§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Graham Allen.]10.17 pm
§ Mr. Austin Mitchell (Great Grimsby)
I congratulate my hon. Friend the Minister on his appointment and on being able to share with me the fun and excitement of this evening's Adjournment debate. Audit is not often regarded as a fun subject: indeed, auditors are supposed to be accountants who cannot stand the excitement of working in the profession.
The debate arises because the Government are about to publish a Bill to allow accountancy partnerships to set up limited liability partnerships. That would ensure that all the partners in a practice, who are currently liable down to their last Jaguar and their last yacht, could evade those liabilities. It seems curious that such a limitation of liabilities should be proposed by a Labour Government because it is a major concession to a huge vested interest: the big accountancy firms.
Such firms have a statutory monopoly of audit, which is given to protect the stakeholders. Stakeholders are identified by the various Companies Acts over the years as shareholders, creditors, employees—even journalists, as well as the public and markets. It is the job of auditors to provide information to all those stakeholders, invigilate the performance of firms and audit the accounts on their behalf. They are failing in that responsibility.
Such failure has been clearly demonstrated by a number of scandals—Bank of Credit and Commerce International, Maxwell, Levitt, Polly Peck, MTM, Queens Moat Houses, British and Commonwealth, Barings and Resort Hotels. There is an enormous list of failures and scandals, about which in each case the cry has gone up, "Where were the auditors?" Now we know. They were busy lobbying the Department of Trade and Industry for protection from liability for the consequences of their own failure.
If auditors want to avoid such liability, they can turn themselves into limited liability companies. When I was serving on the Standing Committee of the Companies Bill in 1989, I remember auditors lobbying for such a prerogative. They said that it was extremely important that they should be allowed to turn themselves into limited liability companies. We agreed to it at the behest of the then Government. Having agreed to it, the auditors now do not want to become limited liability companies because they want to remain partnerships.
There are various tax perks and advantages of being a partnership. There is also the great advantage of secrecy—auditors do not have to publish anything about their affairs, performance or activities. They want to keep the tax perks and secrecy, but they want protection from the liability that is supposed to be conceded by a partnership, making the partners liable for everything in each case.
Such limitation of liability seems a curious principle for a Labour Government to enact. It is anti-consumer to do so. After the Caparo judgment, the consumer has all too little redress or rights against auditors. If we concede limitation of liability, such redress will be even more limited.
The principle is curious, too, in the light of the very dubious and dodgy tactics used by big accountancy houses to try to get such limitation of liability. 219 They lobbied first through Ian Greer Associates and attempted to persuade the then Minister of Corporate Affairs, Neil Hamilton, to concede the principle. He ran up against a small obstacle when the Law Commission ruled that the proportion of liability that they were then asking for was against the public interest, so that avenue was blocked off.
Price Waterhouse then decided to transfer its lobbying activity to Jersey, work on the tin-pot legislature there in order to get the prerogative and then come back and blackmail the British Government into conceding the principle so as to stop competition from Jersey. In effect, it bought legislation in Jersey, and fast-track legislation, too: it was rushed through with very little debate. The legislation cost £1 million to draw up, and through a series of murky deals of the kind that go on in Jersey, it achieved its goal.
Price Waterhouse did not want to use the privilege that it had been given to set up in Jersey because who in their right mind in this country would use dodgy auditors set up in a tin-pot jurisdiction in Jersey to audit the accounts of a major public limited company? It wanted to blackmail the British Government into conceding what it had already bought in Jersey. It is an interesting legislative procedure to go overseas, buy legislation, then come back and say to the British Government, "Do the same for us." The tactic seems to have worked under the previous Government, since here we are, as a Labour Government, bringing in legislation that was obviously prepared under that previous Government.
Such limitation of liability is curious because if we are to have fair trading the privilege must be extended to all partnerships of all kinds and to all firms that compete with big accountancy houses but do not audit, such as management selection and tax advice and consultancy services. It would be anti-competitive to make such a concession to just one section—the auditors—and not to all partnerships and all firms that compete with partnerships.
