise way of putting it.

It is the person actually responsible for signing the accounts who, the Minister says, should have the right to appear. I can understand the strong arguments why that should be so. It is ultimately, of course, the person responsible for signing the accounts who carries the can. Perhaps that is something we ought to consider, but it is not the main point. The main point is whether it should only be the person who was carrying out the audit who ought to be allowed to appear. From time to time the individual who was responsible may change firms or may emigrate or disappear altogether from the scene. At that point he will not be able to appear and explain what was wrong and, as I understand it, the Minister is saying that another member of his firm then responsible should not be allowed to appear in his stead. I am far from convinced that that is right.

Mr. Clinton Davis

I do not want to go into the merits in detail. I thought that the hon. Gentleman was alluding to the non-professional members of firms engaged in audits. Maybe there was a misunderstanding between us. They would not have any right to appear.

Mr. Higgins

There are two points. The first is that of the non-professional. That would not be quite the correct definition. Perhaps "the manager" would be the right expression, as against the individual who signed the accounts. There may be good reasons for that and I do not wish to come down on one side or the other of that argument.

The second point is perhaps of greater substance, and one which we are, incidentally, considering for the first time on this Bill. This is not something that has been raised earlier. Clearly the problem facing us is a serious one. I am far from convinced that we can overcome it by establishing a relationship where either the auditor has to resign in the circumstances the Minister has described or he is sacked. What we need is to establish in a much better way the independence of the auditor in such matters.

I am far from clear that the Bill as drafted, and with these new clauses, achieves that objective. I am still strongly in favour of self-regulation in these matters rather than legislation, to the extent that that can be achieved. It must depend on the standards set by the profession. I am glad to see that the Minister agrees with that view. I feel bound also to support what he said, namely that recent events, particularly recent DTI inquiries, suggest that the sanction which used to apply, whereby an individual who has been criticised feels that the right course is to resign, no longer applies. This has not happened in recent cases.

The Minister refers to a new committee which is to consider this subject. I welcome that. Perhaps he would clear up one point. There was an article in the Press on the day after the appointment of the new committee was announced, which I understand is under the chairmanship of Lord Cross of Chelsea. The article was headlined—I agree that sub-editors sometimes get these things wrong— Dell team of eight for check on accountants. However, the final paragraph reads: Mr. Dell yesterday welcomed the speedy establishment of the Committee. Even this Government are not in the habit of setting up committees and congratulating themselves on doing so. Perhaps the Minister would make clear the status of this committee. Certainly there is no doubt that recent events still give grave cause for concern.

I hope that action within the profession will be adequate to deal with this issue. We still need legislative back-up and for the reasons I have mentioned, even at this late hour, I am far from clear that the new clauses, which are of great complexity, are adequate to meet the worries rightly held in the professional Press and the Press generally. I hope that the Minister can clarify the points I have raised and that we can go on to consider whether it is right to agree to the new clauses and the amendments he has proposed.

Mr. Wigley

At the outset, perhaps I might raise what is, in effect, a point of order and draw attention to the fact, although I appreciate that nothing can be done about it tonight, that Amendments (a) and (b) on page 2808 of the Notice Paper were tabled as amendments to New Clause 2 and not to New Clause 1. Somewhere in the process from going into the Table Office and appearing here, they not only have been transferred from one clause to another but now appear with different line numbers. That causes some confusion, to say the least, and it may be a matter which can be looked into.

Secondly, may I say that when new clauses are tabled, it would be a good idea if their titles could be as different as possible from each other? In the case of New Clauses 1 and 2, the titles are similar, and no doubt that has led to the difficulties.

To that end, perhaps I might make a few remarks about New Clause 2 against the background of Amendments (a) and (b). Amendment (a) was to have come in subsection (1)(c) of New Clause 2, which reads: (c) reappointing as auditor a retiring auditor"—

Mr. Clinton Davis

On a point of order, Mr. Deputy Speaker. With respect to the hon. Member for Caernarvon (Mr. Wigley), as I understand it he is seeking to debate two matters which have been ruled out by Mr. Speaker for debate. The hon. Gentleman is referring to Amendments (a) and (b), whereas what has been selected is Amendment (c).

Mr. Wigley

I do not intend to press those amendments, of course. I cannot. But, in order to make my point on New Clause 2 and to explain my criticism of the clause, it will be helpful if hon. Members appreciate what I am talking about.

I draw attention to that paragraph of New Clause 2, which says: (c) reappointing as auditor a retiring auditor who was appointed by the directors to fill a casual vacancy". My criticism of that is that there could equally be grouped with that or auditors who have been appointed by the Secretary of State. It is not inconceivable that auditors appointed by the Secretary of State may need to be reappointed. If that is the case, they should be treated the same as the reappointing of a retiring auditor who is appointed by the directors to fill a casual vacancy. That is a provision which should be made in this Bill, although I appreciate that it is impossible to do at this stage.

