§ 5.16 p.m.
§ Lord Plowden rose to ask Her Majesty's Government whether they agree with the conclusions of the Report of the European Communities Committee on Group Accounts (18th Report, 1981–82, H.L. 215) and what has been the progress made in the Council of Ministers.
§ The noble Lord said: My Lords, I beg to ask the Question standing in my name on the Order Paper. This is the second report from the Select Committee on the subject of the proposed Seventh Company Law Directive on Group Accounts. The previous report appeared in 1977 and since then the draft directive has been much revised, and in the view of the Select Committee for the better. The report which we are discussing comments on the draft directive as it now stands. The basic objective of the draft directive is to lay down the framework for the preparation and publication of consolidated accounts which present a true and fair view of the business of groups of undertakings within the Community. Progress within the Community has been slow. Outside the Community general agreement has been reached on the method of presenting group accounts. Agreement has been reached in the United States, Canada, a number of Commonwealth countries and the United Kingdom. It is most desirable that harmonisation within the Community should be broadly in line with the wider international agreements already reached. Further, it is most desirable that swifter progress be made within the Community.
§ The draft directive first appeared in June 1976. The elimination of non-tariff barriers, of which differences in national company law requirements are an example, is an important and essential step in operating a single or a common market. The need for this draft directive stems from this basic objective of creating a unified or common market throughout the Community, something which is much in the interests of this country.
An essential part of the draft directive is the definition of a group. The definition originally proposed by the Commission, which had an economic basis, would have introduced a fundamentally new concept into United Kingdom law. It was based on questions of fact which would have been matters of subjective judgment, and this without doubt would have led to great uncertainty. It was, therefore, contentious. The previous report said:
Economic definition is undoubtedly the most contentious issue in the draft directive".
§ The revised directive has now adopted a legal basis for defining a group, and this legal basis is similar to that used in this country for defining a group. It is indeed a most welcome improvement.
§ The revised directive contains six definitions of a group. Four of them are to be compulsory and two are to be optional. The Select Committee examined these various definitions. The compulsory definitions are, first, control of a majority of the voting power; second, membership of the undertaking plus control of the board's composition; third, acceptance by a dependent company of management by the controlling enterprise—that is, controlled contracts as are found in West Germany; and, fourth, control of 20 per cent. of the voting rights plus de facto appointment of the board.
§ The committee believes that the first two definitions are satisfactory and in some respects improve on the law of this country. It believes that the "controlled contract" definition is almost certainly too wide and likely to lead to confusion. It should either be deleted or at least made optional. The committee considers that the definition based on control of 20 per cent. of the voting rights plus de facto appointment of the board is unacceptable. The way to deal with this is by equity accounting.
§ The directive has a large number of optional provisions, only some of which, in the view of the committee, are necessary and useful. If individual member states are permitted to adopt alternative definitions or concepts it will defeat the purpose of the draft directive. In particular, multinational organisations would be faced with great difficulty in conforming to the different requirements of the national laws implementing the directive. But there is one useful optional provision, which is to permit member states to limit the scope of the term "parent undertaking" to limited companies. At present the scope of the draft directive is not confined to limited companies. Indeed, it is arguable whether the scope is such even to extend to a single trader or individual carrying on business. The committee's view is that the scope should not be so extensive as to require consolidated accounts of groups headed by undertakings other than limited companies.
§ Sub-Committee A was most fortunate in having the noble Lord, Lord Benson, as a member. He probably knows as much about group accounts as almost anyone in this country, or more. He will be able to speak with much better authority than I can on this draft directive. I therefore end by repeating that speedy agreement on the lines proposed by the committee is of great importance to the business community of this country.
§ 5.23 p.m.
§ Lord Benson
My Lords, this is a dull technical subject. It is, nevertheless, of great importance to the industrial and commercial community and to anyone who is connected with the investment of funds.
In 1978 Brussels issued the Fourth Directive. That was concerned only with the way accounts of individual companies should be prepared. But every business of any size usually has one or more subsidiary companies to carry on different parts of the business.
153 Sometimes the subsidiary companies are numbered in single figures, sometimes in scores and often in hundreds. The purpose of consolidated or group accounts—the term is interchangeable—is to present the accounts of the whole enterprise as though it was a single undertaking. Only in that way is it possible to comprehend the financial position of the group. The Fourth Directive did not go into the question of consolidated or group accounts at all, and the Seventh Directive now before us, which has undergone many changes, now seeks to do so.
Since the Companies Act 1948 this country has produced consolidated accounts and the same practice has been adopted, as the noble Lord, Lord Plowden, pointed out, in America, Canada and many other countries. What is of crucial importance—and it is strongly emphasised in the report—is that the provisions of the Seventh Directive should not be far out of line with what has already been adopted in this country and elsewhere for so many years, otherwise Europe will find itself, so to speak, in the position of being the only man in the battalion who is out of step.
The Seventh Directive has already undergone a number of changes, but, if the provisions of the report are acceptable to your Lordships and to Brussels, it will comply in broad outline with the arrangements which have existed for so many years, here and elsewhere.
The Committee's conclusions are given at the end of the report, and it may be helpful to the House if I summarise in non-technical language what they comprise. There are eight in number. The first is the question of what is a group and how it is to be defined. As the noble Lord, Lord Plowden, pointed out, we have come down firmly in favour of the proposal that it should be defined by legal control. That is to say, where a company has a shareholding in another company which gives it more than 50 per cent. of the voting power, or where a company has a shareholding in another company with power to appoint the majority of the board, in those cases consolidation should be compulsory. All other definitions should, in the opinion of the Committee, be abandoned, or made optional only in a particular member state. I shall come back to the question of options later.
