AUDITORS' DUTIES TO COMMISSION AND RELATED RIGHTS (Hansard, 24 July 1986)

§ Dr. Oonagh McDonald (Thurrock)

I want to raise only one point on amendment No. 127, which is another expression of the Government's approach to their attempt to stamp out fraud. That applies to the proposals relating to both banking supervision and the building societies. Amendment No. 127 places a duty on the auditor to furnish information to which the obligation extends notwithstanding any obligation of confidence incumbent on him. The following subsection in amendment No. 127 provides that the power to make an order has to be laid before and approved by a resolution of each House of Parliament. That provides us with an opportunity to debate this issue on a future occasion. However, before we reach that stage, I trust that the Government will consider again their approach to auditors. Auditors have a primary responsibility to the institution concerned to inspect the accounts. In the case of a company the obligation is 690 primarily to the shareholders. A conflict of interest could therefore arise between the duty of an auditor to carry out the work that he has been hired to do and this particular duty that the Government seek to impose upon auditors. I refer to the auditors of building societies and to the auditors of other bodies. I stress again that, apart from the most obvious and blatant instances, it is not the duty of an auditor to act as a kind of detective. That should be the job of whichever regulatory agency supervises the financial institution. In this case it is the commission rather than the auditor.

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Therefore, I trust that before the Government introduce an order such as this they will reconsider the matter, since I know that they have been approached by auditors as individuals and companies and by auditors' organisations. It is wrong to expect auditors to be detectives on the cheap for the Government. In their efforts to stamp our fraud, the Government should ensure that proper regulatory bodies are set in place with proper staff to equip them to carry out the task.

§ Mr. Ian Stewart

The hon. Member for Thurrock (Dr. McDonald) has mentioned another important area of the Bill which is worth further discussion. I remind the hon. Lady of the comments made by my hon. Friend the Parliamentary Under-Secretary of State for Trade and Industry on 9 June. He said: I have given especially careful consideration to the … circumstances in which an auditor should be expected to report on his own initiative to a supervisor." — [Official Report, 9 June 1986; Vol. 99, c. 45.] He went on to say—this was said in the context of the Financial Services Bill—but the general principles apply equally here— I have concluded that there should be no general duty placed on auditors in the Bill to report to supervisors. The particular circumstances in which a report should be made need to be carefully defined. I believe that this is best achieved by professional guidance and I look to the professional accountancy bodies, in consultation with the supervisors, to draw up such guidance. But an amendment to the Bill will be brought forward to give the Secretary of State a reserve power to lay down rules obliging auditors to report in certain circumstances to the supervisors. Such a power would be invoked only if suitable professional guidance was not issued."—[Official Report, 9 June 1986; Vol. 99, c. 45.] My hon. Friend the Under-Secretary of State added that a parallel measure for banks and building societies was being considered by Treasury Ministers. That is the case. The Government believe that this same reserve power would be desirable in the Building Societies Bill because of the great importance of effective communication between building society auditors, who must visit their societies regularly and may be the first to detect danger signals, and the commission as the supervisor.

It is not just a question of fraud. The stability of the institution may be at risk and so therefore, may be the funds of depositors. The Government believe that, in the case of building societies and other financial companies, such matters are best dealt with by the auditors and the professional bodies involved. We intend that the power should be exercised only by the Treasury if the profession fails to produce an effective code of practice. It is much better for the whole matter to be dealt with in a more informal fashion. The accountancy profession now recognises that that is our intention and welcomes it.

691 Equally, we cannot foresee in detail how supervisory needs may develop, as the institutions change in a fast-moving market place, so it is right that the exercise of any power in the Bill should be available, subject to the affirmative resolution procedure. In saying that, I assure the hon. Member for Thurrock and the House that we would give the most careful consideration, before introducing such a measure, to whether to introduce it and in what form. We do not intend to introduce such a measure now. We believe it is right, however, in view of potential uncertanties, that there should be such a power in the Bill. Whether it must be implemented later would have to be considered at the time, but we would think most carefully about it before introducing it, and would not do so without consultation.