§ The Secretary of State for Trade and Industry (Ms Patricia Hewitt)
With permission, Madam Deputy Speaker, I should like to make a statement about the interim report of the co-ordinating group on audit and accounting issues, which my right hon. Friend the Chancellor and I are publishing today.
The world's capital markets rely on timely, true and fair financial reporting, underpinned by high standards of auditing and accounting. We have all been shocked by the major corporate failures in the United States at Enron and WorldCom. It is incumbent on the Government to be vigilant and to take the necessary action where required.
Audit and accountancy standards in Britain are different from those in the United States: different and, as is now widely acknowledged, in some respects better. That is partly the result of changes made here following the UK's own corporate scandals of the late 1980s. However, there is no room for complacency. The millions of people who invest in our companies, whether as individuals or through their pension funds, look to the Government to ensure that our own financial reporting regime is as transparent and effective as possible.
That is why the Chancellor and I set up a co-ordinating group on audit and accounting issues in February, chaired by the Under-Secretary of State for Trade and Industry, my hon. Friend the Member for Welwyn Hatfield (Miss Johnson), who has responsibility for competition, consumers and markets, and by my hon. Friend the Financial Secretary, and comprising the principal regulators. The interim report shows clearly what needs to be done to build on the strengths of the current system. The Government welcome the group's proposals.
We are extremely grateful to the group for its hard work in producing the interim report, copies of which have been placed in the Libraries of both Houses.
In responding to the interim report, let me stress that this is not about piling unnecessary regulation on the vast majority of companies that are honestly and properly run. But the actions of a few are damaging the reputation of all, and by taking sensible steps to strengthen corporate governance and financial reporting, and thus to restore investor confidence, we will benefit business and our economy as a whole.
I turn now to the proposals contained in the interim report and the Government's response. A key recommendation is for tougher mechanisms to reinforce auditor independence.
First, the group proposes, and we agree, that we must strengthen and enhance the role of audit committees. The audit committee should act more clearly on behalf of the shareholders. It should make recommendations to the shareholders on the appointment of the auditors, and underpin auditor independence; for example, by approving the purchase of non-audit services from the auditor. We welcome the work that the Financial Reporting Council will oversee to develop improved guidance in the combined code.
We need to ensure that audit committees are effective and can act independently of the executive directors. Audit committees should therefore be made up entirely of independent non-executive directors. Derek Higgs's 1004 review of non-executive directors is obviously crucial in that respect. We need also to develop the competence of audit committee members; for example, by developing available training.
Secondly, we agree with the report's conclusion that the principle of audit partner rotation should be extended to other senior members of the audit team and that the time scale for rotation of the audit partner should be cut from seven to five years. On the rotation of audit firms, the Treasury Committee, whose report was published yesterday, argues that there is a strong case for the mandatory rotation of audit firms, as well as audit partners and teams. We, and the group, will want to consider its report very carefully. The Chancellor and I are therefore asking the group over the next few months to look more closely at audit firm rotation, including the possible implications for competition in audit services, and to report by around the end of the year.
Thirdly, the group says that we need to look in more detail at the need for a further tightening of the rules governing the extent to which auditors can provide non-audit services to audit clients. We agree, and I have asked for recommendations on that important point in the group's final report. I have also asked my Department to consult on changes to regulations under the Companies Acts to improve the disclosure by companies of the nature and value of non-audit work provided by their auditors.
The group also wants to see much greater openness and transparency by the major accountancy firms in relation to their own processes, practices and structures. We agree with that too. One approach under serious consideration is to make such transparency compulsory for those audit firms undertaking the statutory audit of major companies. We will consider that with the recognised audit supervisory bodies by the end of the year.
We also agree with the group that there should be an early review of the way in which the accountancy industry as a whole is regulated, including the role of the recently established Accountancy Foundation and its related bodies. Despite the efforts of Lord Borrie and his colleagues in the Accountancy Foundation, the new arrangements have not progressed as rapidly as we had hoped. The Chancellor and I have therefore decided to conduct an immediate review of the regulatory arrangements to see whether there are sensible structural improvements that should be made. That will include the question of future funding arrangements for the foundation and take into account the work to be undertaken by the review board on the arrangements for monitoring the work of auditors.