Further down in New Clause 2, there are provisions in subsection (4) for an auditor to seek redress if he feels that there are representations which should be made. But, if it can be argued that the representations that he makes come to hand too late, that auditor is in great danger of missing out by default. It is necessary for an auditor to have some ultimate sanction if that appears to be the case. He should be put in the situation where he can make application to a court for a postponement of a general meeting until a copy of his representations have been sent to the people to whom they would otherwise have been sent had they come to hand in time.

I believe that there is a device in the new clause which can allow a company which wants to short-circuit an auditor to do so by claiming that time is against him and that there was no time to send out his representations. That is a serious weakness in the clause.

This is one of the difficulties when substantial new clauses appear at a Report stage. Hon. Members have four or five days in which to digest them, and very little opportunity to amend them. When new clauses of such complexity and magnitude come forward at this late stage, we are in danger of enacting bad legislation which will result in a lot of problems for a great many companies.

Mr. Peter Morrison (City of Chester)

I wish to discuss Amendments (a) and (b). I was bamboozled by what the Minister said about them. When my hon. Friends and I tabled the amendments, we were trying to be helpful.

The Minister did not seem to understand the situation which could exist in regard to firms such as Price Waterhouse & Co. The purpose of the amendments is to allow an auditor who is either retiring or being removed to be represented at the appropriate general meeting.

The Minister led me to believe that he thought that specific auditors were in charge of given companies. In fact, a firm such as Price Waterhouse & Co. would be the auditors of a company. A partner in the firm might be specifically responsible for the company, but if it were a large concern, a group of partners in the auditors might be responsible.

I understood the Minister to say that an auditor had a personal right to go to an extraordinary general meeting where his situation was being reviewed. However, if the auditor is in a partnership and he is unable to attend the meeting—but another partner can attend—surely the other partner should be allowed to represent his colleague.

When one man is the auditor of a company, he might not—despite what the Minister said—be able to attend the extraordinary general meeting. It might be held at an inconvenient time; the auditor might be out of the country; he might have another even more important meeting; he might be ill. In these circumstances, it is right that a person should be allowed to be represented. It would not be that he would not wish to attend. He would have been prevented for some reason.

Another important point is that when a company wishes to get rid of an auditor because it feels that he is breathing down its neck, the extraordinary general meeting might be arranged for a time when it is known that the auditor would not be able to attend. Surely it would be sensible to allow him to be represented.

In large firms of auditors, a fully-qualified member of the staff—not a partner—may be responsible for a given company. It would also be sensible to allow him or her to be represented at an extraordinary general meeting.

11.0 p.m.

Mr. Clinton Davis

I wonder whether I might try to shorten matters to some extent. I go along with the hon. Gentleman regarding members of the firm, because they carry responsibility equally with the partner who is directly responsible for the audit. But "representative" is not defined in the amendment. That is one problem.

Secondly, I do not think that the hon. Gentleman can seriously be saying that it would be right to attach to somebody who does not carry the same degree of professional responsibility for the partnership as a partner the same rights as would be accorded to the partner or partners who would have a right under the clause.

Mr. Morrison

I do not think that the Minister has been listening to my argument. My point is that the principal in a one-man or one-woman firm, who has a fully qualified accountant in his or her employ who is not necessarily legally responsible, can be prevented from going to a meeting through no fault on his or her part—for example, pneumonia, appendicitis, or whatever it may be. In that case, surely it is only right that the principal should be allowed to send his FCA or fully qualified chartered accountant in his stead so that the argument can be put on his behalf.

I accept that the amendment may need to be tightened. I accept that a better definition of "representative" may be required. I would not quibble over that. However, it is important that the auditor should be allowed to be represented.

I should like to make one final point. The Minister may say that I am trying to prolong the debate, but I am not. I am as keen as he is to get on with it.

There must be some auditors—probably very few, but some—who are incapable of expressing themselves in public. They may do a fantastically good job with the books, but they may have a speech impediment or be deaf and be utterly useless and ill at ease at a public meeting. In cases of physical disability, surely the Minister agrees that they should be represented. Those are the people about whom I am talking. I hope that the Minister will come back with a sympathetic reply.

Mr. Richard Wainwright

I should like to make three quite unrelated points. The first concerns the attendance of an auditor at the type of extraordinary general meeting which has been under discussion. It would assist the House if, at a time of his own choosing in the debate, the Minister would rescue us from the confusion into which he has started to plunge us by his remarks.