The second proposal relates to the parent concern at the top. Every group has to have a parent concern at the top, and the report's proposal is that compulsory consolidation should be necessary only where the parent concern at the top is a limited company. In other words, there will be no need to produce consolidated accounts if the concern at the top is a private individual or a private partnership firm.
The third recommendation relates to size. The Committee believes that in all cases consolidation should take place except in those limited cases where the size of the concern is so small as to be unimportant. There has been much debate as to what the threshold should be, but the Committee believes that the right threshold is the small company definition already enshrined in the Fourth Directive.
The fourth recommendation proposes that in each member state consolidated accounts should be produced where there is a parent company and subsidiaries, and that this should take place even 154 though the parent company in a member state is the subsidiary of a company outside the member state. There is only one condition, or reservation, to that proposal. If the parent company in a member state has children and grandchildren companies, provided the children companies are wholly owned by the parent they need not produce consolidated accounts. In short, intermediate consolidations within a member state are unnecessary.
The fifth recommendation relates to options. The Seventh Directive is sprinkled all over with options. In effect, the committee proposes that options should not be granted; they should be abandoned in all possible ways. The reason for that is fairly obvious, but if it is necessary to produce consolidated accounts by compulsion in all member states it means that every member state that wishes to take advantage of an option will have to produce an additional set of accounts for each option it exercises. This will be extremely confusing to the business community. I repeat, for that reason the committee urges that options should be done away with.
The sixth recommendation is to ensure that, if certain companies are excluded from consolidation—and there are valid reasons sometimes, though on rare occasions, when companies should be excluded from consolidation—there should be full and proper disclosure about all the companies excluded. The object of that is to prevent misrepresentation and distortion in the group accounts which are published.
The seventh recommendation is to suggest that certain techniques which have been forged by hard experience all over the world where consolidated accounts are produced, should be followed in the Seventh Directive. These are of a highly technical character, mostly concerned with the way in which assets and liabilities are valued. I do not think that it is necessary to trouble the House with the detailed specifications of those technical items. I think it is enough to leave it there and merely to say that we recommend that hard experience should be incorporated in the Seventh Directive.
The eighth and final recommendation of any importance relates to what are called "associated companies". If a parent company holds a substantial shareholding in another company, not making it a subsidiary but nevertheless holding a substantial shareholding—let us say, for example 20 per cent.—and the parent company exercises influence on the financial and operating policies of that associated company, then it is proposed, as happens all over the world at present, that that associated company should be dealt with for the purpose of consolidated accounts by the system of what is called "equity" accounting. That is merely a technical term, but what it provides is that the net assets and the net profits and losses of those associated companies shall be individually disclosed in the consolidated accounts so that everybody knows what is happening.
In short, that is what the report is all about. We have had great support from the department of Government concerned, from the accountancy profession and from many others. I hope that your Lordships will be willing to smile upon the proposals, because they will be a good step forward in the accounting arrangements in the Common Market.
§ 5.35 p.m.
§ Lord Hirshfield
My Lords, at the best of times it is a challenging experience for me to follow two such eminent noble Lords as the noble Lord, Lord Plowden, and the noble Lord, Lord Benson, more especially since both of them have been leading members of the Select Committee which has produced this report, and therefore must know a great deal more about it than I can hope to know at short notice.
I believe it is appropriate at the outset of my contribution to this discussion in your Lordships' House upon the Unstarred Question placed on the Order Paper by the noble Lord, Lord Plowden, that I declare a professional interest in the subject of group accounts. I happen to be president and chief executive officer of Horwath & Horwath International, a world-wide organisation of nationally independent accounting and consulting firms practising in nearly 70 countries around the world. It is thought now to be among the world's largest accounting groups.
Last July the international accounting and auditing committee of my organisation issued a press release in which it urged the world-wide membership to intervene with local accounting standards-setting bodies to encourage a more realistic and simpler approach to financial reporting. The release covered two subjects: current cost accounting, and what has become known as "accounting standards overload". The first subject is unconnected with the Question of the noble Lord, Lord Plowden, but the release asserted that the accounting standards overload has created a cause for national concern by both large and small companies. I hope your Lordships will allow me to quote somewhat briefly from the press release to which I have referred. It said:Dissatisfaction resulting from the problem (the accounting standards overload) permeates the entire business and financial community, creating disillusionment, a diminution in support for standards-setting bodies and an increase in failures to comply with generally accepted accounting principles.The financial statements of a small or closely held business, like its big counterparts, should present its financial position and results of operations on a meaningful and fair basis that will satisfy the needs of the users of such financial statements. It is universally acknowledged, however, that two criteria should be paramount in the standards-setting process: relevance, as measured by the needs of the statement users, and cost-benefit considerations in the development of the information. The small and medium-sized companies operate in an entirely different environment from large public and multinational companies.It should be acknowledged internationally, and by the accounting profession in particular, that generally accepted accounting principles do not necessarily have to be applied uniformly by all businesses. Differences in required principles for small enterprises, arising from considerations of relevance and cost-effectiveness, should be recognised and implemented. Appropriately selected, these differences would not adversely affect the usefulness of the resulting financial presentations.The committee believes that one broad set of accounting principles with selected exemptions for small or closely held businesses can solve these growing and increasingly expensive problems of business and the accounting profession".Before addressing your Lordships' House, I have consulted the chairman of the committee that issued the release from which I have been quoting. He is David Cairns, a partner in Stoy Hayward & Co., the United Kingdom partner firm in the international organisation to which I have referred. He is also a joint editor of two important Financial Times surveys of the 156 reports and accounts of the major European and international companies.
I congratulate the Select Committee upon carrying out the very considerable and detailed deliberations which were necessary for producing the report on group accounts. But I should now like to concentrate on one aspect of the EEC's Seventh Draft Company Law Directive on Group Accounts. Article 6 empowers member states to grant complete exemption from the application of the directive to small groups. I believe that this is entirely desirable. I am, therefore, concerned that the Select Committee appears reluctant to accept exemptions. In paragraph 12 of the report it urges that exemption limits be kept low so as to ensure that shareholders and creditors concerned with smaller groups are kept informed and protected.