The group also highlights the importance of proper international accounting standards. Given the increasing globalisation of capital markets, it is essential that our own Accounting Standards Board works closely with the international board to improve the transparency of company reporting. It is particularly important that such standards are developed to address share options and other share-based payments systems, which have played a significant role in the current concerns. That issue can be dealt with only at an international level, so I welcome the fact that the international board is giving priority to developing such standards.
Of course, standards, whether national or international, must also be effectively enforced. I agree with the group that the financial reporting review panel should develop a 1005 proactive role as well as simply responding to complaints. I know that the panel is already looking at such a change, and we fully support moves to develop current practice. The group suggests that the Government should consider the adequacy of the current enforcement arrangements more widely, and we will do that as a matter of urgency.
Finally, the group recommended, and we accept, that the Department of Trade and Industry and Treasury consider with the Office of Trading whether there are any competition implications arising from the high concentration in the market of audit and accountancy services for the largest firms, and whether any of the other proposals in the report have competition implications.
I also remind the House of the important provisions contained in the Government's White Paper on company law reform, which my hon. Friend the Under-Secretary published last week. In particular, we have decided to introduce a statutory statement of directors' general duties; to require large companies to provide an operating and financial review, covering non-financial areas also, such as strategy and risk; and to place a legal obligation on directors to volunteer relevant information to the auditors and to give auditors the statutory right to ask for company information from employees and certain contractors.
In preparing its interim report, the group was mindful of the fact that high standards of financial reporting and audit regulation are promoted in the United Kingdom in a number of ways, ranging from statutory or independent regulation to self-regulation, voluntary codes of best practice and market pressure. The effectiveness of the UK's arrangements must be judged by considering the combined effect of those various elements. The group's recommendations, too, must be seen in the same light, as a package of measures.
This is only an interim report. The Chancellor and I have asked the group to carry on its work and to deliver a final report around the end of the year on progress made in all those areas. For our part, the Government will act quickly in response to the recommendations that fall to us to take forward. But success will require action from everyone—from the regulators and the profession. I also challenge UK companies to make a difference, and welcome the fact that many are already doing so.
As the co-ordinating group and, indeed, the Treasury Committee have both said, the status quo is not an option. The measures that I have announced today will ensure that the UK has the best possible regulatory regime that will benefit our companies, our capital markets and our economy alike.
§ Mr. Tim Yeo (South Suffolk)
I welcome this early opportunity to address some of the issues that have recently caused great concern on both sides of the Atlantic. I am glad that the Secretary of State decided to announce the publication of the interim report by way of an oral statement to the House, a practice that I hope she will continue to follow wherever possible. I am also grateful for a copy of the statement, which I received about an hour ago, and for the chance to glance at the report. I have obviously not had time to read the report from cover to cover but, from what the Secretary of State said, I am sure that there is much on which we will agree. I welcome the broad tenor of those aspects of the report to which she referred.
1006 For the sake of clarity, will the Secretary of State confirm that what she said today refers only to listed companies? I hope that before long she will be able to say whether the Government accept the need to raise the turnover threshold above which unlisted companies are required to undertake an audit to a more realistic level.
Events in the United States have inevitably caused anxiety in Britain among employees, shareholders, creditors, customers and the general public. I agree that our accounting and auditing practices are sufficiently different from those followed in the United States to give us confidence that the problems that have arisen there are less likely to occur here. The vast majority of British businesses are honestly run and the vast majority of audits are responsibly conducted. We should not proceed on the assumption that the actions that occurred at Enron, which are the subject of criminal investigations in the United States, are widely practised in Britain.
It is right, however, to review matters from time to time. We should never be complacent about the risk of uncovering a damaging financial scandal in this country. The restoration and maintenance of full trust in accountancy, reporting standards and audit procedures is important to ensure that business continues to have access to the funds that are needed to sustain growth.
The overriding need is for the response to the current anxieties to be proportionate to the risks involved. It is important to distinguish between the more onerous requirements rightly imposed on listed companies and other categories of companies which, although subject to audit, do not need to meet similar demanding standards.
On the specific issue of audit firm rotation, we should proceed with caution in considering the Treasury Committee recommendations.