It is still not clear to some hon. Members—certainly not to me—whether the hon. Gentleman now agrees that a partner's connection with a particular audit is wholly irrelevant. Will he make it clear to the House that, the law of partnership being what it is and what it has been for many years, any partner in a firm which is duly appointed as auditor, even if he has never been near the client in his life, is entitled under the clause to attend? If that will be made clear by the Minister—either now, if he wishes, or later—the House will at least know what it is discussing.

Secondly, the clause is an example—fortunately, a modest and minor example—of the zigzag government from which this country has suffered for so long and continues to suffer at present. Governments and Government servants become the victims of wild swings of irrational fashion.

When company law was reviewed after the war, leading up to the Companies Act 1948, the fashion was to say that the auditors' position vis-a-vis the companies should be strengthened. It was enacted, and is still the law, that they should be automatically reappointed unless due notice has been given the appropriate time beforehand. That was considered at the time to be the last word in the conventional new wisdom. The idea was to strengthen the auditors in their duty to the shareholders as against the board which appointed them.

The root of the trouble is that while the auditors are there on behalf of the shareholders, in 99½ per cent. of cases they are appointed by the board. In an attempt to get over that dilemma, the law was enacted that the auditors should have a strong position vis-a-vis the board of directors.

Now, without adequate explanation, the pendulum of fashion has swung the other way, partly in panic—and there has been a good deal of panic in various circles, including the Government, as a result of some recent auditing debacles. Now it has been made in some respects marginally easier to get at auditors and possibly to undermine their position.

Neither of these positions is defensible. Who are the rare beings who are likely to know whether an audit is being conducted sloppily or in a phoney manner? Such people are, by the nature of things, likely to be few. In the first place, they would have to be professionally qualified and experienced enough to know whether the auditor was slipping up in the conduct of the audit; secondly, they would have to be intimately connected with the books of account that were being audited.

The law has never taken account of the simple fact that the only people likely to know in advance of the debacle whether the audit is being well conducted, or honestly conducted, are, first, the professionally qualified accountants who work for the company, and, secondly, the professionally qualified men employed on the audit by the firm of auditors. These, the only people likely to be in a position to sound the alarm bells, are given no status in law. I have written to the Under-Secretary of State and his predecessor on this point and have had no satisfactory reply. It is a pity that the Government have not taken this aspect up in the Bill, which was taken out of a dusty pigeon hole when the case of London & County suddenly started the panic.

Thirdly, some status in the audit report, especially where an auditor is making a statement to a meeting of shareholders, should be given to the professionally qualified employees who have been doing what I call the "coal face work" of the audit. It is axiomatic these days that in a complicated audit the professional man, usually a young man, at the coal face of the audit is likely to know some things of importance which his boss, the partner, may never get to hear of, because large firms of auditors are, by their nature, hierarchical. I know this because for some years I was a partner in a reasonably well-known international firm. There is the partner, then there is the qualified manager, and then there is the qualified man in charge of that particular audit, who is responsible only to the manager. Then on the audit there are section leaders who are qualified young men taking a particular aspect of the audit—the stock, the cash, the loans, the bank position, and so on. Then there are the youngest men or women, who are probably articled pupils or the like, doing the actual ticking.

In these hierarchical firms—some of which, but not many, have suffered debacles in recent months—it is an offence against the firm's code for any professional man lower down the hierarchy to jump the queue and to speak to the partner. In a smaller firm, in which I have also had experience, that does not happen, because the partner has the good sense to keep in touch with all his staff.

But in the sort of audits with which we are concerned, when we think of the difficult scandals which have taken place, it has been impossible for the professionally qualified man at the coal face of the audit to get in touch with the partner who will attend the meeting of shareholders. The Government will be missing the whole point if they do not provide in various ways for the people who are doing the work to participate in the actual judgment on the company's accounts.

Under the clause the Secretary of State will have power on occasion—admittedly in certain very odd circumstances—to appoint the auditors to a company. Surely in taking this power the Minister will be good enough to give some idea to the House of how his administration would use it. Is it the intention of his Department simply to take the lazy way out—Buggins' turn—and to have a list of the great and good firms whose debacles are at least a few months distant? Or is he to take a dynamic view of the position and to see which firms of auditors are prepared to give the qualified man at the coal face some say in the compilation of the audit report? Does the Department of Trade have any notion of worker participation, or is that simply confined to the Department of Employment?

The Government are asking us to vote them the power for the Secretary of State in certain circumstances to appoint auditors. Is it right that we should consider passing the clause before the Secretary of State has told us how he would set about exercising that power?

Mr. David Mitchell

With regard to New Clause 2, perhaps the Minister will guide me as to the meaning of the words at line 13. the casual vacancy was caused by the resignation of an auditor, to the auditor who resigned. Who, may I ask, is an auditor to an auditor who has resigned. As one who might have to try to interpret the meaning, I should be grateful for guidance and clarification.