In my judgment, the Select Committee has failed to realise that in many small companies the owners—that is, the shareholders—and the management are the same group of people. They are all aware, from their involvement in the day-to-day running of the business, of the company's fortunes and prospects. They do not need accountants charging expensive fees to produce information that they know they do not need but which the bureaucrats of Brussels and Whitehall think they do. Let us stand up for the small businessman and allow him if he wishes to take advantage of the maximum possible exemptions from requirements which give him no benefit.
In this country, in my submission, we have already made a big mistake in requiring all companies to comply with the detailed requirements of the Fourth Directive dealing with the layout, accounting rules and contents of the annual report and accounts, which were later embodied in the Companies Act 1981. We had the opportunity to reduce the legislative burden by exempting medium and small businesses from preparing extensive sets of accounts and a directors' report. The only exemption we gave them was in filing the information with the Registrar of Companies. That achieved nothing. All the information has to be prepared in the proper form and audited, and only then can it be edited for sending to the Registrar.
A number of practising accountants have expressed to me the opinion that the Fourth Directive requirements contained in the Companies Act 1981 are a farce. They are required to prepare for their clients masses of information which their clients do not want, the Registrar does not want, the Inland Revenue does not need, and very few loan creditors want. Why do they have to do it? It is because the Government decided that their clients—the owners and managers of these small and medium sized businesses—might suffer if they did not have it.
The Select Committee's report is pushing in the same direction on the Seventh Directive. It is saying that exemptions should be restricted so far as possible; it is telling the owners and managers of medium and small businesses that they need this information for their own good; it is ignoring their pleas that they do not need it, and that it is of no use to them in running their businesses. I believe that we should seek the maximum possible exemptions for these owner-managed businesses. We should ensure that the 157 Seventh Directive permits it, and we should amend the Companies Act 1981 to put right the wrongs that we have already done.
§ 5.45 p.m.
§ Lord O'Brien of Lothbury
My Lords, the noble Lord, Lord Benson, has said that this is a dull and technical subject, as indeed is the case. Nevertheless, company accounts and group accounts enshrine some of the great dramas of human existence—the success or failure of commercial and industrial enterprise. They are, therefore, exceedingly important. In my lifetime I have come across companies—large and small—many of which have produced admirable products, but because the financial side did not add up, they have run into trouble. Therefore, company accounts and what they reveal are important not only to those who prepare them, but to their shareholders and, indeed, to the rest of us.
I am sorry that the noble Lord, Lord Hirshfield, thinks that the Select Committee, in being rather strict about the exemptions from the requirements of the Seventh Directive, has made a mistake. I wonder whether smaller businessmen always know what is good for them, and I think that keeping accounts under strict provisions is probably good rather than bad.
As a Member of Sub-Committee A, I felt it incumbent upon myself to give support to the noble Lords, Lord Plowden and Lord Benson, on whom the great burden of the work has largely fallen, in commending this report to your Lordships. I did so in the certain knowledge that I would be speaking after them in this debate and that therefore they would have said all that I could possibly say on the subject. I should only like to say that I believe it is important that the Seventh Directive should soon come into being. Its gestation has taken place over many years. It is true that in that long period opportunities have been taken to correct misconceptions at the beginning, so that the directive now in draft is certainly very much better than it was when it started. I believe that it will be still further improved if account is taken of the recommendations made in the Select Committee's report. I also believe that it is to everyone's advantage that practice within the Community, which falls rather short of that in the United Kingdom and in a number of countries outside the Community, should be harmonised with those countries where the better practice exists. Therefore, I hope I may ask that your Lordships will accept this report.
§ 5.48 p.m.
§ Lord Chorley
My Lords, I am sure that all sides of the House will welcome the Report of the Select Committee on Group Accounts, and the United Kingdom legislature is, indeed, fortunate in being able to bring such really expert authority to its scrutiny of technical and complex proposals, such as the proposed Seventh Directive. I know, too, that the accountancy profession in this country will welcome the conclusions reached by the Committee.
At the same time, I should like to recognise and commend the work of our officials and of my fellows in the accountancy profession—and I have in mind 158 here particularly the members of the Company Law Sub-committee of the CCAB—and those in Brussels in their efforts to harmonise Community company law and, in the process, to upgrade the law in member states. Their task is a particularly thankless and tedious one requiring, I should imagine, a considerable exercise of persuasion and also of patience.
If one compares the draft of the directive, which was examined by the Committee, with the original proposals, it is evident that considerable progress has been made. It may have taken many years to get to where we are, but at least we have a document which now makes much better sense. As several noble Lords have said, this is pretty arid stuff, but it is still of the utmost importance. Apart from anything else, I do not believe that the Fourth Directive would be particularly effective if the Seventh Directive does not proceed.
Company law on group accounts in a number of member states, as has been pointed out, is most unsatisfactory. According to my reckoning in five member states there is no requirement for consolidated accounts while in one member state only domestic operations require to be consolidated. A few years ago the Financial Times carried out a survey, and while that showed that the majority of the largest companies in the Community published consolidated accounts of their operations, there were certainly some significant companies which did not. Beyond that there must be hundreds, if not thousands, of companies in respect of whom there must be an even larger number of investors and creditors who have to rely on unconsolidated statements.
In short, the law in parts of the Community lags far behind its economic and commercial development, and lags far behind the development in not just other Western countries such as the USA, Canada, and the Commonwealth countries that have been referred to, and not just Japan, which I believe has now gone over to consolidated accounts, but also many less developed countries. It would be an appropriate moment here to record the lead given by my old friend the noble Lord, Lord Benson, in the formation of the International Accounting Standards Committee 10 years ago.