The real problem with the proposal is whether it is responsible government to confer such an enormous privilege on the auditors without the quid pro quo of a drastic change in the regulatory framework for auditing, which at present is totally inadequate. The regulation of auditing has always been kept privileged by the big accountancy houses and the professional bodies. The present structures are inefficient, ineffective and pathetic.
We have a structure of so-called self-regulation which essentially means that the mafia regulate the mafia. In other words, a trade association regulates itself. It would be unacceptable if a trade union asked to regulate industrial relations, but, because the regulator is a professional body, responsibility is conceded.
There is a proliferation of overlapping bodies. Regulation is mostly done by professional bodies as recognised supervisory bodies. The professional bodies are themselves dominated by the big accountancy houses, which give their partners and staff time off to run the professional institutes, whose powers are pathetic. For example, one of the biggest fines imposed by the regulatory structure was on Messrs. Jordan and Stone of Coopers and Lybrand for their infringement of the guidelines in accepting work on the liquidation of Polly 220 Peck when their firm was already involved. They were fined £1,000 each. What a massive, terrifying fine that was: the fees from the insolvency were £17 million, so the firm must have been terrified at such horrendous fines from the regulatory bodies. Only one partner has been disqualified by the regulatory procedure—and he retired to Switzerland. If that is regulation, I do not know what real discipline would be like.
The structure includes no compensation for defrauded consumers, and no investigation of audit practices is undertaken. Several major audit firms have been criticised by Department of Trade and Industry inspectors and inquiries. The buck is passed back to the professional bodies, which do nothing. However often one writes to them, nothing happens. They have not investigated the standards of any of the big accountancy houses. The Securities and Exchange Commission in the United States is planning to investigate Coopers and Lybrand, which has been involved in a series of headline scandals there, but we cannot hope for such an investigation here. What chance is there that one of the big firms will have its standards investigated by such a light-touch regulatory regime?
The regulatory bodies never report on audit failure. There were failures of the audit in Maxwell, Levitt, Polly Peck, Wallace Smith, Homes Assured and London United Investment. None of them was investigated. In the United States, the Kerry committee investigated the audit of the Bank of Credit and Commerce International. Price Waterhouse, which is an international body, said that it could not co-operate with an investigation in the US because it was a firm of British auditors. The fact that it sells its services internationally was apparently not relevant: because it is a British firm, it can refuse to give any evidence to the Kerry inquiry. It is no wonder that the Kerry Brown report states—for the Minister's information, it is in chapter 10—that the partnership structure inhibits international regulation. If someone has a case against Union Carbide, the case can be pursued in the American courts, but if someone has a case against Price Waterhouse UK, it cannot be pursued in the American courts. The same problem arose with KPMG and the Ferranti affair.
The Financial Reporting Panel has been set up and on 23 occasions it has found that published audited accounts were defective. The auditors had drawn a fee, established that the accounts were true and fair and given their approval; yet the Financial Reporting panel said that they were defective. There has never been an investigation of any of those 23 audit firms, and action has been taken against none of them. This is not regulation—it is a farce.
It is disastrous, as audit is dominated by the big firms which do 90 per cent. of audits for plcs and are in intense competition with each other as the sellers of services. They want to sell other services which are more profitable than audit. To do that, they want to get a foot in the door by cutting the price of the audit. They get the contract with the firm, and then use that as a market stall to sell other services. A classic example four years back was when Price Waterhouse—or half-Price Waterhouse, as it should be called—offered to cut the audit fee for the Prudential by £900,000 to get that work so that they could sell other services.
Such competition must debase the audit. It imposes pressure, as unqualified people are used, corners are cut and time is reduced. It produces a potential for disaster, 221 but firms are getting away with it because of the lack of regulation and effective inquiry, and because auditing standards are effectively under the control of the audit industry, whereas the licensing, monitoring, complaints, investigations and appeals are under the control of the accountancy bodies, which are, in turn, dominated by the big firms. It is a lovely little racket.
