COMMONS AMENDMENT (Hansard, 7 November 1989)

§ Lord Trefgarne
My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 20. At the same time I should like to speak to Amendment No. 36 and perhaps also make reference to Amendment No. 36A, tabled in the name of the noble Lord, Lord Williams, which is an amendment to Amendment No. 36.
We believe it is right, for the two purposes specified by these Commons amendments, that there should be disclosure of the fact that the auditors' report contains a statement under new Section 236(2) or (3). These are statements which the auditors are required to make but which stop short of a formal audit qualification.
Amendment No. 20 has this effect in relation to the publication of non-statutory accounts under new Section 240. Under this amendment such accounts would have to be accompanied by a statement saying not only whether the company's statutory accounts have been qualified but also whether or not the auditors' report contained a statement under Section 236. Amendment No. 36 has a similar effect in relation to summary financial statements in Clause 14.
I turn now to Amendment No. 36A, tabled in the name of the noble Lord, Lord Williams. If I understand the noble Lord correctly, he is not opposed to the requirement to disclose and set out in the summary financial statements any statement in the auditors' report made under Section 236(2) or (3) but questions the need to make a statement in the summary accounts where there are no such statements in the audit report, as in the majority of cases.
I believe the noble Lord's point is one of detail. Amendment No. 36 in its present form need not cause the sort of difficulties the noble Lord envisages, either for the company preparing the summary financial statement or indeed the reader. I accept that it would not be particularly informative to most readers of summary statements to read that the auditors' report on the full accounts does not contain a statement under Section 236(2) or (3) of the 1985 Act. But such a requirement is, in our view, the necessary obverse to the requirement that when such a statement has been made in relation to the full accounts the fact should be noted in the summary financial statement. We believe that companies should be able to meet this requirement without undue difficulty or expense. We hope that, on reflection, the noble Lord will agree. I beg to move.

§ Lord Williams of Elvel
My Lords, perhaps I may speak to the amendment tabled in my name, which is an amendment to Amendment No. 36, since it is in the same grouping. We have some procedural problems here. I have no particular problem with Amendment No. 12, but I have a problem with Amendment No. 36 Therefore, since they are all in the same grouping perhaps I may speak to Amendment No. 36A on the basis that I shall be moving the amendment. I am most grateful to the House.
The problem with Amendment No. 36, which refers to Clause 14, is that it does not rectify what I and certain of my advisers believe to be a problem about the expression contained in subsection (4)(b) of the clause. It is therefore for procedural reasons—because we can only amend Commons amendments —that I have tacked on Amendment No. 36A to Amendment No. 36. In reality it refers to subsection (4)(b), which I am not allowed to amend because it has passed through all its stages and has not been amended in another place.
The problem is that a summary financial statement is required by subsection (4)(b) of the clause to be, consistent with those accounts and that report". It is the word "consistent" which bothers me and other people. What does it mean? If I could have amended the subsection in question I should have put the words "properly extracted from" in place of the word "consistent", thereby making absolutely clear that the summary financial statement was an extract of the full form report and accounts. I am not allowed to do so and therefore I must tack on an amendment to try to achieve the same effect.
This is, however, an important point. Under the new regime many shareholders will be asked to affirm positively whether they wish to receive a full report and accounts. Many of them will not answer the letters and will simply say, "We shall not bother", and so on. Therefore they will receive summary financial statements. If those summary financial statements are consistent, as they must be under the statute, with the full long form report and accounts, that will mean whatever it means. However, if they are not properly extracted they can still be consistent and the shareholder may well be misled.
Perhaps I may give an example. A company has a turnover, it has a trading profit, it has a profit pre-tax and a profit post-tax. Let us consider the profit and loss account of the company. It would be consistent with the report and accounts for the summary financial statement to show the turnover and the profit after tax. That would be perfectly consistent. However, it may be that there is a large tax credit which has been shown in the full report and accounts but which is not shown in the summary financial statement. In that case, although the summary financial statement is consistent with the full report and accounts it has not been properly extracted, and hence, in such a situation, it would be misleading.
597 I should like to see an amendment along the lines of the one I have put forward being accepted by the Government to ensure that "consistent" means "properly extracted from" so that there can be no doubt that the auditors will say, "Yes, this summary financial statement is a proper extract of the full report and accounts". That is the object of my amendment.

§ Lord Lloyd of Kilgerran
My Lords, I too am anxious about the inconsistency of the word "consistent" in the context of subsection (4)(b). I should have thought that it was inevitable, having regard to the ordinary understanding of the word "consistent", that a further explanation is necessary along the lines of Amendment No. 36A. It should state that the statement is not merely consistent but that the information has been properly extracted from the company's annual accounts. I was a little worried about the word "properly" in the amendment. I do not, however, want to differ with the noble Lord, Lord Williams, on a fundamental point. It might have been a better amendment to leave out the word "properly". In any event, I do not know whether I am being procedurally improper in making such a suggestion. In the circumstances, I support what the noble Lord, Lord Williams, has said.

§ Lord Trefgarne
My Lords, I hope that I can set the noble Lord's mind at rest on this matter. I am informed that the term "consistent with" is already used in the Companies Act in the context that requires auditors to judge the consistency of information in the directors' report with the accounts. With aid from suitable guidance from the APC, I do not believe that consistency is a concept which would cause auditors any degree of difficulty. I understand that the APC has already set up a working group to consider what guidance might be necessary. I hope that that will meet the noble Lord's concern.
I agree that there needs to be some guidance in this area. The APC is the right body to give that guidance. I am happy to reassure the noble Lord that it is already at work and ready to do just that.

§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord for that information. It was not conveyed to me yesterday afternoon by a member of the APC, but if he tells me that that is the case I have no doubt that he is properly advised. It is one thing to say in statute that the report is consistent with another set of documents, which are accounts. It is another thing to say that a précis, which is the summary financial statement, is consistent with the full version. There are two different concepts of consistency.
I was most grateful for the support of the noble Lord, Lord Lloyd of Kilgerran. I used the expression "properly" so as to lay the onus on the auditors to say that the summary financial report had been properly extracted; in other words, it was for the auditors to say, "Yes, we take the responsibility for saying that the thing had been properly extracted". If the auditors merely say, "It has been extracted", 598 that is less strong than the auditors saying, "Yes, we are absolutely satisfied that it is not merely consistent but has been properly extracted".

§ Lord Lloyd of Kilgerran
My Lords, I am grateful to the noble Lord, Lord Williams, for his explanation.

§ Lord Williams of Elvel
My Lords, the question arises as to what we do, because this is the last occasion on which we can do anything. I am not happy about the expression "consistent". I am not happy that we can just leave the matter to the APC (the auditors) to decide whether the guidance that it issues is the type of guidance that we should accept under the Act. I am afraid that I shall have to press the amendment.