I think that most of the points have already been made. I should just like to touch on one or two. As the noble Lord, Lord Plowden, reminded us, the draft is now largely based on legal definitions rather than economic definitions, but elsewhere, as is described in paragraphs 7 and 8 of the report, and as the noble Lord, Lord Benson, reminded us, additional definitions which are economic definitions have crept in as optional alternatives. These, in my view, are unsatisfactory because they are out of line with the wider generally accepted principles. They are unsatisfactory because, far from providing a framework for a common approach, they serve to perpetuate existing differences; and they are unsatisfactory because they will end up in a confusion of both legal and economic definitions.
One can understand that some member states may wish to maintain their existing approach. But in that case the remedy is simple: two sets of consolidated accounts, as explained in paragraph 16 of the report. It is difficult to see how a member state could object to 159 this simple but important suggestion. The noble Lord, Lord Plowden, dealt with the unsatisfactory features of the quasi associated company compulsory definition of Article 6(1) (d) and I do not propose to go any further on that. As the report says, the right way is by equity accounting.
My third point—and here I disagree with the noble Lord, Lord Hirshfield, on the question of size—is that I have always regarded limited liability as being a privilege. If creditors can be obscured—that is to say, creditors are unable to find the position about what is a single undertaking because subsidiary unconsolidated accounts are dotted around—that is a bad thing. Personally I should prefer to have gone the whole hog and had compulsory consolidation right down to the bottom, but I recognise the practicalities of the situation, and I think therefore that what the Committee has suggested makes sense.
My fourth point—again I am rather repeating the noble Lord, Lord Benson, but I do so rather deliberately—is on the question of the techniques of consolidation which are referred to in paragraph 18. There is perhaps a danger that we may lose sight of these important points in discussing the rather wider issues of definitions of what is a group and what is not. If the draft, as I understand it, goes ahead, it would appear to mean that techniques which are commercially important in this country might be prohibited. That would be rather serious.
The particular points that I have mentioned are ones of detail, and in some cases of essential detail, and a few amendments will put the directive right. I very much hope therefore that 1983 will see the conclusion of this understandably long, drawn-out process, and then the directive will have made a major step forward. But there is one further reason for wishing to finalise the directive in that it will enable us in the United Kingdom to move on to the drafting of consolidated companies' legislation. That, in my opinion, is now becoming increasingly urgent.
§ 5.57 p.m.
§ Lord Seebohm
My Lords, as the evening goes on there is less and less for me to say. I should like first to express my thanks to the noble Lord, Lord Benson, not only for having explained so clearly to your Lordships' House what the main points of the directive are, but also for the part he took in the final drafting of the report itself. I find that it is now actually comprehensible. As has been said, the object of group accounts is to give creditors, shareholders and employees as reasonable a picture as possible of the financial state and profitability of the undertaking. This is where I cross swords with the noble Lord, Lord Hirshfield, who seemed to think that the shareholders were the only people interested, whereas as an ex-banker I would say that the creditors and the employees are equally important. As a banker, I would say that the creditors are the most important.
I use the word "reasonable" because I have found that it is difficult to give valuations that are not of a subjective nature to a great number of the assets of any group. Having been chairman for some years of a group that has about 16 subsidiary and associated 160 companies, I think perhaps I may just spend a couple of minutes describing some of the difficulties that I have encountered. As most of the companies were overseas there were difficulties in different accountancy practices and also in balance sheet dates. This latter problem was quite serious as much could happen in three to six months which could alter the picture. In theory a balance sheet is a "still". Everything should be valued and profits settled on that particular date. But in dealing with companies with different balance sheet dates this can only be partially true. This can normally be put right with subsidiary companies, and a lot of things can be put right either in notes or in the chairman's statement, if necessary. This is what I think used to happen.
A further complication arose in deciding how much weight one ought to give to such things as exchange controls and dividend limitation. Should one, for instance, exclude from the balance sheet profits and current reserves which one knows could not be remitted? Rhodesia during the UDI period was an example, and so was Ghana when the balance of payments position and an unrealistic exchange rate made the figures highly dubious.
My real worry however has always been, and still is now, how to deal with associated companies where one may have de facto management control but not de jure control. Your Lordships will be aware that in the latter case assets may be moved from one company to another at will, and therefore the line-by-line system of drawing up the accounts is quite appropriate. In all other cases it is certainly not appropriate and is often actually misleading. Most companies to this day show in their profit and loss account the full proportion of the associated companies' profits although they have no control over their distribution.
I therefore strongly support the move to equity accounting, as recommended in the report, for any so-called subsidiary that is not a de jure subsidiary, and would go further and insist that the profit and loss account and statement of earnings per share should include only dividends actually remitted. My responsibility was to ensure that any dividend declared by the group was well covered by cash actually received, even though they were available in the currency of the country of origin. This form of equity accounting, which places the associated company in virtually the same category as a portfolio investment, gives the interested parties a much more accurate idea of the true liquidity of the holding company.
To turn to other matters, I strongly hope that no articles in the directive will disturb the general agreement that has been reached, after a tremendous effort, with the United States. Canada and the Commonwealth countries. This has been a major achievement and must not be upset. I also believe that small companies, who certainly need some exemptions, should be defined as in the Fourth Directive; different definitions in different parts of EEC legislation would be chaotic. Finally, I hope the Government will press hard for the committee's recommendations to be accepted.
§ 6.1 p.m.
§ Lord Diamond
My Lords, I apologise for the fact that my name does not appear among the list of 161 speakers. It was omitted through a mistake for which I offer the House my apologies. I am anxious to speak, albeit briefly at this stage of the debate, because, while I was not a member of the committee, I feel it right that non-members of the committee should express their views of the committee's work. I wish to express my wholehearted congratulations on the work of the committee and on the way in which the noble Lord, Lord Plowden, introduced his report.