I support the arguments of my hon. Friend the Member for the City of Chester (Mr. Morrison). The Minister in his introductory remarks tried to deal with the amendment before it had been moved. He said that the auditor himself knows best, and that he certainly knows better than any representative could know. But surely the Minister will realise that there is nothing in the clause compelling a representative to go. It is suggested that it should be within the hands of the auditor himself to decide whether he attends or sends a representative.

There are very good reasons—my hon. Friend has sketched them in—why an auditor might not be able to attend on a particular occasion. He might be doing another very important audit or even be connected with sonic international audit work. He might not be good at speaking, or he might be nervous. I know a very good auditor but he has a very nervous stammer and would be quite incapable of appearing in a tense moment in front of an opposing board which had a difference of opinion with him. For that reason I think it would be wise to accept the amendment.

11.15 p.m.

In particular, I would put it to the Minister that the Bill is either faulty or the Minister has not made clear in his introduction of the new clause what he is up to, because New Clause 2 states in line 3 appointing as auditor a person —Not a company or a partnership or a firm of auditors, but— a person". If a person is to be appointed does that not mean that every time one particular partner leaves the firm of Deloitte and Co., or Price Waterhouse & Co., or whatever, every one of those companies will have to go through the rigmarole of appointing a new auditor because the Minister has provided in New Clause 2 that they appoint a person and not a partnership? Does that also mean that the accounts will have to be signed by Joe Smith, auditor rather than by Price Waterhouse & Co.? What significance that will convey in international circles I am not sure. Could we please have some guidance from the Minister, because this appears to put the whole clause in a totally new light, from the way in which it was introduced.

Mr. Peter Rees (Dover and Deal)

I had not proopsed to intervene in this debate but I was totally confused, and I rather sense that some of my hon. Friends have been confused. I do not, of course, mean hon. Members on the other side of the House who were following the Minister's introduction with such acuteness and professional experience.

The Minister proceeded on the assumption that most auditors of companies are either individuals or corporate entities. The first is untrue in fact. Indeed, as my hon. Friends have pointed out, nowadays, with the compexity of modern life, most firms of accountants contain two, three or may be up to 20 members. The second assumption is quite untrue in law. As the Under-Secretary should know well, a partnership, except in Scotland, is not a body corporate. It is not an entity independent of the members who comprise it.

On that basis I have been compelled to take a further look at Clauses 15 and 16 and at New Clause 2, which I understand the Under-Secretary is commending to the House. I find it difficult to fit the words to the point that I have been endeavouring to make. Let me ask the Under-Secretary to look at Clause 15(2) which states: An auditor's notice of resignation shall not be effective unless it contains either— (a) a statement to the effect that there are no circumstances connected with his resignation which he considers should be brought to the notice of the members or creditors of the company;". Who is "he" in the situation where a firm is involved? Is it the firm collectively? Does every single member of the firm have to sign that statement? May one partner sign on behalf of the whole firm? Does the person professionally qualified, or otherwise, who was actually concerned with the audit, have to sign it? These are matters of ambiguity, and they have certainly not been cleared up by the Under-Secretary's intervention so far.

Perhaps even more important, Clause 15(4) states that: the court may order the company's costs on an application under this subsection to be paid in whole or in part by the auditor". That is where the company has been exposed to needless publicity of a defamatory kind. In that situation, against whom may the court award these costs or damages? Is it only against those members of the partnership who were partners at the time that this defamatory matter was circulated? What about those who have become partners subsequently? Indeed, what about those who have left the partnership before the court has heard the application? How does the Secretary of State describe the non-professional persons who may be involved?

These are matters of great moment. Despite the lateness of the hour, and the fact that the Under-Secretary does not understand the complexity of his own Bill—who can blame him for that, because one appreciates the great burden of his office—he owes it to the House to go into these important matters with a little more care.

Again, I ask the Under-Secretary to look at Clause 16(2), which states: Where an auditor's note of resignation contains any such statement as aforesaid and the aduitor requests the company to circulate to its members…". Does every member of a partnership, or only the senior partner, or only the partner who has been most closely connected with the audit, or the non-professional or professional persons who do not happen to be partners, request this of the company?

No doubt some of my hon. Friends could find many examples that need elucidation. Finally, what about Clause 16(5)? That states: An auditor of a company who has resigned his office shall be entitled to attend…". My hon. Friends may welcome a graphic illustration of who is obliged to attend. Is it the non-professional person who is articulate and not suffering from a stammer, who has had the most close connection with the company's affairs? Is it the senior partner, who may be a deaf mute by this stage? Is it the former partner who is most closely concerned but who has resigned?