I have reservations about the idea that firms should be compulsorily rotated after a relatively short period. The costs would be substantial and would fall on the businesses concerned, and therefore on their shareholders and customers. Furthermore, an audit firm taking on an audit for the first time is not necessarily better able to scrutinise the operations of its client. However, rotation of audit partners and senior staff is a very different matter, and, subject to proper recognition of the special or different circumstances of smaller accountancy firms, I welcome the report's recommendations.
I agree with the concerns that have been expressed about separating audit work from consultancy. It is important that there should be a clear statement, breaking down into individual categories of work the fees that are received for non-audit work, which are paid to firms that act as auditors. I hope that the Secretary of State will give her support to that.
With reference to the Secretary of State's decision to conduct a review of how the accountancy industry is regulated, will she indicate its likely terms of reference and the timetable that she envisages for its completion?
On the development of international accounting standards, does the Secretary of State accept that however desirable that may sound, Britain should not abandon our principles-based approach in favour of a rules-based system merely in pursuit of harmonisation? I would welcome a review of the accounting treatment of share options, however, and I hope that that would reflect the fact that share options are effectively a form of employee remuneration.
1007 Giving audit committees more responsibility seems sensible, although perhaps the Secretary of State could enlarge her comments about training for non-executive directors.
Where the employees of an audit firm wish to join their client's payroll, proportionality should again be the watchword. It is clearly right that partners in charge of the audit should he subject to a cooling-off period before being able to move across to the former client. Restrictions on more junior staff who have worked for an auditor would not be justified.
On the question of whether there is sufficient competition between accountancy firms, I am sceptical about the value of an OFT inquiry. It would be expensive, time consuming and possibly unproductive. Will the Secretary of State say whether her Department has received any complaints from businesses about the alleged inadequacy of competition between accountancy firms?
The Secretary of State rightly distinguished between the United States' approach, which is rules-based—as long as all the boxes have been ticked the requirements appear to be satisfied—and the British approach, which requires the auditors to present a true and fair view. Does she agree that the Chancellor of the Exchequer has adopted the United States' rules-based approach in his concealment of substantial public liabilities arising from PFI and PPP schemes? That dishonesty and off-balance-sheet accounting sits ill with the Chancellor's consistently repeated claims that large sums of public debt have been repaid. Surely the British people as shareholders in all public projects, however financed, deserve to be treated in at least as open a manner as shareholders of the companies about which the Secretary of State has spoken.
More generally, the loss of trust in the audit process, whether in the public or the private sector, weakened confidence when financial markets were already vulnerable. The effects of that weakening of confidence range widely, extending to pensions, jobs, endowment mortgages and many other matters. Nevertheless, despite those risks, our response should always be in proportion to the dangers involved. The essence of what is now needed is not necessarily more regulation but better regulation.
§ Ms Hewitt
May I begin by welcoming the hon. Gentleman to his new portfolio on the Conservative Front Bench? I am grateful for his general support for the statement.
On the issue of large versus small companies, some of the proposals that we are making apply only to large companies—for instance, the proposal for an operating and financial review, which will really apply only to the 1, 000 largest companies. Of course, the greatest impact of the proposals that I have announced this afternoon will, rightly, be felt by the listed companies. I remind the House that a few years ago we raised the threshold for statutory audit to exempt a large number of small firms from that onerous requirement.
I strongly agree with the hon. Gentleman that we do better to have a principles-based approach to accountancy standards than the detailed check list of rules that has been 1008 adopted in the United States. I think that the United States is likely to move more in our direction in that respect, but I agree that we should not sacrifice our own approach even if doing so would achieve greater international harmonisation.
The hon. Gentleman is right to say that there are arguments for and against rotation of audit firms. I observe that the Australian and the Irish Governments, who recently reviewed that issue, both came down against proposals for mandatory rotation of audit firms, but, as I said, we will consider that in more detail before arriving at a final view.
I hope that I made it clear in my statement that I entirely agree with the hon. Gentleman about the need for much greater transparency about the purchasing of non-audit services from the audit firm. We will consider that matter further, but I think that the proposal that we have already accepted—that audit committees should approve the purchase of non-audit services from their auditors—will be helpful.
