REMEDIES FOR FAILURE TO COMPLY WITH ACCOUNTING REQUIREMENTS (Hansard, 26 October 1989)

Mr. Hanky
I beg to move amendment No. 3, in page 25, leave out lines 8 and 9.

Mr. Deputy Speaker
With this we shall discuss the following amendments: No. 285, in page 25, line 39, at end insert—

§ Mr. Hanley
Clause 12 introduces procedures for the revision of defective accounts. This largely replaces the present criminal offence of non-compliance with the accounting requirements of the Act. It also implements one of the recommendations of the Dearing report.
New sections 245B and 245C enable the Secretary of State, or any person to whom the Secretary of State delegates his powers, to apply to the court for an order requiring the directors of a company to prepare revised accounts. It is envisaged that this power would in practice be delegated to the review panel, a body to be set up to implement another recommendation of the Dearing report. It might also be delegated to other bodies, such as the stock exchange.
In the view of the combined consultative accounting bodies, however, if responsibility for action is divided among more than one body, there will inevitably be buck passing and inaction. For enforcement to be effective, it has to be the responsibility of only one person or body. This must be the Secretary of State. We discussed this matter at reasonable length both on Second Reading and 1134 in Committee. Amendments Nos. 3 and 6 would ensure that the Secretary of State takes full responsibility by removing the possibility of any delegation of his powers.
New section 245B(4) enables the court to require directors who approve defective accounts to meet the cost of preparing revised accounts. Whether accounts are defective may well be a matter of opinion. Directors could find that they prepare the accounts in good faith, but that the court takes a different view from them of how the accounts should have been prepared. The costs that they would have to meet in such a case might be substantial. This would be unjust if the directors have indeed been acting in good faith.
Amendment No. 285 provides a remedy for this injustice by requiring the court, whenever it makes an order against directors to pay costs, to have regard to whether the directors involved knew or ought to have known that the accounts did not comply with the requirements of the Act. In this way, innocent non-compliance will not be punished unduly.
Amendments Nos. 3 and 6 should be dealt with together, with amendment No. 285 being dealt with separately. I should be grateful to my hon. Friend if he would respond to my points.

§ Mr. John Garrett (Norwich, South)
As the hon. Member for Richmond and Barnes (Mr. Hanley) explained, these amendments seek to restrict power to the Secretary of State to take a company to court to have its accounts revised if they are defective. We discussed this matter in Committee and the Opposition supported that general concept.
The Bill implements the Dearing proposals and introduces a new statutory power under civil law for certain authorised bodies or the Secretary of State to apply to the courts for an order requiring revision of accounts that do not appear to show a true and fair view.
The Dearing report suggested that the authorised bodies should be the review panel of the proposed Financial Reporting Council and the stock exchange. However, we believe that the possible exercise of such a power should be restricted to the Secretary of State. In Committee we adduced two main arguments in favour of that. First, if more than one body is responsible for applying to the courts to seek the revision of accounts there could be an argument about who is ultimately responsible for bringing such a case. The hon. Gentleman referred to that as buck passing. We think that such an arrangement makes for confusion about whose responsibility it properly is to bring such a case and it would lead to uncertainty as to which of the various bodies have the power, authority and will to require the revision of a defective set of accounts.
As was also pointed out in Committee, bringing a case against a company for the revision of its defective accounts could prove to be very expensive, especially if the director's of the company took the case to the House of Lords—which is what happened in the Lonrho case. The review panel's finances are likely to be limited. The stock exchange might also feel that its funds were limited in the light of its cool response to the Dearing proposals. Therefore, it is more appropriate for the Secretary of State and the Department to take upon themselves the responsibility for bringing such matters to proper redress. The chance of defective accounts would be lessened if it was known by the directors, who might otherwise let 1135 defective accounts be published, that the Secretary of State had this power and was known to be willing to use it. In general, the hon. Member for Richmond and Barnes has the right approach to the matter.

§ Mr. Redwood
I am grateful to my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) and to the hon. Member for Norwich, South (Mr. Garrett) for the way in which they have put forward their ideas. I recommend that we accept amendment No. 285. There is a problem which that amendment tackles well.
On amendments Nos. 3 and 6 I have more difficulties. I understand the arguments that have been put forward by hon. Members on both sides of the House but I am afraid that I am not persuaded by them. I am unconvinced that giving more power to more than one person will prove a recipe for buck passing and inaction. It is likely in practice that the Financial Reporting Council and the proposed review panel under it will be concerned only with large companies. In other cases, where the public interest dictates, it will be for the Secretary of State to take action.
The point has been made that the cost of bringing such actions will prove too great for the FRC review panel. I recognise that the financing arrangements for the new arrangements for accounting standards will need to provide adequate resources for that purpose. That will emerge in due course as Sir Ronald Dearing carries out his work.
Let me conclude by saying why the Bill is correct in its present form on those points.
For large companies the likelihood is that the review panel will be in the lead in enforcing accounting standards. A power to apply to the courts strengthens the panel's position and adds weight to its powers of persuasion.
In a wide sense we do not seek legislation to require everything to be funnelled through the Secretary of State. That would be unwelcome in the overall balance of the Dearing proposals.
Above all, it must be right at this stage, when the new institutional arrangements are not yet in place, to keep the options open. The provision in the Bill is permissive; it does not require other bodies to be authorised for this purpose.
Therefore, I ask the House to reject amendments Nos. 3 and 6.

§ Mr. Hanley
I am grateful to my hon. Friend the Minister for accepting amendment No. 285. In the light of his statement, I shall withdraw amendments Nos. 3 and 6. That is a vote of confidence in Sir Ronald Dearing's appointment yesterday. It would be right to allow Sir Ronald to tackle the job. A person is now in place to look at the issue. Therefore, I ask my hon. Friend to consider carefully the funding arrangements of the exercise as they are crucial to the success of the accounting standards programme.
During the recess we heard that the CBI disagreed with the funding arrangements. The accounting profession feels that they are not the right way forward. It has already been said in Committee that a levy on all companies might be a more sensible and equitable way forward. Therefore, I hope that my hon. Friend will discuss with Sir Ronald the funding arrangements in due course. In the meantime, I beg to ask leave to withdraw amendment No. 3.