These are important matters. It may surprise the Under-Secretary to learn that our debates are closely followed by professional persons who, whether or not they be partners, may have to interpret and operate the Bill. The Under-Secretary may feel that he has been sponging the bruised and battered face of capitalism tonight. He has left me in a state of total confusion. I hope that he will apply himself with a little more acuteness and perceptiveness to the problems that have been raised by Opposition Members.

Mr. Cecil Parkinson (Hertfordshire, South)

I listened with great interest to the hon. Member for Colne Valley (Mr. Wainwright). Like him, I must declare an interest. I am one of those in the Chamber who has been both auditor and audited. I make no secret of that.

When I listened to the hon. Member describing the reasoning behind the 1948 Act—that the auditor should continue in office provided that he was willing to do so and automatically be re-elected unless he did not want to be re-elected—I thought that it was very useful for the House to he reminded of that fact. The theory behind it was that the auditor needed to have his position strengthened. He needed to be strong enough to stand up to the directors and to speak his mind without fear of being in danger of losing his job. That was very much in the minds of those who drafted the 1948 Act.

We have now turned full circle and reached the stage at which the Department of Trade thinks that it is strengthening the auditor's position by making it possible or easier to get rid of him. Over a period of 28 years, there is nothing particularly wrong in changing one's mind. But it is a very significant change of mind.

What I doubt—and this is the reason why I speak in this debate—is whether the reasoning on this occasion is sound. It seems crystal clear—more so as every day passes—that the position of the auditor in relation to the directors and as the representative of the shareholders needs to be strengthened. Labour Members might argue that the auditor has a responsibility to people other than the shareholders. However, at present his responsibility is to the shareholders, and all our efforts in this House should be lent to making him more accountable to those who pay his fees, to making him more answerable to them, not less, and to strengthening his position so that if he feels that he is not happy about the way in which the directors are handling the assets of the company—which belongs to the shareholders, the directors being trustees—he is free and strong enough to speak out against what the directors are doing and to tell the shareholders just what the directors are doing.

New Clauses 1 and 2 are rather irrelevant at present. To make it easier to get rid of the auditor, and easier to get rid of him on an annual basis, will not serve the interests of shareholders at all. It has no relevance to the problems encountered in companies at the moment.

At present—I am sure that the House will be interested in this—there is a strict limit on the amount of information which the auditor is allowed to present to the shareholders. If one goes to a company's annual meeting and asks a question, the chairman is quite entitled to say "I am sorry, but the accounts of the company comply with the statutory requirements, and no one here will answer your question". The auditor's report to the shareholders normally consists of a brief sentence, which he reads to the annual general meeting at the invitation of the chairman. In fact, the rather smart and snobbish thing to do nowadays is to make that report as short as possible, and the shorter the report the more eminent the firm is judged to be.

Thus, from the shareholder's point of view at present, those who care to go to the annual meeting see someone whom they have never seen before stand up, gabble a sentence which means little to them, and then sit down; and in that way the statutory duty of the auditor has been complied with.

We here should be finding ways by which the shareholders can meet the auditor and get to know him, by which they can get answers to questions which they wish to ask and have the satisfaction of prying into the affairs of the company, knowing that the man they are paying is answering to them about the affairs of the company. These two new clauses add nothing to that. All they do is make it possible for shareholders to sack an auditor on an annual basis, and they make no provision for him to be replaced if the shareholders decide to do so.

Mr. Bruce Douglas-Mann (Mitcham and Morden)

I was not a member of the Standing Committee and I am seek- ing information. I stand to be corrected, but my understanding of the new clauses is that they impose a requirement that special notice has to be given of a proposal to remove an auditor. Does that not make it more difficult to remove an auditor than it is at present? Is it not giving a greater right to the auditor to ensure that he presents his views properly to the members and to the public?

Mr. Parkinson

I am sorry to have to disappoint the hon. Gentleman, who makes fine speeches about housing and who is so admired in the House, but he will find that under the 1948 Act the position of the auditor is much stronger than it will be under the proposed change. The auditor continues in office under the present Act provided that he signifies his willingness to do so, and the procedure for getting rid of him is very involved. Therefore, his position is in no way strengthened by the new clauses.

The new clauses are voluminous and complex. The Minister obviously does not understand them, as he proved conclusively in his opening speech. They are irrelevant. It is sad that the Government have missed an opportunity to do something about the position of an officer of a company who is very important and whose position is not understood by the people who employ him—and I have to say that the House is wasting its time in being asked to pass these two rather complicated proposals.

Sir Brandon Rhys Williams (Kensington)

Because of a misunderstanding I did not have the fortune to hear the Minister's presentation of the two new clauses, and for that I apologise, but I support what has been said by my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson) because, as I read them, the new clauses will do nothing to add to the confidence or strength of auditors or get to the bottom of the problem, which is that the whole relationship between the auditors and the board is unsatisfactory.