When reviewing the regulatory framework we shall look at the entire structure. I shall in due course publish more detailed terms of reference, but we want to conduct that review as quickly as possible, building on the work that is already being done by the various bodies. I hope to be able to report on that piece of work around the end of the year.
Of course, share options should properly be regarded as part of the pay package of employees and directors of a firm, but it would be wrong of our country to act in isolation in that respect. That is why I welcome the fact that Sir David Tweedie and his colleagues at the international board have said that they will deal with the issue and propose appropriate standards.
The hon. Gentleman raised the specific question of skills and training for non-executive directors. As part of his wider review, Derek Higgs is to consider the skills required for non-executive directors and how we can widen the pool of appropriately qualified people. However, it is disturbing that there appears to be no properly agreed definition of the competences that are required of members of audit committees in particular. That is certainly a matter to which the regulatory and professional bodies should pay attention.
On the issue of competition, the Office of Fair Trading will, naturally, want to consider both the report published today and the Select Committee's report published yesterday. As far as I am aware, no complaints about lack of competition in the market for audit services have been made to my Department.
On the hon. Gentleman's final point about broader Government issues relating to accounting practices and public finances, let me make it clear that since he became Chancellor of the Exchequer, my right hon. Friend has ensured that, for the first time, the assumptions that underpin each year's Budget are independently audited by the National Audit Office. Public-private partnerships are properly accounted for in line with international best practice. When it comes to transparency and robustness of the fiscal framework, we are among the best in the world, and I am sorry that the hon. Gentleman—in an otherwise welcome response—did not acknowledge that.
§ Dr. Vincent Cable (Twickenham)
I welcome the statement, as far as it goes—which is not all that far—in making proposals on the tightening up of audit and accounting practice, especially the tentative moves towards rotation of auditors and separation of audit and consultancy practice. However, does the Secretary of State agree that if changes such as rotation are to be meaningful, there must be far more competition? It is impossible to envisage real competition in an industry dominated by only four companies. I welcome the move to the Office of Fair Trading reference, but does the right hon. Lady agree that the only logical outcome that would increase competition is the break-up of one or more of the large accounting companies? Is that an outcome that she would welcome?
I welcome also the move to strengthen the independence of audit committees in companies. Does the right hon. Lady agree that for that to become effective, there must be much more far-reaching reform of independent directorships following the Higgs review? Does she agree also that at present the largely self-selecting group of non-executive directors means that a few individuals hold far too many directorships and are unable to provide the focus and professional supervision that companies need?
The right hon. Lady has not referred to fraud. Is she consulting the Law Officers on how to introduce a tougher approach to real financial fraud? Are there not still too many cases, such as Allied Carpets a few weeks ago, where crooked directors who steal from their shareholders are treated far more leniently by the criminal justice system than criminals who rob the same amount from a bank? There must be a tough and consistent approach.
Finally, I turn to international standards. If it is correct, as the Secretary of State says, that British standards of practice are exceptionally high, how does she intend to protect those standards when harmonisation takes effect in 2005? Will she explain why it is, if British standards are relatively high, that in the months that have passed since the Enron crisis, the FTSE index in London has fallen even more precipitately than the Dow Jones index in New York?
§ Ms Hewitt
We shall reduce the period for audit partner rotation from seven years to five, and extend the requirement of rotation to other senior members of the audit team. Those are two specific and, I believe, thoroughly desirable actions that we are taking as a result of the interim report.
On competition, the hon. Gentleman will be aware that the Office of Fair Trading recently conducted a review of the market for audit and accountancy services. It reported on that in its report on competition and professions. As I am sure the hon. Gentleman will acknowledge, it found that small and medium-sized companies in the United Kingdom have an extensive choice of auditors and accountants. As the hon. Gentleman and the OFT acknowledge, there is much less competition in the market for large company audit and accountancy services. However, there was no indication in the OFT report that that produced a problem of inadequate competition.
It is worth stressing that when we talk about this relatively concentrated market, we are talking about the largest firms—some national, but most of them international—that increasingly buy their audit and 1010 accountancy services from multinational firms in an increasingly global marketplace. It is not an issue for the United Kingdom alone, but one which the OFT will be examining and which I and my colleagues in the Treasury will be discussing with it.