It is an excellent report, which I have read with care and interest, and I hope I have digested it fully. It is a great improvement on the previous suggestions which were made and, in my view, it is not a technical matter at all. It is, indeed, a most important part of the harmonisation which is an essential element in creating what is the main purpose of the EEC, a common market. Without group accounts, you cannot move satisfactorily towards a real common market, and I am anxious to speak on the subject in purely non-technical terms.
I support it and hope that it will soon find agreement in the Community and become effective, having regard to the time that has already elapsed. I endorse practically every conclusion reached by the committee, and shortly I shall comment on the remarks of the noble Lord, Lord Hirshfield, with a slight difference of emphasis. I listened carefully to the remarks of the noble Lord, Lord Benson, who is a world authority on this matter. I had previously taken the view that options should not merely be discouraged but eliminated, and I was glad to hear Lord Benson making comments very much towards that end. I therefore could not understand completely—no doubt the fault is mine—why, in one conclusion, the committee considered that,either a certain provision ought to be deleted or at least made optional".I do not feel that the making of one option is an appropriate way of dealing with an attempt to get group accounts which will be really meaningful and on which all can satisfactorily depend; and, if I may say so, to introduce a discordant note is to make the whole thing discordant. Therefore, I should want to see as far as possible that all were acting under the same clear definitions so that one could compare like with like by seeing one set of group accounts and comparing it with another set.
This is clearly going contrary to the line which the noble Lord, Lord Hirshfield, was taking. He speaks with great authority on the subject, as he explained, but I was not able completely to follow him in his defence of the small man. Of course we all want to help the small man and we do not want to subject him to unnecessary accountancy charges, especially as it is a long time since I ceased to practise as an accountant. But the real difficulty I have with the remarks of the noble Lord, Lord Hirshfield, is to understand how a man who wants to run his own show nevertheless wants a structure which consists not only of one company but of a group of companies, parent and subsidiary companies and so on. How small a man can he be that he should find it necessary to adopt a structure of that kind? I should find it very difficult indeed to imagine the kind of small man, small business—which we all want to help and rid of difficulties—carrying on under such a structure, 162 whereas for the middle man—the man who finds it necessary to have a structure of that kind—it would be healthy for him, for his creditors and for his bankers, from whom, no doubt, he would want to get facilities and for whom he would have to produce group accounts.
That is all I have to say on the matter. Everything has been said, and well said, and I wish all speed—the Minister who is to reply is an expert on speed; the noble Lord, Lord Lyell, is one of the fastest people I have ever come across going downhill—to the conclusion of agreement on this directive.
§ 6.6 p.m.
Lord Bruce of Donington
My Lords, the House will be grateful to the noble Lord, Lord Plowden, for initiating the debate and will be grateful once again to Sub-Committee A for having drawn up such an excellent report. The report must, of course, be taken as a sequel to Report No. 118, printed on 23rd March 1977, the 25th Report on Group Accounts.
It is perhaps necessary to say in this day and age that the Select Committee entrusted with the task has done your Lordships' House a great service. It is not generally realised outside the Palace of Westminster what detailed work goes into the preparation of these documents and how much time the members of such a committee spend reading very complicated documents—most EEC directives are complicated, anyway—and examining witnesses who appear before them, and the time they give to formulating the whole body of the report in conjunction with their chairman and the committee clerk and his staff. The world outside this place does not always know that, and the valuable function performed for the whole of the body politic by the activities of committees of your Lordships' House cannot be too strongly emphasised. This one is no exception, and I endorse in every way the remarks of the noble Lord, Lord Plowden, on the matter.
I would draw your Lordships' attention to Article 26 of the draft directive, which says:Member States shall, within 18 months of notification of this Directive, make all the amendments to their laws, regulations and administrative provisions necessary to comply with the provisions of this Directive, and shall forthwith inform the Commission thereof. They shall bring such amendments into force within 30 months of the notification of this Directive".In the light of that article, I was particularly struck by the contribution of the noble Lord, Lord Chorley, who very rightly drew your Lordships' attention to the necessity for speedy consolidation of the various Companies Acts, including two that have passed through your Lordships' House during the current Parliament. One question that I have to ask the noble Lord, Lord Lyell—who I am pleased to see is to reply to the debate—is how long does he think it will take for the necessary legislation to be brought before your Lordships' House, and is it the intention to postpone consolidation until after the legislation which requires us to comply with the Seventh Directive comes into operation? Timing now becomes important, and I venture to suggest to the noble Lord—though I would not commit him to anything that I would say—that, if the Seventh Directive is to take a long time to be enacted in detail in the British Parliament, it would be 163 preferable to press ahead with consolidation without further delay. But opinions on that might differ.
It will not be necessary for me to go through any of the parts of the committee's report that have been dealt with by the noble Lord, Lord Benson. I find myself in complete agreement with him, which is not unusual when matters of accounts are concerned. He has been truly described as a world authority on the subject—I indeed am not—and I am only happy to say that I agree entirely with his approach to it.
I think that the noble Lord must have been reassured by the fact—though, somewhat modestly, he did not mention it—that at last in an EEC directive there appear the words "true and fair". On the continent of Europe the "true and fair view" has been very difficult to establish. It has taken years for the Continental accounting profession, and indeed the EEC itself, to accept the full rigours of what over the last 100 years or more we in this country have emphasised: the necessity for accounts to show a true and fair view. In general terms, and without becoming at all technical, I would say that this is really what the proposals for the consolidation of group accounts are for. They are intended to provide that, when companies have subsidiary or associated companies, or have other companies under their control, an account should be prepared in consolidation showing a true and fair view of the activities of the group as a whole.