The clauses are enormously long and, no doubt, will require a great deal of careful interpretation by professional men, and by company secretaries and others. I feel that the Department's aim is wide of the mark if it feels that it will contribute anything of great use by introducing these lengthy provisions at this late stage of the Bill.

One has known of companies in which the auditors were virtually strangers to the board, which is extremely unsatisfactory. In other cases, the auditors are sometimes little better than an appendage of the board, which also is hightly unsatisfactory. In neither case is the auditor able to act as an effective agent of the shareholders, ensuring that the company operates efficiently and is accurate in its financial statements.

11.30 p.m.

Making more detailed provision for changing an auditor will not set the problem right. It is that unsolved problem which gives rise to headline news about auditors failing in their function. If one asks someone to do the impossible, he is bound to fall down. It is remarkable that auditors in this country are still as professional and effective as they are.

Auditors become ineffective because of their status in relation to the board and because the formal basis of their interaction with the board has never been clarified in legislation or in professional practice. Their function is to look backwards, but an accurate view of the strength of a company can be taken only in relation to its present and likely future performance. I know from my own experience in consultancy, when making inquiries of senior people engaged in a company and meeting the auditors, that one can often hear it said that one can easily discover what is wrong with a company but it is not the auditor's business to tell. There are large gaps in company law in this respect and I hope to be able before the end of the present Session to introduce a Bill which will strengthen and widen the powers of auditors by setting up audit committees to formalise the relationship between the auditors and the board.

Provisions relating to the appointment and removal of auditors may be necessary and useful but they will contribute little to restoring the confidence of the profession or to improving the efficiency of joint stock companies.

Mr. Ron Thomas (Bristol, North-West)

I shall make several brief remarks to seek advice. I have listened to some of the experts but I am confused because I start from the premise that auditors have let down the workers, if not the general public and general interest. They have not given workers in certain enterprises the information which they want and which the general public wish them to be given.

I am not sure what is meant by the protection given to auditors under the 1948 Act. Do hon. Members mean that under that Act as long as the auditor does what the board tells him to do, he can never get the sack? To many of us that seems to be the case. We all know the old story of the company chairman interviewing accountants for the post of auditor who asked the first half-dozen applicants what two and two equalled. They said that it made four and did not get the job. The next applicant, when asked the same question asked "What answer do you have in mind?"—and was immediately appointed.

Will the provision strengthen the position of auditors in relation to the AGM rather than the board and will it make auditors more independent of the board? To relatively large firms of auditors to get the account of a large company is a large commission and there must be considerable pressure on them to do exactly what they are told by the board.

Mr. Richard Wainwright

I evidently did not succeed in getting across to the hon. Gentleman or the House the point I was seeking to make, which was that the 1948 Act, which is now to be altered, was intended to make it much more difficult and embarrassing for a board to get rid of a truly independent and outspoken auditor. It is that which, irrationally in my view, the Government are seeking to change.

Mr. Thomas

I am grateful for that information, but it leads to more doubts in my mind, because it seems to me that since 1948 auditors have less and less shown their independence. I hope that in the two clauses the Government are trying to make the auditors really independent, so that they can give a clear picture to shareholders, those who work in the establishments concerned and the general public.

Mr. Clinton Davis

The whole philosophy behind the provisions is to strengthen the position of auditors, to make them more independent of the directors and more answerable to the shareholders whom they are supposed to represent. Deficiencies have been exhibited on a pretty substantial scale in that respect, and we should give careful attention to these matters.

It is no good simply saying that we rely on the philosophy of the 1948 Act. The Jenkins Committee felt that that philosophy should be reconsidered, and our predecessors in office thought that it required change very much along the lines of our proposals. That is also the view of the profession, faced, as it has been recently, by massive criticisms of the position of auditors.

The profession wants to put its house in order. No profession likes to have reflections made upon its competence or, even more seriously, upon the integrity of its members.

We have not suddenly embarked upon a change without adequate thought. The matter has not exercised only the minds of my Department. It is not only the creature of the Department of Trade or the Department of Trade and Industry, as it was under our predecessors, but is a matter that has involved considerable consultation with the profession—and far wider than the profession.

My hon. Friend the Member for Bristol, North-West (Mr. Thomas) is right to be concerned about these matters. The Government have sought to precipitate more consideration by the profession of the serious criticisms which have emerged from a whole series of reports. The profession has responded with urgency, setting up a high-powered committee to investigate a whole series of criticisms against auditors.

Mr. Higgins

The House may have been misled by the Minister's initial remarks. Certainly some of the provisions in these complex new clauses and amendments help overall security. But our impression is that in some respects it is easier now for a company to remove an auditor than it was before, because it can do so in an ordinary general meeting. Is that so?