I agree with the hon. Gentleman about the need to broaden the pool from which companies recruit their non-executive directors—far too few are drawn from too narrow a pool. That is precisely why my right hon. Friend the Chancellor and I invited Derek Higgs to conduct a review of the role and recruitment of non-executive directors. We await his findings with interest, and I shall return to the House on the matter in due course.
As for fraudulent, criminal behaviour by a small minority of company directors, my Department acts with great vigour in investigating complaints that are brought to us, or of which we have become aware. Where necessary, we disqualify directors whose behaviour makes them unfit to hold such office. In the past two years, we have disqualified a couple of thousand company directors in pursuit of our powers.
The hon. Gentleman referred to international standards. Our own Accounting Standards Board is already working closely with the international board, and with our partners on that board, to ensure that we get the best possible standards at an international level so that companies in the UK, in an increasingly global and interdependent economy, have the benefit of best-practice standards at an international as well as a national level. In this global and interdependent economy, although the problems on which we are particularly focused have arisen in the United States, the shock waves are felt in stock markets right across the world, and despite the underlying strength of our own economy here in the United Kingdom our own stock market is not immune from those shock waves.
§ Mr. Martin O'Neill (Ochil)
I thank my right hon. Friend for her statement. It is important that we all recognise that the Government are being seen to try and restore a sense of confidence and trust in a profession that has taken, perhaps, an undeserved battering, but a battering none the less in recent months.
On the rotation of auditors, we must also take account of the audit office with only one client. Over-dependence on the one office was part of the problems of Enron, apart from the illegality involved. In Italy, firms are rotated for auditing purposes, but often the staff remain the same, because in a particular location there are not the people to undertake the work. We must be sensitive to the problem. It is not just a matter of partners and senior staff; there must be a more comprehensive look at the issue to avoid that situation.
Lastly, does my right hon. Friend hope to incorporate in the new companies legislation, which has been circulated in draft form, the constructive proposals that will come out of the consultative process? Is it intended that before this time next year, we may have a companies Bill nearing Royal Assent, which will include the very creditable proposals that she made in her statement today?
§ Ms Hewitt
I am grateful to my hon. Friend for those comments. On audit rotation, he is right to draw attention to the practical difficulties, in some cases, and the competition implications of the proposal for compulsory firm rotation. That is why we want to consider that and 1011 have the group consider it in more detail before we make a final decision. In any case, it is very important that commentators do not get fixated on one particular item that is being considered, when there is a package of measures that needs to be considered as a whole, because that is how it will have its effect.
On the companies Bill, the Minister with responsibility for competition, consumers and markets, my hon. Friend the Member for Welwyn Hatfield (Miss Johnson), published the White Paper last week, including 200 or so draft clauses for a future companies Bill. We will, of course, examine closely the responses to that consultation and we will move ahead as speedily as we can to publish further draft clauses for what will be a major piece of law reform—certainly, one of the largest Bills that my Department or probably any other Department will have introduced. My hon. Friend will understand that I cannot pre-empt future Queen's Speeches, but I can say that we are determined to introduce that Bill as soon as we can, and to make that law reform in this Parliament.
§ Mr. David Ruffley (Bury St. Edmunds)
There is much to welcome in the right hon. Lady's statement. She will be aware of the report of the Select Committee on the Treasury this week, and its proposals on audit committees. We proposed that audit committees should be required every five years to consider whether the audit firm should be rotated, and that if the audit committee decided that there should be no such rotation, the reasons for that decision should be made clear to shareholders in a statement. Is the Secretary of State attracted to that proposal, and if not, why not?
§ Ms Hewitt
I am grateful to the hon. Gentleman for his welcome for the statement. He is a long-standing member of the Select Committee. We will want to respond in detail to the Committee's report, which was published yesterday. I noticed in particular the proposal that the audit committee should consider rotation of the audit firm after five years and should report fully on why, if it does not do so, it has chosen not to do so. That seems a helpful and practical suggestion, and I have no doubt that the group will consider it carefully, as we shall.