That information is necessary not only from the point of view of the shareholders of the company, and in particular the shareholders of the parent company, if it is a public company; it is vital for those who advance money to the group or its subsidiaries. We are living in an era—I shall not expatiate on any of the political overtones of it, because this is not the time to do so—when large sections of industry, not only in this country but elsewhere, are in very heavy debt to the banks. I can quite understand the observations of the noble Lord, Lord O'Brien of Lothbury, when he spoke as a banker; it is necessary that the advancers of money to companies shall be able to obtain correct and balanced accounting information that complies not only with the Companies Act 1948, but also with a standard method of group accounting consolidation.
I, too, found myself in some slight disagreement with my colleague, the noble Lord, Lord Hirshfield. I hope that I have not misunderstood him, and I should be the last person to seek to misrepresent him, but he seemed to ask for even greater exemptions for small and medium-size businesses. I hope that I am not being unfair to the noble Lord, but at one point I wondered whether he really thought that companies ought to keep books at all. The whole purpose of keeping books, and of complying with the sections of the Companies Act 1948 that prescribe the particulars that shall be entered in the books of accounts, is precisely to ensure that the state of affairs of the company shall be established—and not only for tax purposes; though, in the case of a small or medium-size business, that is of consuming importance to the owners, in particular if the company is a small, private company. The purpose is also to enable the management of the company itself to know the aggregate result of the various revenue and capital transactions 164 so as to be able to form an objective view of what the future cash flow is likely to be. Further, the purpose is to enable the management to peer more into the future, to enable it to have a more accurate assessment of costs, and to see how costs can be saved.
I should not want to tax the House too much with my own personal experience of these matters as a practising accountant, but I am bound to say in reply to the noble Lord, Lord Hirshfield, that with a very large proportion of the small and medium-sized companies that go into liquidation, or fail the test, one of the main causes of failure has been the fact that the accounts have not been kept up to date and a correct picture has not been presented to the owners. So, although I am in very considerable sympathy with exempting small companies from unduly onerous requirements which could perhaps legitimately be said to be a mere bureaucratic interference, I for one should not wish to lower the accounting standards of small and medium-sized businesses. In fact I should seek to ensure that the standards are improved, because I am quite sure that the possession by the owners of small firms of accurate accounting information is a very substantial ingredient towards in some cases their survival, but in all cases their continued success.
I envisage some difficulty in translating the Seventh Directive into British law. I seek your Lordships' indulgence by asking you to think back to the experiences that we had when dealing with the 1981 Companies Bill and seeking to translate the Fourth Directive into legislation. At the time it was the Government's view that the whole matter was comparatively simple. Indeed, the advice that the noble Lord and his noble friend were receiving from the Box behind them—presumably at the behest of parliamentary counsel—was that the first draft of the Companies Bill 1981 was more or less inviolable and could not be improved upon. In fact, your Lordships will remember the very strenuous efforts that were made to interpret and to improve the Bill, and which were, I am afraid, to a large extent resisted by the Government.
I therefore hope that when this legislation in support of the directive comes before your Lordships' House we may perhaps be met by a slightly more open mind this time, so that when suggestions and amendments come from all sides of your Lordships' Committee—from industrialists, accountants and lawyers of very considerable experience—the Government will perhaps pay a little more attention to them than was paid in the case of the 1981 Bill. Because the noble Lord is himself a distinguished accountant, he must know that the view of the 1981 Act which is held in the profession—and not only in the accountancy profession—tends to give it the "thumbs down" rather than enthusiastic support.
I will not detain the House any longer except to thank, on behalf of the Opposition, all those noble Lords who have taken part in this debate. We are very much indebted to all the members of Standing Committee A; and we look forward to answers to the questions—and they are a very limited number—which I have ventured to address to the noble Lord opposite.
§ 6.21 p.m.
§ Lord Lyell
My Lords, I think your Lordships would wish me to begin by congratulating the noble Lord, Lord Plowden, and his entire committee on the quality, and indeed the timeliness, of their report which we are debating this evening. As your Lordships will be aware, there are other directives which are considered by the European Communities Committees which sit upstairs, but we have heard from all round the House tonight that this particular directive is more than a little technical and complicated. Indeed, like the other directives which are issued under the European Communities' company law harmonisation programme, we find that the subject matter of this directive is certainly neither easy nor of obvious political significance. However, there are Members of your Lordships' House who I think can be classified as veterans of the passage of the two Companies Acts of 1980 and 1981, and all of us who sat through the heat, dust and toil of those battles know that in due course we shall have to embody an adopted directive in our domestic law, and that therefore the directive's terms need to be analysed closely in the course of negotiations when there is still some opportunity to influence the outcome.
I should like to take this early opportunity to echo the words of the noble Lord, Lord Chorley, in commending members of the Consultative Committee of Accountancy Bodies, and indeed of the other bodies, for the advice and very valuable help that all of them gave to the Government in the course of these somewhat protracted negotiations.
Before I turn to the substantive and rather varied questions raised by the report, I hope your Lordships will bear with me if I say a few words about the timetable. Although it is over five years since the Select Committee first reported on the original draft directive, negotiations did not begin in earnest until after the Fourth Directive on individual accounts had been adopted in July 1978. These negotiations have thus been in train for over four years, but I am afraid I would be guilty of over-confidence if I said that the end was yet in sight.
However, what we can say definitely is that the outstanding issues are slowly being whittled away. For the whole of this year the Committee of Permanent Representatives, and on two occasions the Council of Ministers, have been considering Articles 6 to 10A—and, of course, as your Lordships will be aware, they are the articles dealing primarily with the scope of the directive. We understand that the Danish presidency considers that progress on those articles has been carried as far as it can be at this stage, and that negotiations will now move on to Articles 11 to 27. Those of your Lordships who have studied the directive, and I am sure all Members of your Lordships' committee, will be aware that Articles 11 to 27 deal with the technique of consolidation and with such varied questions as audit and publication. For that reason, any estimate that I gave at this stage of a likely date of adoption would, I am afraid, be purely speculative.