Mr. Davis

I shall come to that. It is no good my answering points at random. I want to try to answer them coherently. Serious points have been raised, and I shall largely deal with them in the order in which they were presented.

I was taken to task over the concept of who was an auditor. The hon. and learned Member for Dover and Deal (Mr. Rees) made a good deal of play about that in his inimitable Kentish way, but he omitted to recall some of the elementary points of partnership law. He is not a barrister in that area of the law, perhaps. He is a taxation expert, and may have forgotten some of the elementary aspects of partnership law.

Let me deal with the first point about the appointment of a firm of auditors. That was a realistic and bona fide point. In a sense the Price Waterhouse & Co. type of firm is distinct from the small firms of auditors, perhaps one-man firms who may be the auditors for moderate or small businesses. The principle is the same. Under our law a firm as such is not a legal person, and when a firm is appointed as auditor every member of the firm is therefore appointed. Each of them carries a joint and several responsibility. As long as the firm remains the auditor, any partner of the firm can speak as the auditor. Obviously someone who has left the firm is no longer in the position of being an auditor.

Therefore this picture of the stammering or deaf mute or similarly disabled auditors, who according to the Opposition populate the profession in such numbers, being unable to take to a meeting a representative who carries the same responsibility does not stand up.

Mr. David Mitchell

I slightly resent the suggestion that the Opposition believe that there are large numbers of the accountancy profession who are stammering and incapable of presenting themselves. The Minister has distorted what we were saying. Will he explain why New Clause 2 deals with the appointment of "a person"? How does he square that with what he has said about a firm?

Mr. Davis

What I have said squares perfectly with the Bill. The hon. Member will see from Hansard tomorrow that my remarks were an accurate reflection of the law and that in no way is the law impaired by the clause.

A right is conferred upon a duly appointed auditor because it is the duly appointed auditor who has been removed. It was suggested that employees should be able to participate as representatives. It would be wholly inconsistent with the concepts I have outlined to allow that position to operate. The employees would not be carrying that responsibility.

Mr. Peter Morrison

The Minister accepts that there are one-man firms. No doubt he also accepts that in some cases these firms suffer from appendicitis and so on. Surely in such cases it is only right that the auditor should be able to send a qualified accountant employed by the firm to the meeting. Such firms are not like Price Waterhouse & Co. with 20 or 25 partners. It is one man working on his own who needs to be represented.

11.45 p.m.

Mr. Davis

I cannot accept that one can delegate the responsibility to somebody who does not carry the same degree of responsibility as the partner in law. It is the sole proprietor of the firm, or one of the partners, who binds the other partners and who has asserted the need to make a statement. He would have the opportunity of making a statement in writing. It does not necessarily follow that he would wish to attend the meeting. Therefore, the hon. Gentleman is inviting a situation that would be capable of being subject to considerable abuse. I do not accept his argument.

I turn to the next point—

Mr. Higgins


Mr. Davis

I am coming to the hon. Gentleman's point—or if it is another point, I shall give way.

Mr. Higgins

Until the Minister says what it is, how can I tell?

Mr. David Mitchell

Will the Minister guide me on the matter of appointing personally as auditor? Am I to understand that in future one will appoint a person or a partnership?

Mr. Davis

One does not refer to the appointment of a partner, nor has it been so referred to in previous legislation when dealing with these matters. This is no different from the precedents established earlier on matters of definition. On reflection, I do not think the hon. Member for Worthing (Mr. Higgins) will think that the matters he raises are cause for anxiety or fears.

Perhaps I can elaborate slightly. It is right to say that "a person" means any individual or individuals. I hope the hon. Gentleman's fears are allayed. It does not include a body corporate.

Mr. Peter Morrison


Mr. Davis

I do not think I can give way any more. Hon. Members have had a pretty fair whack. Let me go to some other points that have been made. On the question of removal of auditors—

Mr. Higgins

The Minister is obviously leaving the point on which I sought to intervene earlier. Perhaps I may now deal with it. The Minister must make the situation clear. It is no good his telling my hon. Friend the Member for City of Chester (Mr. Morrison) that we cannot have any more interventions, because the Minister has not answered the point.

The Minister made two points. He said that in a small firm if arrangements were made to send a representative the process was open to abuse. He asserted that, but he did not explain how it could be open to abuse. In his first speech the Minister said something that was inconsistent with what he said in replying to the debate. In opening he made it clear—and this is why we have been cross-questioning him—that it was a personal right—that is, a right vested in an individual. Then in reply—no doubt after having received notes from the Box—he said something quite different. He then said that the partnership is the right thing to adopt and that it is not a personal right—not a right vested in the individual but a righ which gives the auditors or the partnership the opportunity to appear. Any individual in the partnership presumably can appear.

