HC Deb 24 July 2000 vol 354 cc826-31

Lords amendment: No. 4, in page 3, line 13, at end insert—

("( ) For the purpose of subsection (3)(a) and (b) the Treasury shall in particular—

  1. (a) have regard to any relevant guidance issued by the Accounting Standards Board Limited or any other body prescribed for the purposes of section 256 of the Companies Act 1985 (accounting standards), and
  2. (b) require resource accounts to include, subject to paragraph (a), a statement of financial performance, a statement of financial position and a cash flow statement.")

Miss Melanie Johnson

I beg to move, That this House agrees with the Lords in the said amendment.

Mr. Deputy Speaker

With this it will be convenient to discuss Lords amendments Nos. 9, 10 and 15.

Miss Johnson

I shall deal first with amendments Nos. 4, 9 and 10. When it went to the Lords, the Bill already provided that resource accounts and whole of Government accounts would be prepared in accordance with generally accepted accounting practice and, in the case of resource accounts, would need to show a true and fair view. It was the Government's view that those rigorous conditions were sufficient to ensure that the accounts would be produced in accordance with best professional practice and to the highest standard.

However, following further discussions in the Lords, the Government brought forward further amendments to clarify the basis on which the accounts would be prepared. Amendment No. 9 extended the requirement to show a true and fair view to whole of Government accounts.

Amendment No. 4, in relation to resource accounts, and amendment No. 10, in relation to whole of Government accounts, lay down in more detail than we have hitherto provided the financial statements that must be prepared for resource accounts. Rather than doing that by reference to current accounting requirements, it refers to the fundamental financial statements as defined by the Accounting Standards Board in its statement of principles for financial reporting. We believe that that will satisfy the concerns that the Opposition have expressed in that regard at various stages of the Bill, while being sufficiently "future proof' to enable resource accounts to adapt to changes in the financial reporting requirements as and when necessary.

The amendments also make it clear that the Treasury will have regard to the guidance issued by the Accounting Standards Board or any of its successors when ensuring that the resource accounts show a true and fair view and comply with generally accepted accounting practice.

I shall now deal with amendment No. 15. The existing provisions of the Bill, further reinforced by the amendments that we have just discussed, will ensure that resource accounts will be prepared in accordance with best practice and the guidance issued by the Accounting Standards Board. However, as we have always made clear, because of the particular requirements of central Government accounts, it will sometimes be necessary to adapt standard accounting practice. The Financial Reporting Advisory Board was set up in 1996 to provide advice on accounting matters generally, but in particular to advise on appropriate accounting treatments in areas where some adaptation of standard practice was required.

We believe that the current arrangements for the FRAB are working well and that the FRAB is recognised to be independent. However, to address some of the concerns that have been expressed about how the board works and to reinforce the independence of the process, the Government brought forward a new clause on Report in the Lords—amendment No. 15—which would place the following duties on the Treasury. First, before determining the accounting practices for resource accounts and whole of Government accounts, the Treasury would be required to consult with a group of persons—that is, of course, currently the FRAB—who appear to it appropriate to advise on financial reporting principles and standards.

Secondly, the Treasury must consult with the Comptroller and Auditor General in determining the composition of the group. In practice, however, the Treasury would also consult with a wider range of other interested parties. Thirdly, the group will be required to prepare an annual report of its activities, which must be laid before the House of Commons.

Those requirements ensure that the Treasury seeks independent expert advice on accounting matters. Furthermore, by requiring that the group report to the House of Commons, we shall also ensure that, in any case where the Treasury does not accept that advice, the disagreement will be brought to the attention of the House.

We believe that the explicit requirements introduced by the Government's amendments to have regard to Accounting Standards Board guidance, combined with a requirement for the Treasury to obtain expert advice on financial reporting principles and standards, will ensure that the Government's accounts meet the highest standards of accounting practice. The requirement for the FRAB to report to the House of Commons on its work will give complete transparency to the Government's accounting guidance process.

Mr. Letwin

We very much regret that their lordships, although they have done some good work, have by no means gone as far as we would have liked, or as far as we pressed the Government to go during various stages of the Bill.

