HC Deb 22 March 1977 vol 928 cc1081-8

3.33 p.m.

Mr. Ivor Clemitson (Luton, East)

I beg to move, That leave be given to bring in a Bill to establish a public audit board for the purpose of providing an independent auditing service to companies, financed by a levy upon such companies; and for purposes connected therewith. I beg leave to move this Bill against the background of what the Financial Editor of The Times described in September 1976 as a time of growing public disquiet about the rôle and responsibilities of auditors". I wish to refer to two of the cases that have given rise to that disquiet. The first concerns the strange case of the profit that was not—the case of SUITS. I quote again from The Times of 21st September 1976: In a statement last night Touche Ross said that the mistake had arisen from a straightforward clerical error by Suits in the preparation of its accounts when the relevant loans were incorrectly added to cash at bankers and on hand. The relevant papers had been reviewed in the audit, but the error had not been noticed. There was no association, the statement said, between the error and the subsequent provision against the loan. Despite the dismay in the City at the error, it seems unlikely at this stage that any of the major accounting bodies will feel the need to pursue the matter further. I should also like to quote from the Department of Trade report on Lonrho: It is our view that it was the auditors' duty to test Mr. Rowland's retrospective expense claim by reference to the objective evidence available to them. This claim was an enormous claim by any standard of judgment. The House may remember that it was about £300,000. The report goes on: The claim was submitted for the specific purpose of dealing with Mr. Rowland's overdrawn personal accounts which Lonrho had been advised were unlawful in terms of S 190 of the Companies Act, 1948.… Having regard to the size of the claim and the circumstances surrounding its preparation we believe that both firms of auditors were on notice to exercise particular care in dealing with the matter. It is our view that the auditors did not do so. They did not test the claim by reference to the objective evidence available to them and we are critical of them accordingly. I do not suggest that the criticism that was levelled at the auditors in the cases to which I have referred—or in other cases that I could have quoted—is true of all or of a majority of auditors. I have no doubt that the vast majority of auditors try to carry out their functions in the most responsible manner, but the fact that auditors are appointed by companies and not to them militates against the independence of auditors that is at the heart of the function of auditing.

The Bill is intended to strengthen the independence of auditors and to raise standards of auditing. I am concerned to avoid the sort of scandals that have sadly become all too frequent in recent years and to do so without direct governmental interference and a further multiplication of patronage. The Bill's central proposal is to establish a public auditing board. The professional accountancy bodies, the TUC and the CBI would appoint representatives directly to the board. Under the board there would be an executive committee responsible for the day to day running of affairs. Auditors would be employed by the board and they would have the right to select part of the executive committee, the remainder of whom would be appointed by the board.

The board's functions would be three fold. The first function of the board would be to provide an auditing service to companies. In order to do that the board would need to recruit professionally qualified auditors and to provide the necessary training for them. Secondly, the board would be charged with the responsibility in consultation with professional accountancy bodies, of devising accounting standards. The profession itself recognises the need for proper and common accountancy standards and it has done some work on this matter. However, there is a need to accelerate the process and to give the agreed standards more weight and teeth than has hitherto been the case.

The board would also have the responsibility—besides that of publishing an annual report—of giving advice from time to time on auditing and accounting practices. This advice would be directed to the appropriate body or bodies and not necessarily to the Secretary of State. Advice might be given to the Secretary of State about, for example, changes in the law that were thought to be necessary to alter the present statutorily defined duties of auditors.

The board, through its staff, would have the power to audit the affairs of any company after having given reasonable notice that it intended to do so. The audit would be in place of the normal, legally required annual audit and a company audited in this way would pay a fee to the board.

Any interested person or body, including, for example, the trade unions or shareholders concerned, would have the right to make representations to the board that the company in which they had an interest should receive an audit by the board. It would be for the board to decide whether to act upon any such representations.

Clearly it would be impossible for the board to undertake the auditing of all companies in this country. It is probable that the number of companies audited by the boad in a year would form only a very small proportion of the total, but I believe that the significance would not be small. It would be much greater than the proportion of companies directly audited.

The board would provide a totally independent and highly skilled service which would, in large measure, help to reinforce the independence of other auditors performing traditional audits.

No well-run company need fear the possibility of an audit by such a board. Others would clearly have a strong inducement to improve the running of their affairs. Shareholders would benefit from the raising of standards in the companies in which they have investments. They have much to gain from such a proposal. Employees, whose investment of labour, skill and time, is no less significant, would similarly benefit. Consumers would benefit because it is obviously better to buy products from a properly ordered and efficiently run company than from an inefficiently run company. The accountancy profession would also benefit. The essence of a profession is that it should provide a service of high quality governed by high ethical standards.