This is a difficult point. If the audit is wrongly carried out, or if the individual partner wants to make the point that he should be the individual who appears, the argument turns itself on its head. The Minister has not clarified this matter. Much of the recent criticism has been on the lines "Why has not a particular individual in a partnership carried the can in a particular case?". We have to consider both aspects, and the Minister has not clarified them.

Mr. Davis

The hon. Gentleman, with his mighty and massive intervention, which represents his second speech, has hardly clarified the situation. That which he is now urging is in direct conflict with that which his hon. Friends have been arguing. The hon. Gentleman asks me about abuse. What is a representative? Is it a barrister, a solicitor or a friend? These are matters that the Opposition have failed to define. Would there be abuse if someone who had no close connection with the matter and carried no responsibility were able to articulate on behalf of another?

Mr. David Mitchell


Mr. Davis

No, I shall not give way again on that issue. I have given an example of the possibility of abuse. There is no monopoly of inconsistency. We have just heard the inconsistency of the hon. Member for Worthing.

I thought I made it clear in interventions before rising to reply—I might inadvertently have misunderstood what the hon. Gentleman was saying—that "personal right" relates to individual partners in a firm. That is the only way in which the matter can be defined in law.

It is necessary to provide for the removal of auditors because they will hold office until a general meeting at which audited accounts are laid before the company. If the auditor failed to carry out the audit, the company would be placed in an impossible position. It would have no effective auditor and it would be unable to appoint another because there would be no audited accounts. We have to deal with that situation.

The hon. Member for Worthing wanted to know about the removal safeguards. My hon. Friend the Member for Mitcham and Morden (Mr. Douglas-Mann) dealt with that matter in his intervention. Special notice is required to be given of a resolution to remove an auditor. The definition of a special notice is provided. A copy of the notice has to be sent to the auditor. The auditor whom it is proposed to remove has the right to make representations and to have them circulated. He can speak at the meeting if he so wishes. I believe that those safeguards are real and a real improvement. I believe that they will assist in strengthening the position of the auditor rather than diminishing it.

The matter raised by the hon. Member for Colne Valley (Mr. Wainwright) related to the philosophy. I must repeat that these provisions were strongly recommended by the Jenkins Committee. The committee examined the situation with great care.

Mr. Richard Wainwright

Does the hon. Gentleman agree that one aspect of an auditor's independence that was considered some years ago to be of prime importance is disappearing under the Bill? As the law now stands an auditor is deemed to be reappointed unless certain steps are taken by the shareholders who wish to change him.

Mr. Davis

But subject to strong safeguards which are spelt out. These are welcomed by those who are primarily concerned with safeguarding the position of auditors.

Mr. Richard Wainwright

Are they?

Mr. Davis

I think that they are. The information that I have put to the House on what has happened with the past week or so is evidence of that determination.

I repeat, that if that determination is seen to be wavering the Government will have to consider what legislation is needed to safeguard the position further. The glare of publicity is a mightily important way of assisting people to know what is going on in a company. It is being given the possibility of being effective by these provisions. There have to be certain safeguards. I do not pretend that this is the last word. If I took that view I would not be urging auditors to take further action, possibly to deal with the matter by self-regulation, possibly by additional legislation.

The best is the enemy of the good. We have to take urgent action now even if we are not able to encompass all possible safeguards. We are still learn- ing from reports that have been presented to the public recently.

Mr. Douglas-Mann

Will my hon. Friend agree that the principal effect of New Clause 1 is to direct the minds of the general meeting of every company to the question whether it wishes to reappoint the auditor? To that extent it is a strengthening of the rights of members of that company, if not of the rights of members of the public. The principal effect of New Clause 2 is that it gives the right to an auditor whom it is proposed to dismiss to come along to the meeting and to say why he should not be dismissed. Despite the patronising remarks of the hon. Member for Hertfordshire, South (Mr. Parkinson), these are strengthening provisions and do not weaken the rights of auditors.

Mr. Davis

My hon. Friend characteristically summarises the safeguards we are seeking to introduce.

Mr. Parkinson


Mr. Davis

I will not give way again. I have given way already on eight or nine occasions and that is reasonably generous. I think I have dealt with all the powers—

Mr. Richard Wainwright

What about the powers of the Secretary of State to appoint?

Mr. Davis

We already have the powers to appoint auditors. We have not exercised them recently. If the Department had to appoint auditors it would consult the directors and principal shareholders. It would also have regard to the size of the company and the complexity of the accounts in deciding which firm of accountants to approach. The provision dealing with that is section 159(3) of the 1948 Act.

Question put, That the clause be read a Second time:—

The House divided: Ayes 120, Noes 14.

For Division List No. 335 [See Col. 1413]

Question accordingly negatived.

Clause read a Second time, and added to the Bill.

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