Trade associations cannot be regulators, and the only people excluded from all this are the consumers of accounts, the stakeholders, the public and anyone who loses money in the scandals produced by this situation. The last Government believed in self-regulation. The present Government believe in independent regulation—the principle that we are establishing in financial services and which we promised in the 1992 manifesto for accountancy and audit. We need independent regulation which will ban the sale of other services to audit clients, enforce the rotation of auditors, require auditors to report and detect fraud as they do in local government—they just do not want to take it on in the big firms-and acknowledge the public interest.
Any limitation of liability makes it essential that the Government as a quid pro quo impose independent regulation, because liability cannot be limited in the present regulatory framework without disasters ensuing for the consumers of accounts and without the powers of vested interests being increased. Such vested interests must be made answerable. It is wrong to make concessions to the accountancy firms unless we strengthen the power of stakeholders against negligent auditors. That would be disastrous, and certainly would not coincide with the purpose of the Government, who want to encourage and sustain a stakeholder society. We want to protect the consumer, and we need a regime which investigates standards, punishes derelictions and failures and gives confidence to stakeholders.
This is a monopoly based on a statute given to firms for public purposes which they are not fulfilling adequately. Only effective independent regulation can impose those purposes. We cannot have a situation in which such a concession can be given to auditors without the public being given some protection from the consequences of the failures of those auditors, and without a framework of regulation which requires them to fulfil their responsibilities. Independent regulation is the essential quid pro quo in this case—or perhaps I should say quo pro quid pro quid pro quid, because that is what will arise if this limitation of liability is conceded without effective regulation.
§ The Minister of State, Department of Trade and Industry (Mr. Ian McCartney)
I thank my hon. Friend the Member for Great Grimsby (Mr. Mitchell) for an animated, enthusiastic and provocative presentation of his case. Over the years, he has led the debate about the regulation of auditors, and his contribution has always been made from the point of view of the public interest. In that respect, my views are the same as his: the availability of reliable, audited accounts is a fundamental matter of public interest, and the proper regulation of auditors is an important aspect of maintaining confidence in the environment for doing business in the United Kingdom.
My hon. Friend will also be aware that the Government are committed, through our business manifesto, to ensuring that there is a framework of independent regulation for the 222 accountancy profession, of which statutory auditors are a part. He will appreciate that, in view of time constraints, I shall confine myself to the general criteria that must guide us in the matter. The criteria are effectiveness, independence and transparency.
My hon. Friend also referred to various proposals for changes to audit regulation and to the liability of auditors. Let me make it absolutely clear that we shall give a full and fair hearing to all proposals. We shall also give full consideration to the views expressed by all interested parties. As the Government, our fundamental responsibility is to come to a view on how to strike a fair overall balance, in the public interest. I assure my hon. Friend that we shall consider all proposals fully and rigorously from that standpoint.
An extensive framework for the regulation of auditing, derived ultimately from European Union legislation, was put in place by the Companies Act 1989. What particularly interests me is its effectiveness, and how we improve any aspects of the system that are in need of improvement. Under the Act, the Secretary of State for Trade and Industry is responsible for recognising appropriately qualified bodies to maintain standards of qualification and supervision within the profession. The bodies are required to submit annual reports to the Secretary of State on their reporting functions.
The qualifying and supervising bodies must ensure, for example, that auditors have undergone an appropriate period of theoretical study and of professional experience; that rules are in place to ensure that standards are maintained; and that auditors are fit and proper people, with the necessary standards of professional integrity. They also have systems of discipline, appeals systems and procedures for dealing with complaints.
In addition, the standards to which auditors work are set by a body, the Auditing Practices Board, half of whose members are practising auditors, the other half being business people, lawyers, academics and others with wide business experience—the stakeholders to whom my hon. Friend referred.
Whenever there is a company collapse, there is a rush to blame the auditors. Often, aggrieved parties will seek to sue the auditors for alleged negligence. I should like to consider two aspects of that: are there effective procedures for dealing with problems when something goes wrong; and is there an effective system of monitoring and feedback to raise general standards, so that problems are less likely to occur in the first place?