§ Mr. James Plaskitt (Warwick and Leamington)
I welcome my right hon. Friend's statement, and I am pleased that she has found time to read the Treasury Committee's report, as it has only just become available. We took important evidence from Sir David Tweedie, who chairs the International Accounting Standards Board, especially on the way in which the industry is financed, which is by raising income from companies. He gave examples of companies that have tried to put pressure on accounting firms, because they are paying the fees for the operation. That led us to conclude that an alternative structure for financing the accountancy industry should be examined, and we suggested that it be done on a similar basis to that which applies to the Financial Services Authority. Has my right hon. Friend had time to think about that recommendation?
§ Ms Hewitt
I am grateful to my hon. Friend for those comments. We shall closely consider the Select Committee's proposal. I shall certainly not make a snap judgment on it, any more than I would on its other proposals. The Select Committee drew an analogy with 1012 the FSA. As I said, we will consider the funding arrangements for the Accountancy Foundation as part of the review of the regulatory structure.
§ Mr. William Cash (Stone)
Does the Secretary of State accept that her proposals are greatly welcomed in the round by Conservative Members, but company law reform is a matter of enormous importance for capital markets and for the true value that can be placed by shareholders and others on the public interest. Does she agree that, in reviewing the duties of directors, auditors and others, it is imperative that an arrangement is made in company law to protect those people? They know what is going on inside a company at a given time, and they know in good time what is going wrong. They should be protected and insulated if they whistleblow and tell shareholders or the public in general what is going on. That was the key problem with Enron. Accountancy firms often have an intrinsic interest in the fee structure, and the Secretary of State could reflect on that. Would she be good enough to give me a response?
§ Ms Hewitt
The hon. Gentleman raises an important point. A crucial part of our proposals for company law reform is to spell out in statute the duties of directors. One of the deeply unsatisfactory features of current company law is that it is almost impossible for a non-executive director to find out what his or her legal duties are, because they are buried in several different statutes and in case law. We are also proposing that independent directors should be able to get advice from Companies House about the application of those duties.
On the hon. Gentleman's specific point about how we protect directors who are whistleblowers, we will consider whether the legal protection that we have already put in place for whistleblowers needs to be strengthened through company law.
§ Mr. Tam Dalyell (Linlithgow)
Is it generally true, or is there a soupcon of special pleading in relation to small auditors, that if non-audit services are divorced from auditing, the cost of auditing goes up not marginally but significantly? That problem affects many small companies.
§ Ms Hewitt
I am not sure whether the provision of non-audit services is an issue for small audit firms. It has been raised as a matter of concern in relation to large audit companies that can secure substantial fees for non-audit services to clients for whom they also provide audit services. I am not sure that the same concern applies to small audit firms, which tend to concentrate on purely audit and accountancy services.
§ Adam Price (East Carmarthen and Dinefwr)
The Secretary of State is right to eschew complacency, but does she accept that doubts will persist for as long as the accountancy profession is effectively judge and jury in relation to complaints made against it, meeting behind closed doors so that there is no opportunity for the quality and extent of investigations to be evaluated?
Will the right hon. Lady accompany her rather timid proposals with an undertaking to consider more radical ideas for reform, including the establishment of a fully independent regulatory system, a complete separation of audit and non-audit practice, making the issuing and audit 1013 of defective accounts an offence in law, and the imposing of fines commensurate with the financial costs of malpractice—to be paid to those affected rather than, as is currently the case, to accountancy bodies themselves?
§ Ms Hewitt
I have already made plain our approach to the separation of non-audit from audit services. As for the investigation of complaints and breaches of the disciplinary rules, following the creation of the Accountancy Foundation we have seen a strengthening of the independence of the investigatory system. Nevertheless, I am not satisfied with the present position, which is why I announced this afternoon that we would review the entire regulatory structure. One option that may be considered is a move to the fully independent regulatory system that the hon. Gentleman suggests.
§ David Taylor (North-West Leicestershire)
I draw the House's attention to my entry in the Register of Members' Interests as a member of the Chartered Institute of Public Finance and Accountancy.
May I congratulate my right hon. Friend on her statement, and on the priority she is giving to driving up standards in corporate governance and financial reporting? However, following the remarks of the shadow Secretary of State for Trade and Industry—a preface that I never thought I would use in this place—I think there is a case to answer in relation to the treatment of the private finance initiative and public-private partnerships. I think that the question of the National Audit Office, and that of the international standards of best practice that my right hon. Friend mentioned, need to be re-examined.
