Accounting Standards

HC Deb 11 July 2002 vol 388 cc1026-8

6. Mr. Desmond Swayne (New Forest, West)

If she will make a statement about the findings of the review of accounting standards. [66372]

The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson)

The group set up in February to co-ordinate the responses of the key regulators to issues for audit and accounting raised in the aftermath of Enron—and now WorldCom—will produce an interim report by the end of this month. The Government have made it clear that it is important to restore confidence in the independence of auditors.

Mr. Swayne

Does the hon. Lady agree that our procedures are more robust, largely as a consequence of the lessons learned from the Mirror Group Maxwell affair? If so, will she say why the reaction of the stock market in this country has been more alarming even than that in the United States?

Miss Johnson

I agree with the hon. Gentleman that our systems appear to be more robust than those of the United States. Indeed, the UK's principles-based regime is a more effective basis for accounting than the rules-based system of the United States. Clearly, consideration is now being given to what changes might be made across the Atlantic. The response of the markets is unsurprising, because no one suffers more than business if the legitimacy of business is called into question. We believe that trust and confidence are key, which is why it is so important that confidence must be restored.

Mr. Andrew Love (Edmonton)

Does my hon. Friend agree that accounting standards cannot be entirely divorced from corporate governance and, in particular, the role of non-executive directors? Does she also agree that such directors should be more independent, take responsibility for the audit function and report directly to the annual meeting?

Miss Johnson

I certainly agree with my hon. Friend about the importance of non-executive directors. That is why the Government have commissioned the review that is being conducted by Derek Higgs into their role and effectiveness. The review was conceived before the events at Enron and WorldCom, but it is highly relevant to them. There is a question about the composition, duties and effectiveness of audit committees, and the review will look into it. We will consider the review and any other issues that arise post-Enron.

Dr. Vincent Cable (Twickenham)

Does the Minister accept that investor confidence in accounting standards has been seriously undermined as a result of the involvement of leading accounting companies in a succession of audit failures? If British standards are superior, as she said, why does she propose to abolish them in 2005 and replace them with an American-dominated global standard that will be significantly weaker?

Miss Johnson

We certainly do not propose to abolish those standards and to replace them with any weaker ones. It is clear from current discussions in the USA that there may be significant changes in approach. Negotiations are currently under way to modernise EU accounting directives and international dimensions are also under discussion. Like the hon. Gentleman, we are keen, whatever happens, to examine ways to regain confidence in the independence of the auditor on both sides of the Atlantic, and we look forward to seeing regulatory activity and reform to support that aim.

Mr. Colin Challen (Morley and Rothwell)

Does my hon. Friend agree that we would have higher accountancy standards if there were a complete separation of accountancy services from consultancy services? How can accountancy firms advise the Government on PFI, but participate at the same time in consortiums that are making bids for those projects? We then get advice from other firms, such as Arthur Andersen, which seems to be the only advice yet available on the value for money of those bids. Does she agree that there should be complete separation?

Miss Johnson

I agree with my hon. Friend that the relationships between auditors and clients can be too cosy and that there is a need to demonstrate independence. As my right hon. Friend the Secretary of State said in her recent speech to the Cambridge university faculty of law, there is a risk of having too many conflicts of interest. We are currently exploring questions in relation to audit firm rotation, more frequent rotation of partners and the supply of non-audit services to audit clients.

Mr. Nigel Waterson (Eastbourne)

In the wake of the problems faced by companies such as Enron, WorldCom and now Qwest, it is clear that the overwhelming priority is to reassure investors and markets. The Opposition welcome the review of accounting standards. However, does the Minister agree that when all the evidence is collected, many of the problems may turn out to have been caused by simple fraud rather than audit failures? Is not a calm, measured response required, rather than a rush to place unnecessary extra burdens on business?

Miss Johnson

I entirely agree with the hon. Gentleman that in some of those instances outright fraud has clearly been perpetrated. We believe that it is important that regulators identify the changes that they think are needed, including any that involve accounting standards, audit firm rotation or the other issues that I mentioned. The co-ordinating group, which I lead with my hon. Friend the Financial Secretary, is ensuring that those issues are well thought through and properly "ordinated, and the Government will make any further changes that they believe are necessary. I agree that a considered response is needed.