For major public interest cases, the joint disciplinary scheme operates as an independent investigator on behalf of the three main professional bodies and, after investigation, makes recommendations to them. The sponsoring bodies are currently reviewing the operation of the scheme and I shall, of course, take the closest interest in the proposals that they develop to improve its effectiveness.
I cannot comment on individual cases that are before the courts or under investigation, but I strongly agree with my hon. Friend's view that the system of investigation, for cases of major public interest and for all other cases, should be subject to continuing independent review.
That is an aspect which I shall certainly bear in mind when I receive the profession's own proposals for independent scrutiny of its regulatory activities. Underpinning that, there is, of course, the system of 223 monitoring of auditors set up by the 1989 Act, refined in the light of an extensive review in 1994, and overseen by the Secretary of State.
I want to talk about certain aspects of improving the system as a whole. My hon. Friend will be aware that the present system of annual reporting is transparent, in that the supervisory bodies' annual reports are published and laid before the House. As he will have seen, those reports provide a valuable pen picture of the way in which the bodies fulfil the requirements placed on them and highlight areas for improvement. The fifth set of reports has recently been submitted to the Department. I intend to scrutinise them and I am sure that my hon. Friend will do so, too. I look forward to hearing his views.
The audit monitoring process was the subject of extensive scrutiny by Peter Moizer, professor of accounting at Leeds university, at the request of my Department. His report was published in 1994. Professor Moizer considered in detail the monitoring arrangements put in place by the supervisory bodies. He concluded:I believe that the monitoring units are working well and effectively and that self-regulation is being operated conscientiously.Those are the views of an independent academic on the functioning of the monitoring process.
The report also made a number of recommendations for improvements to the audit monitoring processes. Many of the recommendations, which included an increase in the frequency of visits, to ensure that all firms would be visited over a five-year period, and greater co-ordination among the monitoring bodies, have been implemented by the bodies.
A recommendation for greater public scrutiny of the audit monitoring process is picked up by the professional bodies' current work on proposals for the creation of an independent oversight body. My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) has written to my Department on that matter. I can assure him that I shall meet him and his colleagues at a later date to discuss the issues that he has put before me and my officials.
The annual reports to the Secretary of State include material on action taken against auditors who are found wanting and on the handling of complaints. I cannot pre-empt the contents of the reports for 1996, which have not yet been published, but I remind my hon. Friend the Member for Great Grimsby that in 1995, a total of 63 member firms of the Institute of Chartered Accountants in England and Wales had their registration withdrawn or surrendered, which is slightly more than the number to which my hon. Friend seemed to allude.
§ Mr. Mitchell
I was talking about the auditing of the major plcs. All the sanctions and disciplinary procedures are exercised energetically against smaller firms. The weight of regulation falls on them. The real problem, however, is the debasement of audit by the big firms, which are largely unaccountable and which dominate the regulation process.
§ Mr. McCartney
My hon. Friend has reiterated some of the issues that he has written to me about. I think that I have said that I am prepared to consider them as part of 224 the consultation process. I shall give the evidence that he has placed before me adequate consideration, as part of the consultation process that I shall have with him and with the individuals who advise him on the issue.
§ Mr. Andrew Stunell (Hazel Grove)
When considering those matters, will the Minister take account of the experience in north America and in particular the regulatory structure in the United States, and perhaps apply some of the lessons that his hon. Friend drew to his attention, so that those structures can be applied in the United Kingdom?
§ Mr. McCartney
At the outset, I said that I was open to consideration of a range of issues, including the contribution that my hon. Friend has made this evening and in writing on numerous occasions. I welcome the hon. Gentleman to the Front Bench, by the way. I am not sure whether this is a Liberal Democrat takeover of the Opposition Front Bench, but he is a welcome sight after some of the individuals whom I occasionally have to face across the Dispatch Box. I wish him well and hope to see him on many more occasions.
As I said, in 1995, a total of 63 member firms of the English institute had their registration withdrawn. Restrictions were also placed on the registration of a further 107 firms—that is out of a total of 1,115 matters that were pursued by the institute following monitoring visits.