Of course it is a bit rich for the Conservatives to talk of something that originated in the dying days of the Major Administration when they had lost control of public borrowing, but—as is made clear in early-day motion 1668—there is great unease in the profession, which fears that this is a device to wipe legitimate Government debts from the Government balance sheet. If we are to have a greater effect on the matters that my right hon. Friend has cited, our own house ought to be clean and clear.
§ Ms Hewitt
Public-private partnerships are not, as my hon. Friend seemed to imply, a way of trying to keep public sector debt off the balance sheet. PPPs are designed to add private finance to infrastructure investment where it is badly needed, and to introduce more innovation in the provision of public services along with better management of, in particular, large-scale infrastructure projects.
Complications arise when it comes to assessing the risk-sharing that takes place in PPPs, but I think we are getting better at that. I entirely endorse the principle of transparency commended by my hon. Friend, which is precisely the principle that my right hon. Friend the Chancellor has adopted.
Increasingly, PPPs are fully reflected on the public-sector balance sheet. The Office for National Statistics, which helps to audit the risks and the accounts, has been placed on an independent footing by the Government.
§ Mr. Andrew Tyrie (Chichester)
I do not think that that will do. Everyone who has looked into the matter 1014 knows that the treatment of the PFI and PPPs in the public accounts is manifestly inadequate. Everyone knows that a number of contingent liabilities should almost certainly score in the accounts, but they do not. Following the many letters of comfort that have already been written, surely some value should be placed on them and they should score above the line, as they would in many cases in the private sector. When I raised this matter with the Chancellor, he said "We are following best private-sector practice." The obvious rejoinder was "We have just had some Enron economics."
In every other respect, unfortunately, I rather agree with what the Secretary of State has said. I thought her statement excellent, and I feel able to support it. My only question is this: a number of the proposals will involve a substantial increase in the compliance burden on firms so when the proposals are presented, will the Government publish a rigorous assessment of the full compliance burden?
§ Ms Hewitt
I simply do not accept the hon. Gentleman's remarks about the standards of public accounting. The fact is that we are one of the very few countries that fully comply with the international, generally accepted accounting practice standards for public-private partnerships. We are following international standards and international best practice in that respect.
On the hon. Gentleman's other point, which was rather more relevant to my statement, we are looking and will look carefully at the compliance costs. But I repeat what I said in my statement, and I hope that he will accept it: a more robust regulatory framework and a system of financial reporting in which people can have full confidence is hugely to the benefit of our businesses, our investors and our capital markets alike.
§ Mr. Mark Lazarowicz (Edinburgh, North and Leith)
I particularly welcome what my right hon. Friend said about strengthening the rules on the consultancy work that auditors can undertake, at least in the case of larger companies. I urge her to give guidance to the working group to make those rules as strong as possible and to move to a position where the general rule is that auditors should not carry out consultancy work for the firms for which they carry out an audit. Does she accept that there will always be a problem with public confidence and a risk of conflict of interest when an accountancy firm receives large fees from a company to act as an auditor while receiving fees for non-audit services whose very continuation depends on the audit wing of the firm giving the company a clean bill of health?
§ Ms Hewitt
My hon. Friend makes an important point. Some principles are already in place, in particular the rule that auditors should not make management decisions or audit their own work, but I think that the group's approach is sensible. It will look at a much more careful definition of the kind of non-audit services that it would not be acceptable for auditors to provide—those that do not cause any threat to the independence of the audit and those that may be acceptable but only with proper safeguards. A more careful analysis of the different kinds of non-audit services that may be provided by audit firms will provide the basis for much better and more transparent decision making in the sector.
§ Mr. Michael Moore (Tweeddale, Ettrick and Lauderdale)
As a chartered accountant who qualified through the Institute of Chartered Accountants in Scotland, I support the proposals in so far as they are set out here today. Does the Secretary of State agree that regulation of the profession is the key to restoring public confidence in financial statements? Does she accept that the current situation is a mish-mash—not even the accountancy bodies and professionals understand how it operates—and that until we have Government-sponsored regulation, the confidence of those who use accounts will not be regained?