I wish to ask a specific question, to which it would be helpful to have the Economic Secretary's answer on record, not least because it may influence judicial review proceedings or other such proceedings. What was meant by the phrase that the Government used in amendment No. 10 in another place, have regard to any relevant guidance issued by the Accounting Standards Board Limited or any other body prescribed for the purposes of section 256 of the Companies Act? The interpretation of the phrase "have regard to" is clearly important. If it means that the Treasury can look at the guidance produced by the ASB and, having perhaps framed it in some suitable office, nonchalantly ignore it, that is a very different matter from having regard to the guidance in the sense of paying attention to, applying and living by it. If the meaning is that second possibility, their lordships have done us a great service. We seek clarification from the Economic Secretary on that point.

The deficiency in the Lords amendment is that, even if "have regard to" has a strong connotation, it is none the less quite different from giving the task of identifying appropriate definitions for Government accounts either to a specifically created body—a national accounts commission—as we originally pressed for, or to an existing body, as we later agreed on with the Liberal Democrats. The amendment contains merely a hope and a prayer that the ASB will produce relevant guidance. Does the Economic Secretary envisage the Government positively asking the board for such guidance? If so, the difference between what we pressed for and what the Lords have given us would diminish.

When the board produces relevant guidance, it must concern itself with a wide range of issues, many of which were dealt with in detail in Committee and at other stages. I certainly do not want to bore the House by going through them in equivalent detail now but, to recap briefly, we will need to know how the great obligations of the basic state pension and SERPS, of the unfunded pension liabilities and of the considerable and, under the comprehensive spending review, rapidly growing public-private partnership and private finance initiative liabilities will be accounted on the liabilities side of the balance sheet. We hope for real guidance from the board on that, and we will look to the Treasury to seek that guidance.

On the FRAB, which is the subject of Lords amendment No. 15, I hope that the Economic Secretary will be able to put some statements on record that will help the House and the Treasury to move forward after the Bill has been enacted. Under the amendment, the Treasury shall consult a group of persons who appear to the Treasury to be appropriate to advise on financial reporting principles and standards. I hope that the Economic Secretary will tell us that she will so arrange matters that those who "appear…to be appropriate" are renowned for their independence as well as their skill, and that she will seek, over time, to adjust the composition of the FRAB so that its independence is enhanced, in the same admirable way as, we hope, the Monetary Policy Committee of the Bank of England will become increasingly and evidently independent.

That is obviously important and coheres with the aspirations that the Economic Secretary has just enunciated. I hope that she can make it difficult for this Government and successive Governments to do anything other than choose people who are known for their independence, by putting it on the record that that is her interpretation of the intention of Parliament in Lords amendment No. 15.

In summary, this is good work, and we congratulate the Lords on improving a part of the Bill that, although it received a great deal of attention in this House, was lamentably deficient when it left it—but, alas, the Lords did not go the whole way. We hope that, following clarification from the Economic Secretary, it will be possible for a future Government to introduce a much tougher regime, bringing the setting of standards and definitions for Government accounts to the high level of rigour and independence that is prevalent in the private sector and ought to be observed in the public sector above all.

Mr. Edward Davey (Kingston and Surbiton)

As usual on this Bill, I find myself in almost total agreement with the hon. Member for West Dorset (Mr. Letwin). Our parties fought side by side in Committee to try to get an independent body to set the standards for Government accounts. The Government did not give way. I agree that the Lords have done a good job in moving them some way down that path.

I agree with much that the hon. Gentleman said about the wording of the Lords amendments, and especially the phrase "have regard to"—I hope that the Minister will give a clear and frank response—but I think that they are rather stronger than he suggested. The amendments do not allow only the Government to ask the ASB for guidance. Other parties, such as the National Audit Office, will be free to write to the board and express worries about what is going on. Indeed, the Opposition parties could do so. That is an important safeguard.

Mr. Letwin

I may have paid insufficient attention to that, and I agree wholeheartedly that perhaps our very first action—it could be a joint action—should be to seek guidance from the ASB on a range of contentious issues in the accounts.

Mr. Davey

I am grateful for that contribution.

In Committee, we expressed a concern that a future Government might fiddle around with the accounting standards in a way that is not transparent or immediately obvious and could go undetected by parliamentarians and even the NAO. When, at the start of this process, we examined the resource accounting manual, which lays down the principles, guidelines and definitions, it became immediately clear that this is a complex area with huge detail, so it will be very difficult, when a future Chancellor makes, say, the fourth or fifth comprehensive spending review statement—which may contain millions of different figures for the House to come to terms with rather quickly—for us to notice slight changes in the underlying accounting definitions.