The Question tabled by the noble Lord, Lord Plowden, this evening asks the Government whether they agree with the conclusions of the Select Commit- 166 tee's report, and indeed what progress has been made in the Council of Ministers. I would propose, therefore, to run briefly through the main issues which are identified in the report, and to indicate the Government's views and where matters stand. In the interests of brevity, I would propose to assume some detailed familiarity with the report of your Lordships' committee and with the issues which are under consideration, but I shall certainly try to provide further clarification and amplification if your Lordships would wish it, and I hope that my replies will cover most of the points which have been raised.
First of all, we come to the definition of what is known as a vertical group. That is found in Article 6.1(a). It will be easily seen that the committee noted that the emphasis has moved from the de facto to the de jure approach, which is in line with United Kingdom practice. The Government agree that Articles 6.1(a) and 6.1(b) are satisfactory, but we also share the concern of the committee about Article 6.1(c) which is the inclusion of control contracts. I did not find it in the report, but I had it in my background note that, in German, this fascinating term is Beherrschungsvertrag. At least, I think that is what it is; I will look it up later. But I will forbear to go into that complicated German legal definition at this stage, but if any noble Lord would wish for further elucidation I have no doubt we can find it, either in German or indeed in our mother tongue.
We do not believe that there would be a majority for complete deletion of the provision, but we have some support in seeking to make it applicable only to member states which expressly provide in their law for control contracts. It is certainly essential that the provision should be of the most limited application in this country.
Of more concern to us is Article 6.1(d), which at present envisages mandatory consolidation of minority holdings. We agree that the appropriate treatment of such holdings is by equity accounting under Article 17, and we have strong support for our insistence that Article 6.1(d) should be an optional provision if it is to remain in the directive at all.
We sympathise with the distaste of the committee for the optional provisions in Article 6.1 (a), but I have to advise your Lordships' House that there is no prospect that they might be deleted from the directive and we do not consider that it would contribute to the achievement of our remaining objectives to press for their deletion. They represent the de facto approach, which is alien to practice in this country. But without the retention of such provisions on an optional basis I do not believe that we would have achieved a consensus in favour of de jure principles as the basis for mandatory consolidation. So far as horizontal consolidation is concerned, I would confirm that Article 7—and this deals with so-called real horizontal groups—seems certain to be another optional provision, and I am pleased to say that it now seems very likely that Article 7a, which deals with artificial horizontal groups, will disappear altogether.
The Government sympathise with the committee's general concern about the number of optional provisions. For example, the inclusion of optional provisions in the definition of a group is bound to 167 mean that there will be different definitions of a group in different member states. Some will apply Articles 6.1 (a) and 7, some will not. This will not be conducive to the greater comparability of accounts which is one of the directive's objectives. We agree that it would be better to have a core of mandatory definitions with member states free to require separate consolidated accounts on different bases if they so wished. But I come back to the point that directives are negotiated, and that, particularly in a field such as this, which is new territory for a number of member states, a negotiated directive is almost bound to involve compromises. In this case the compromise is likely to involve some recognition in the directive, but on an optional basis, of the concepts of de facto and horizontal consolidation. From the Government's point of view, the prime objective must be that we should not have to recognise those concepts in our own law.
I accept what has been said by the noble Lords, Lord Plowden and Lord Benson, about the particular problems that member state options will cause for multinational companies. All I would say is that such companies are already subject to very different legal requirements in each member state and it is difficult to believe that their position will not be better after than before the directive. Moreover, the directive is unlikely to be the final word on group accounts.
Still considering the matter of scope, I move on to the question of the legal form of the parent undertaking. On this matter, the committee favoured the so-called third solution which would enable member states to apply the directive only to groups headed by a limited company. I am pleased to inform the House that there is now a very large majority in favour of that provision combined with a proviso, which causes us no difficulty, that its application should be reviewed five years after the directive has been applied by companies. There is very little that I can say about the thresholds for exempting from the directive groups below a certain size, except that we agree with the committee that the thresholds should be low. There is a wide spectrum of views among member states, and there has been little discussion pending resolution of the form of the directive. I suspect that this matter will be left for resolution at the very end of the negotiations.
Turning to the question of exemption from sub-consolidation, we share the Committee's objections to a mandatory exemption for subsidiaries of European Community parent companies. We are prepared to contemplate the extension of the present exemption in United Kingdom law for wholly-owned subsidiaries of United Kingdom parent companies to wholly-owned subsidiaries of European Community parent companies, but mandatory exemption for all subsidiaries of European Community parent companies would result in too great a loss of information to interested parties in this country. So far as subsidiaries of non-European Community parent companies are concerned, we do not fully share the committee's reservations about Article 6b as drafted, which is now virtually agreed. This is not an option of which we are likely to take advantage, but we would regard the concept of equivalence as difficult but not impossible to apply.
168 I am happy to report that the suggestion that so-called voluntary consolidations would have to be prepared in accordance with the directive has now been dropped. The Government have noted the committee's recommendation for safeguards in Article 10 where subsidiaries are omitted from consolidation. Although Article 10 is broadly agreed, the related Article 10a is not and we shall be considering whether to seek to enhance the disclosure obligations in the direction suggested by the committee. Like the Select Committee, I propose to forbear from detailed comment on the remaining, more technical, articles of the directive. We shall keep in close touch with the accountancy profession on such articles as Article 12, on merger accounting, on which we accept that there is considerable further work to be done if the directive is to reflect more closely existing law and practice in this country.