The firms, the professional bodies and the Auditing Practices Board are increasingly looking to ensure that lessons from past failures are brought to practitioners' attention.
Obviously, it is easy to criticise any system of delegated regulation and to say that those closely involved are not best placed to form an independent view of the effectiveness of the system. The answer to such doubts is to ensure the transparency of the system, so that its independence can be seen by all.
That brings me back to the Government's commitment to ensuring that there is a framework of independent regulation. That is the standpoint from which I shall be considering the proposals for the independent external review of their regulatory activities that the professional bodies are now preparing. My hon. Friend will understand that I cannot commit myself in advance on the view that I shall take on those proposals. I can, however, assure him that I come to the issue with an open, but not empty, mind and that I shall take his views into full account in assessing the proposals and reaching a decision on the way forward.
I am grateful to my hon. Friend for raising limited liability partnership, which is a good example of a matter on which we must listen to all parties, and find a solution based on the balance of public interest. The professions have asked whether it is possible to establish a legal structure that would enable them to do business with limited liability, but with the organisational features of a partnership rather than a company. At present in the UK, they must choose between organising as a partnership, with unlimited personal liability and little public disclosure, or as a company, with limited liability and extensive public disclosure. The key difference from the point of view of the client is that any claim that he may have against a partnership is against each and all the 225 partners individually. With a company, his claim is against the assets of the company itself. That is why the Companies Acts require extensive public disclosure, particularly about the state of a company's finances.
It is absolutely right that any business entity with a limited liability should be required to disclose information. However, it does not necessarily follow that the internal organisation of all limited liability entities should be exactly the same as that of companies, with directors, share capital and shareholders. Many businesses prefer a partnership structure, particularly when many skilled people wish to join in the ownership of the firm on the basis of the skills that they bring to it, without having to make substantial capital contributions to the firm at the outset.
Many states in the United States of America have legislated in the past few years to make such business vehicles available, with the internal organisation of a partnership but the external obligations of a company. They are being copied by an increasing number of offshore centres such as Jersey, which was mentioned by my hon. Friend. No doubt they hope to attract registration from countries such as Britain whose partnership legislation has been unchanged for more than a century.
It was against that background that the Government announced on 22 May our intention to publish draft legislation on limited liability partnership. I emphasise the two basic principles of our approach. Legislation must provide appropriate safeguards for those dealing with the firm, and its details should be worked out in close consultation with all those affected.
I cannot say today what the precise balance and detail of the legislation will be, but I assure my hon. Friends that; in considering its details, we shall take the most careful account of all the representations that have been 226 made in the public consultation that has just closed. We shall also provide full opportunity for consideration of the details of the draft legislation before it is introduced.
§ Mr. Jim Cousins (Newcastle upon Tyne, Central)
Can my hon. Friend assure the House that there will be no move to introduce legislation on limited liability partnerships until the Government are satisfied about the quality, substance and robustness of the independent regulatory regime to which he referred?
§ Mr. McCartney
I assure my hon. Friend that my Department will not publish any Bill, materials or proposals until we are satisfied that they meet the criteria set out in the manifesto and in what I have said this evening. There is no point in my giving commitments tonight and then going back on that promise during consultation on the draft legislation.
In conclusion, I thank my hon. Friend the Member for Great Grimsby for his personal contribution to the continuing debate on standards of auditing and of audit regulation. This area is vital for the credibility and reliability of accounts, and so for the competitiveness of the UK. I have listened carefully to him and to my hon. Friend the Member for Newcastle upon Tyne, Central. I shall bear their remarks in mind when I consider in detail the various aspects of the issue. As my hon. Friend the Member for Great Grimsby knows, I am happy once again to offer to meet him and his advisers. I am keen to hear the views of all those with an interest in those important matters, including the hon. Member for Hazel Grove (Mr. Stunell)—
§ The motion having been made after Ten o'clock, and the debate having continued for half an hour, MR. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at twelve minutes to Eleven o'clock.