§ Ms Hewitt
I agree with the hon. Gentleman that the current situation is pretty complicated. That is one reason why we are taking a fresh look at the whole structure of the professional oversight of accountancy, the regulatory framework and the oversight of that regulatory framework. I am not particularly attracted by the idea of the Government becoming, presumably, the sole supplier of audit regulation, but we will look at that as part of the review of the regulatory framework that I have announced this afternoon.
§ Mr. Jonathan Djanogly (Huntingdon)
Will the proposals to have only independent non-executive directors on audit committees apply only to companies on the full list of the stock exchange? Generally speaking, I am concerned about the consultation period, in so far as it looks as though the proposals are being to some extent bundled up with the companies Bill. That Bill was sent out for consultation for several years and I am sure that it will be a lot better because of that. There is concern that the time in which these complicated issues will have to be reviewed by the profession and by other stakeholders will not be adequate.
§ Ms Hewitt
Obviously, the proposals relating to audit committees will apply only to those firms that have to have audit committees, and clearly that does not include every firm.
On the speed of decision making, as I have said before, we should not rush into knee-jerk reactions to a problem that has arisen in the United States, where there is a somewhat different framework. At the same time, it is important that we build on the work already done—in some cases, over a significant period—by the various existing regulatory and professional bodies. Where there is a clear recommendation from our co-ordinating group that action is desirable, we should take it. The measures that I announced this afternoon fit well within the much broader framework of company law reform that we are pursuing, and which was preceded by extensive consultation.
§ Mr. Jonathan Sayeed (Mid-Bedfordshire)
Some have suggested that a WorldCom or an Enron could never happen here. It is instructive to note that the further away the proponents of that proposition were from the City of London or from company management, the more certain they were of it. I am less sanguine. Does the Secretary of State accept that accountancy standards bodies should look at the treatment of goodwill and capital asset valuation, particularly by those companies that have grown through multiple acquisitions?
1016 Does the Secretary of State understand that an accountancy firm acting as an auditor has a principal responsibility to the shareholder, whereas an accountancy firm acting as a consultant has a responsibility to the company and its directors? As the interests of directors and shareholders often diverge, I am disappointed that she has not made rather more clear the view that there should be a separation of those two provisions.
§ Ms Hewitt
I agree with the hon. Gentleman's first point—we certainly should not be complacent about the situation here. We are not, and that is why we are taking the action and commissioning the further work that I announced this afternoon.
The issue of how goodwill and capital assets are valued has not so far been raised in the reviews, but I am certainly happy to look further at it. On audit and non-audit services, it is precisely the different interests and responsibilities, and the conflicts that can arise between them, that give rise to people's concerns about the fact that audit companies are making so much money from selling non-audit services to their audit clients. There are arguments on both sides of this complicated issue. Not every non-audit service necessarily raises a conflict of interest with the provision of audit services as well. That is why we have asked the group to look at the matter in more detail and take further evidence before we make a final judgment on whether there should be tougher regulation.
§ Mr. George Osborne (Tatton)
Further to the question raised by my hon. Friend the Member for Chichester (Mr. Tyrie), does the Secretary of State agree that the Government should lead by example on transparency of audit? Is she aware that the National Audit Office and the Public Accounts Committee, on which the Financial Secretary sits, are both very concerned about the fact that Network Rail's huge liabilities do not appear on the Treasury's books? When it comes to stamping out Enron-style accounting, should not the Government practise what they preach?
§ Mr. David Laws (Yeovil)
Does the Secretary of State accept that, contrary to the impression given in the press and in her statement today, the Treasury Committee came out in favour not of mandatory rotation of audit firms, but of the principle of rotation, saying that the decision should be left to strengthened audit committees? Is that not precisely the sort of third-way solution that should appeal to the Government and to her?
§ Ms Hewitt
Of course it is already open to audit committees to choose to rotate audit firms but, as I said, there are strong views for and against mandatory rotation of audit firms. There is, on the one hand, a suggestion that some of the worst problems arise in the early years of a new auditor; on the other, there is the assertion that one finds what is going wrong with a new auditor or financial director.
1017 It would be sensible for us, through the co-ordinating group, to look at the evidence more fully before judging whether to make the rotation of audit firms mandatory as well as the rotation of audit partners and senior audit teams, on which we have already decided.