The present system of having an auditor appointed by a company can easily put him in an invidious position and subject him to pressures to depart from his professional objectivity. The introduction of a totally independent service of high quality and the devising of proper standards would give more power to the auditor's elbow.

It is tempting to condemn the obvious scandals in impassioned tones and then to forget about the whole business. I am proposing a serious plan to improve the standards of auditing in this country. I believe that it will benefit employees, shareholders, consumers and, last but not least, the accountancy profession itself.

Mr. Speaker

The hon. Member for Maldon (Mr. Wakeham) has given me notice that he wishes to oppose the motion for leave to introduce the Bill.

3.44 p.m.

Mr. John Wakeham (Maldon)

I beg to oppose this motion for leave to introduce the Bill. I believe that its effects would be harmful and bureaucratic and that it would not deal with many of the difficulties that arise from time to time.

I have to declare an interest as a chartered accountant who used to earn his living by auditing accounts and therefore perhaps has some practical experience in dealing with these problems.

Even the hon. Member for Luton, East (Mr. Clemitson) did not attempt to say that the established procedures for the appointment of auditors—not, as he said, by companies, but by shareholders—is not generally effective and acceptable in the overwhelming number of cases. There are 600,000 companies registered in the United Kingdom and the independence and objectivity of auditors has been called into question in no more than a handful of cases in the last 10 years.

The Companies Act 1976 requires shareholders to confirm the appointment of auditors every year. It is hard to see how, in practice, the powers of shareholders would be made more effective by the proposed new system.

When the independence of auditors has been in doubt, the main causes of concern have been where an auditor has had a financial interest in the company being audited or where he is excessively dependent on one client for his income.

Mr. Russell Kerr (Feltham and Heston)

That is very often the case.

Mr. Wakeham

That is correct. These are the areas where trouble has arisen in perhaps a dozen cases in the last 10 years. If we bear in mind that, in that time, there have been 6 million audits of these 600,000 companies registered in the United Kingdom, we can see the measure of the problem.

The profession is well able to regulate its members and to prevent the recurrence of problems. I can see no way in which a public audit board would provide a more satisfactory method of regulation. The accountancy profession is continually considering the standards of conduct of its members to see that appropriate standards of conduct and independence are applied. No nation in the EEC has found it necessary to establish a public audit board and our standards compare well with the standards

in the Community or anywhere else in the world.

A public audit board would employ a team of administrators. It would be an expensive and bureaucratic institution and would not deal with the problems that arise from time to time. I hope that the House will have no truck with the Bill.

Question put, pursuant to Standing Order No. 13 (Motions for leave to bring in Bills and nomination of Select Committees at commencement of Public Business):

The House divided: Ayes 159, Noes 194.