Mr. Howard Flight (Arundel and South Downs)

I seek confirmation that the hon. Gentleman intends that the ASB's investigation should be public and transparent.

Mr. Davey

I can confirm that. I am only surprised that the hon. Gentleman had to ask.

The benefit that the amendments bring to our scrutiny of the accounts is that, now that the ASB has a remit to issue guidance, to which the Treasury must at least "have regard"—whatever that phrase means—there will be an independent body with a statutory duty to consider these matters and to have a watching brief for them. I hope that the board will take that new statutory function very seriously. It should note that hon. Members of all parties want that. It should see itself as the watchdog patrolling this complex area, which generally receives far too little attention from the House.

7.30 pm

This is a major step forward. I look forward to the ASB pulling up future Governments of whatever colour on any tricks that they might seek to play. However, I agree with the hon. Member for West Dorset that it is not the best solution—it is not the perfect solution. We would have liked the ASB or a similar independent body to be the initiator in the process of defining what the public sector's accounting standards should be. If I may answer his query as to what "have regard to" means, to me, it is the last-ditch defence by the mandarins to give the Treasury a last attempt at flexibility. That is why I am not totally happy with it and why I would like the ASB or a similar body to be the initiator.

The Liberal Democrats would seek to empower an independent body to be the guardian of the public sector's accounting standards. That is the best solution—we debated the matter at length in Committee—but, because we see the measure going a long way to meeting that aim, at this stage, we will not seek to disagree with the Lords on the amendments.

Miss Melanie Johnson

To answer the hon. Member for West Dorset (Mr. Letwin), it is perhaps important to rehearse where we are coming from. I remind him that the Bill requires resource accounts and the whole of Government accounts to show a true and fair view and to conform to generally accepted accounting practice—GAAP—subject only to such adaptations as are necessary in the context of departmental accounts. The Government's new amendments further strengthen that by requiring the Treasury to have particular regard to guidance issued by the ASB.

The hon. Gentleman asked what the words have regard to any relevant guidance issued by the Accounting Standards Board mean. They mean that the Government will apply the ASB's guidance, where it is appropriate, to the accounts of Government Departments. Compliance with the relevant accounting standards is usually necessary to ensure a true and fair view. Resource accounts will be required to meet that particular standard.

It is important to recognise—I reiterate what I said before—that any variations from the guidance will have to go through the FRAB, too, so it is not possible for such variations, as it were, to go by without some attention being drawn to them. Any proposal to depart from GAAP is discussed with the FRAB. If it disagrees with the Treasury's proposed accounting treatment, it can report to Parliament, so there is a chain of events. Were there to be any need to vary things, for whatever reason—good in our view, or otherwise in the view of the Opposition—it would require that process to be gone through. I hope that that is reassuring to Opposition Members.

Mr. Letwin

That is very helpful. I wonder whether the Economic Secretary could complete the loop by telling us whether she will ensure that, where there is a departure from the ASB's guidance and the matter is referred to the FRAB, she will make that plain to Parliament in some appropriate way.

Miss Johnson

I am not quite sure what the hon. Gentleman is suggesting. I have said that, where there is a disagreement in some way, obviously, it must go to the FRAB, and the FRAB is in a position to report that to Parliament. I would have thought, if that disagreement were not resolved in some way, it was highly likely—it will be entirely up to the FRAB to take a view—that it would be reported. That is my understanding of the arrangements. Therefore, that disagreement will be drawn to the attention of hon. Members, including those on any Committee that might consider such matters.

As for persons with particular expertise on accounting matters, the Government are planning to consult with the Comptroller and Auditor General on the membership of the FRAB to help to ensure independence. We regard it as important that the independence, skill and expertise of such individuals be clearly established. We will seek to achieve the same objective as that of the hon. Member for West Dorset.

The hon. Member for Kingston and Surbiton (Mr. Davey) referred to ASB guidance. As I know that he is aware, the ASB does not generally provide specific guidance for particular sectors or individual bodies, but it issues standards that are of general applicability across all bodies that produce accounts. It is on that basis that we will be tied in with its guidance. It is important to recognise that what I said earlier builds into the process a number of safeguards. I hope that that meets his concerns.

Lords amendment agreed to [Special Entry].

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