The noble Lord, Lord Hirshfield, mentioned in the course of his remarks, which I found very interesting, the interesting concept of what we have come to think of as the accounting standards overload. All of us listened with great interest to the comments of the noble Lord about this particular concept. In so far as he referred to accounting standards, this is a matter for the Accounting Standards Committee whom I know are giving special consideration at present to the position of small companies. I do not think that this is the occasion to rehearse the arguments for the Government's implementation of the Fourth Directive; but many considered that the Government achieved a remarkable balance between the conflicting interests.
So far as the Seventh Directive is concerned, I can understand the noble Lord's viewpoint. But it is the Government's view that, on the whole, group accounts are necessary to give shareholders, potential investors and, as we have heard creditors, a true appreciation of the assets and liabilities of the company and of the performance of the holding company. I go on to say that, all in all, I hope that I have demonstrated that there is little, if anything, of significance between your Lordships' Committee and the Government and we think that there is a reasonable chance of achieving a directive that will be consistent with United Kingdom accounting practices and those principles. The noble Lords, Lord Chorley and Lord Bruce, had a word in my ear about consolidation of the Companies Acts. I know that that has always been, even in 1981, a very strong point. It was put in his usual robust fashion by the noble Lord, Lord Bruce. I am able to tell the noble Lord and the noble Lord, Lord Chorley, that work is in hand and that the Government hope—that is all I will say—to bring a consolidating measure forward in the 1983–84 Session. In this matter we express a hope; but the noble Lord's points are certainly under consideration.
The text quoted by the noble Lord, Lord Bruce, when he was dealing with Article 26 included certain timetables for implementation. I would say to him and to Members of the committee that these timetables are not finally determined and that they will be considered at the end of the negotiations. How quickly the United Kingdom will be able to implement will depend on the scale and nature of the changes required. Only in the light of knowledge of them and of the state of the 169 programme for consolidation will we be able to decide which should come first.
I referred in my opening remarks to the uncertainty on the timetable for the adoption of the directive. I should like to come towards my concluding remarks by referring to a further uncertainty; namely, the mode of implementation. We have seen reports that it has already been decided to implement the directive by secondary legislation. We have yet to take any decision on this matter. How we implement depends very largely on what the directive requires of us. This is certainly a matter on which we shall consult, when we are ready to consult, on the changes required by the directive.
If I can very briefly go through the minor points that were raised by Members of your Lordships' House who have spoken this evening, I am sure that your Lordships will bear with me if I reiterate the thanks of the whole House to the noble Lord, Lord Plowden, for chairing and leading the committee and for leading in the debate this evening. Indeed, the noble Lord, Lord Plowden, led in a great expert in accountancy matters, the noble Lord, Lord Benson. I had to take issue with him—even from a sitting position—when he mentioned that accounts were a dull subject.
I am sure your Lordships would agree that I say from this Dispatch Box that when the noble Lord, Lord Benson, is speaking of accounts, a matter on which he has such tremendous knowledge, accounts and accountancy procedures are never dull. Above all, with the speech made this evening by the noble Lord, with his legendary clarity and authority, it was most enlightening and most encouraging. We were also very grateful for the forceful encouragement from the noble Lord, Lord Benson, about the European Communities Committee in this House, and this particular one that has reported this evening, and of the favourable comments that have gone to Brussels.
The noble Lord, Lord Hirshfield, raised the question of size and exemption for the small man. The matter was put by several noble Lords as to the purpose of accounts. I am sure that the noble Lord, Lord Hirshfield, would agree that the main purpose of accounts is to reassure creditors, lenders, debenture holders, employees and everybody else who has a legitimate interest in the performance of a company.
The noble Lord, Lord O'Brien, made a traditional clear and concise speech and I believe he made one of the most relevant comments in the debate. He pointed out that if any company looks after its finances it has at least a chance of prospering. Coming from the noble Lord, with his experience, we are very grateful for being reminded constantly of that point.
I would once again wish to thank the noble Lord, Lord Chorley, for his very valuable support this evening, and indeed I am sure the CCAB would be most grateful for his forthright support for all their efforts in helping the Government to see their way through these rather complicated details. The noble Lord, Lord Seebohm, reiterated exactly what I would 170 stress about creditors and also employees, who deserve information regarding a company on which they have staked their livelihood.
The noble Lord, Lord Diamond, was particularly kind in his various comments about me. He and your Lordships will note that "The Money Programme", which should concern many of us here this evening, precedes "Ski Sunday" of a winter afternoon; so no doubt if the noble Lord is available to stay indoors to look at "The Money Programme" he may see skiers, but not of the calibre of the Lords and Commons Ski Club, proceeding down the slopes of a Sunday afternoon. Certainly we go ski-ing in Switzerland, which might be allied to the subjects we are discussing this evening. But I would thank the noble Lord, Lord Diamond, for his comment about the work done by the committee, and I agree with him very much that harmonisation will lead, we hope, to a Common Market in goods and services.
The noble Lord, Lord Bruce of Donington, wound up from the Opposition Front Bench and did so in his traditionally robust way. The noble Lord is always vigilant on consolidation, and I hope I have been able to give him some hope, at least, for the next Session. The noble Lord referred to the advice that comes from the Box. I would say to him that advice on accountancy matters that comes from the Box is in true accountancy style: it is without fear or favour. Indeed, it upholds the motto of my great institute in Scotland: the Latin maxim is Quaere Verum, or "seek the truth".
I hope we have sought after the truth in the debate we have had this evening. Once again, I should like to echo, I believe on behalf of the entire House, the Government's thanks for the very valuable work that has been done by the noble Lord, Lord Plowden, and his committee. And, indeed, we would like to thank everybody who has taken part in the debate this evening.
House adjourned at sixteen minutes before seven o'clock.