Division No. 93.] AYES [3.48 p.m.
Allaun, Frank Garrett, John (Norwich S) Noble, Mike
Archer, Peter George, Bruce Ogden, Eric
Ashley, Jack Gourlay, Harry Ovenden, John
Ashton, Joe Grant, George (Morpeth) Park, George
Atkins, Ronald (Preston N) Grant, John (Islington C) Parry, Robert
Atkinson, Norman Grocott, Bruce Pavitt, Laurie
Bagier, Gordon A. T. Hamilton, James (Bothwell) Perry, Ernest
Barnett, Guy (Greenwich) Hardy, Peter Price, William (Rugby)
Bates, Alf Harper, Joseph Radice, Giles
Bennett, Andrew (Stockport N) Harrison, Walter (Wakefield) Richardson, Miss Jo
Bishop, E. S. Hayman, Mrs Helene Roberts, Albert (Normanton)
Blenkinsop, Arthur Heffer, Eric S. Roberts, Gwilym (Cannock)
Booth, Rt Hon Albert Hooley, Frank Robinson, Geoffrey
Bottomley, Rt Hon Arthur Hoyle, Doug (Nelson) Roderick, Caerwyn
Bradley, Tom Huckfield, Les Roper, John
Bray, Dr Jeremy Hughes, Rt Hon C. (Anglesey) Rose, Paul B.
Brown, Hugh D. (Provan) Hughes, Robert (Aberdeen N) Sedgemore, Brian
Buchan, Norman Hughes, Roy (Newport) Selby, Harry
Buchanan, Richard Hunter, Adam Shaw, Arnold (Ilford South)
Butler, Mrs Joyce (Wood Green) Irving, Rt Hon S. (Dartford) Silverman, Julius
Callaghan, Jim (Middleton & P) Janner, Greville Skinner, Dennis
Campbell, Ian Jay, Rt Hon Douglas Small, William
Canavan, Dennis Jenkins, Hugh (Putney) Smith, John (N Lanarkshire)
Carmichael, Neil Johnson, James (Hull West) Spearing, Nigel
Cartwright, John Johnson, Walter (Derby S) Spriggs, Leslie
Castle, Rt Hon Barbara Jones, Dan (Burnley) Stallard, A. W.
Clemitson, Ivor Kaufman, Gerald Stewart, Rt Hon M. (Fulham)
Cocks, Rt Hon Michael Kelley, Richard Stoddart, David
Cohen, Stanley Kerr, Russell Summerskill, Hon Dr Shirley
Coleman, Donald Kilroy-Silk, Robert Taylor, Mrs Ann (Bolton W)
Conlan, Bernard Lamond, James Thomas, Ron (Bristol NW)
Cook, Robin F. (Edin C) Latham, Arthur (Paddington) Thorne, Stan (Preston South)
Cowans, Harry Lestor, Miss Joan (Eton & Slough) Tinn, James
Cox, Thomas (Tooting) Lewis, Ron (Carlisle) Torney, Tom
Crawshaw, Richard Lipton, Marcus Tuck, Raphael
Cronin, John Loyden, Eddie Urwin, T. W.
Crowther, Stan (Rotherham) Luard, Evan Varley, Rt Hon Eric G.
Cunningham, G. (Islington S) McCartney, Hugh Wainwright, Edwin (Dearne V)
Davies, Ifor (Gower) McElhone, Frank Ward, Michael
Dean, Joseph (Leeds West) MacFarquhar, Roderick Watkinson, John
Dempsey, James MacKenzie, Gregor Wellbeloved, James
Doig, Peter McMillan, Tom (Glasgow C) White, Frank R. (Bury)
Dormand, J. D. Madden, Max White, James (Pollok)
Eadie, Alex Magee, Bryan Whitlock, William
Edge, Geoff Mahon, Simon Williams, Alan Lee (Hornch'ch)
Ellis, John (Brigg & Scun) Marshall, Dr Edmund (Goole) Wilson, Alexander (Hamilton)
English, Michael Maynard, Miss Joan Wise, Mrs Audrey
Evans, Fred (Caerphilly) Mellish, Rt Hon Robert Woodall, Alec
Evans, Ioan (Aberdare) Mendelson, John Wrigglesworth, Ian
Ewing, Harry (Stirling) Mikardo, Ian Young, David (Bolton E)
Fernyhough, Rt Hon E. Miller, Dr M. S. (E Kilbride)
Flannery, Martin Molloy, William TELLERS FOR THE AYES:
Fletcher, Ted (Darlington) Morris, Charles R. (Openshaw) Mr. George Rodgers and
Foot, Rt Hon Michael Newens, Stanley Mr. David Watkins.
Forrester, John
Adley, Robert Grist, Ian Nelson, Anthony
Alison, Michael Grylls, Michael Neubert, Michael
Amery, Rt Hon Julian Hall, Sir John Newton, Tony
Atkins, Rt Hon H. (Spelthorne) Hamilton, Michael (Salisbury) Onslow, Cranley
Baker, Kenneth Hampson, Dr Keith Oppenheim, Mrs Sally
Banks, Robert Hannam, John Page, Rt Hon R. Graham (Crosby)
Beith, A. J. Harrison, Col Sir Harwood (Eye) Parkinson, Cecil
Bennett, Sir Frederic (Torbay) Harvie Anderson, Rt Hon Miss Penhaligon, David
Bennett, Dr Reginald (Fareham) Hastings, Stephen Percival, Ian
Benyon, W. Havers, Sir Michael Pink, R. Bonner
Berry, Hon Anthony Hayhoe, Barney Powell, Rt Hon J. Enoch
Biggs-Davison, John Hodgson, Robin Price, David (Eastleigh)
Blaker, Peter Holland, Philip Prior, Rt Hon James
Boscawen, Hon Robert Hooson, Emlyn Pym, Rt Hon Francis
Bottomley, Peter Howe, Rt Hon Sir Geoffrey Raison, Timothy
Bowden, A. (Brighton, Kemptown) Howell, David (Guildford) Rathbone, Tim
Boyson, Dr Rhodes (Brent) Howells, Geraint (Cardigan) Rawlinson, Rt Hon Sir Peter
Bradford, Rev Robert Hunt, David (Wirral) Rees-Davies, W. R.
Britton, Leon Hurd, Douglas Renton, Rt Hon Sir D. (Hunts)
Brocklebank-Fowler, C. James, David Renton, Tim (Mid-Sussex)
Brooke, Peter Jenkin, Rt Hon P. (Wanst'd & W'df'd) Rhodes James, R.
Brotherton, Michael Jessel, Toby Ridley, Hon Nicholas
Brown, Sir Edward (Bath) Johnson Smith, G. (E Grinstead) Ridsdale, Julian
Bryan, Sir Paul Joseph, Rt Hon Sir Keith Rifkind, Malcolm
Buchanan-Smith, Alick Kershaw, Anthony Roberts, Michael (Cardiff NW)
Buck, Antony King, Tom (Bridgwater) Roberts, Wyn (Conway)
Budgen, Nick Kitson, Sir Timothy Rodgers, Sir John (Sevenoaks)
Bulmer, Esmond Knight, Mrs Jill Ross, Stephen (Isle of Wight)
Burden, F. A. Knox, David Ross, William (Londonderry)
Butler, Adam (Bosworth) Lamont, Norman Rost, Peter (SE Derbyshire)
Carlisle, Mark Lawrence, Ivan Sainsbury, Tim
Chalker, Mrs Lynda Lawson, Nigel Shaw, Giles (Pudsey)
Channon, Paul Le Marchant, Spencer Shelton, William (Streatham)
Churchill, W. S. Lester, Jim (Beeston) Shepherd, Colin
Clark, Alan (Plymouth, Sutton) Lewis, Kenneth (Rutland) Silvester, Fred
Clarke, Kenneth (Rushcliffe) Loveridge, John Skeet, T. H. H.
Clegg, Walter Luce, Richard Speed, Keith
Cockcroft, John McAdden, Sir Stephen Spence, John
Cooke, Robert (Bristol W) McCrindle, Robert Spicer, Michael (S Worcester)
Cormack, Patrick McCusker, H. Stainton, Keith
Costain, A. P. Macfarlane, Neil Stanley, John
Craig, Rt Hon W. (Belfast E) MacGregor, John Steel, Rt Hon David
Davies, Rt Hon J. (Knutsford) Macmillan, Rt Hon M. (Farnham) Stokes, John
Dean, Paul (N Somerset) McNair-Wilson, P. (New Forest) Stradling Thomas, J.
Dodsworth, Geoffrey Marshall, Michael (Arundel) Tapsell, Peter
Douglas-Hamilton, Lord James Marten, Neil Taylor, Teddy (Cathcart)
Drayson, Burnaby Mates, Michael Tebbit, Norman
Durant, Tony Mather, Carol Temple-Morris, Peter
Edwards, Nicholas (Pembroke) Maude, Angus Thatcher, Rt Hon Margaret
Fairbairn, Nicholas Maudling, Rt Hon Reginald Thorpe, Rt Hon Jeremy (N Devon)
Fairgrieve, Russell Maxwell-Hyslop, Robin Townsend, Cyril D.
Farr, John Meyer, Sir Anthony Trotter, Neville
Finsberg, Geoffrey Mills, Peter van Straubenzee, W. R.
Fletcher, Alex (Edinburgh N) Mitchell, David (Basingstoke) Viggers, Peter
Forman, Nigel Moate, Roger Wainwright, Richard (Colne V)
Fraser, Rt Hon H. (Stafford & St) Molyneaux, James Walder, David (Clitheroe)
Fry, Peter Monro, Hector Wall, Patrick
Gardner, Edward (S. Fylde) Montgomery, Fergus Walters, Dennis
Gilmour, Rt Hon Ian (Chesham) More, Jasper (Ludlow) Weatherill Bernard
Glyn, Dr Alan Morgan, Geraint Whitelaw, Rt Hon William
Goodhart, Philip Morgan-Giles, Rear-Admiral Young, Sir G. (Ealing, Acton)
Goodhew, Victor Morris, Michael (Northampton S) Younger, Hon George
Goodlad, Alastair Morrison, Charles (Devizes)
Gow, Ian (Eastbourne) Morrison, Hon Peter (Chester) TELLERS FOR THE NOES:
Grant, Anthony (Harrow C) Mudd, David Mr. John Wakeham and
Gray, Hamish Neave, Airey Mr. John Cope.
Griffiths, Eldon

Question accordingly negatived.

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