Asked by
To ask Her Majesty’s Government what assessment they have made of
whether their proposals in Restoring trust in audit and corporate
governance, published on 18 March, conflict with those in the UK
Listing Review by ,
published on 3 March.
(Con) [V]
My Lords, I beg leave to ask the Question standing in my name on
the Order Paper. In so doing, I draw your Lordships’ attention to
my interests in the register.
The Parliamentary Under-Secretary of State, Department for
Business, Energy and Industrial Strategy () (Con)
My Lords, the Government’s proposals on audit and corporate
governance reform will enhance the UK’s reputation as a
world-class destination for business and investment. They
complement the aim of the review of the noble Lord, Lord Hill, to
increase the UK’s attractiveness as an international financial
centre while maintaining the UK’s high standards of corporate
governance and shareholder rights. The audit reform White Paper
includes a specific option to exempt newly listed companies
temporarily from the new requirements.
(Con) [V]
My Lords, in the 210-page impact assessment, somewhat
extraordinarily, no monetary benefits were identified, only
costs. The average FTSE 100 company’s annual accounts have some
200-plus pages that are barely read and the proposals will simply
increase the number of those pages. Are we now in danger of
moving away from legislation on corporate governance to
legislation on corporate management by the state? Is this area
not best left to shareholders to decide on? With directors to be
made personally liable for management errors, is my noble friend
the Minister concerned that business will simply move to be
listed in a more business-friendly environment?
(Con)
The impact assessment, in fact, includes examples of quantifiable
benefits that will be refined and developed in further iterations
of the impact assessment. I agree that shareholders have a vital
role in holding companies to account and the White Paper gives
them important new tools to scrutinise audit and corporate
reporting.
(Lab)
[V]
My Lords, from what we have read in the Sunday papers, this is a
timely topic for debate and reporting on a long line of corporate
failures, going back to Polly Peck, BCCI, Barings, Northern Rock,
RBS, Carillion, BHS and, doubtless, many more. Throughout that
time the audit market for major companies has been dominated by a
few private sector accounting firms—now reduced to four. There is
an urgent need to address the quality and effectiveness of audit.
I presume that the Government support the proposals for a new
profession of corporate auditors. What discussions have taken
place with the profession itself on those proposals?
(Con)
Indeed, I have had extensive engagement with the profession,
including the big four and a number of smaller companies, as we
seek to progress the legislation.
(LD) [V]
My Lords, in the RBS rights issue trial, Mr Justice Hildyard said
that the purpose of Section 87A(2) of the Financial Services and
Markets Act, concerning information to enable investors to make
an informed assessment, had to be appropriate for the ordinary
investor whose protection is the statutory objective. Does the
Minister agree that the same logic must apply and be preserved in
any changes to audit and capital maintenance statements? They are
for the ordinary investor, not just expert users.
(Con)
These proposals are to provide information to expert users and
many of the ordinary readers as well. Therefore, both markets are
to be fulfilled.
(Con)
My Lords, no self-respecting non-executive director would take on
a directorship unless the company arranged adequate directors’
and officers’ insurance but the cost of cover has been increasing
dramatically, alongside market capacity reductions. What
assessment has BEIS made of the impact of its new proposals on
the D&O market, with consequential impact on the willingness
of good candidates to take on board appointments?
(Con)
My noble friend makes a good point but the proposals will not
provide a disincentive to people taking on new appointments. It
is important to remember that the proposals for directors’
accountability apply only to the largest companies with revenues
into the hundreds of millions of pounds and with hundreds,
sometimes thousands, of employees. It is right that directors
should take more responsibility.
(CB) [V]
Professor Karthik Ramanna of the Blavatnik School of Government
at Oxford said in the FT last week that corporate auditing is in
crisis and that the UK Government have announced a bold set of
proposals aimed at restoring public trust in audits and markets.
The UK’s reputation as a world leader in corporate governance is
highly prized and a vital part of what makes the UK an attractive
place to invest and do business. What assessment have the
Government made of the impact of these reforms on UK businesses,
and how will the Government ensure that they will not affect the
country’s ability to attract foreign investment nor stifle
entrepreneurial spirit?
(Con)
I do not agree that the audit market is in crisis. Some
worthwhile improvements can be made, which is what we are
proposing. The noble Lord will see that a full impact assessment
is attached to the proposals.
(Lab) [V]
My Lords, further to the question of my noble friend Lord
McKenzie, can the Minister confirm that any annual report on the
state of the City, as proposed in the report of the noble Lord,
Lord Hill, will clearly outline how the dominance of the big four
accountancy firms has been reduced?
(Con)
The big four accountancy firms are important to the regime but we
want to introduce more possible competition into it, which is why
we are introducing the proposals for shared managed audit to try
to bring up the capacity of medium-sized companies.
(GP) [V]
My Lords, given the clear struggle in the report, Restoring Trust
in Audit and Corporate Governance, to find a workable model for
auditing large UK companies, and given Deloitte UK managing
partner Stephen Griggs’s comment to Accountancy Age, stating
that,
“It is important that changes in audit are complemented by
reforms to the governance of the UK’s largest and most complex
businesses”,
does the Minister agree that the terms given to the UK listing
review were fundamentally flawed? We do not need a more complex
so-called competitive sector, but rather simpler, more secure,
stable and auditable company structures.
(Con)
We are discussing audit reforms and reforms to the audit market.
I think that the noble Baroness may want to have a separate
debate about reforms to company structures.
(Con)
My Lords, I refer to my interests in the register. I hope my
noble friend realises that this audit and governance package is
onerous. It will place significant costs on businesses of all
shapes and most sizes and is, I fear, unlikely to achieve a lot
in practice. Does he not agree that the best and more immediate
way forward would be for the existing, comprehensive rules to be
enforced properly by everyone—including firms, auditors and, if
appropriate, prosecutors—while minimising the burden of any new
regulations?
(Con)
I know that my noble friend is passionate about not imposing new
burdens on companies. I share her desire, but we think that the
current regime could be improved. There will be a 16-week
consultation period, so we will take the time to get these
proposals right, but I think that some worthwhile improvements
could be made without damaging competitiveness.
(Lab) [V]
My Lords, I have two points. First, in the absence of a central
enforcer of company law, improvement in corporate governance is
unlikely. Secondly, in the absence of tougher auditor liability
and accountability, there are not sufficient pressure points to
secure improvements in audit quality. When will the Government
realise that their appeasement of big corporations and accounting
firms is actually a recipe for more scandals?
(Con)
We are not appeasing the big accountancy firms; many of them do
not like some of our proposals. These are worthwhile reforms that
will improve the market and help to bring about the state of
affairs that the noble Lord refers to.
(Con)
My Lords, the White Paper proposals place onerous obligations on
directors of larger businesses. Does my noble friend the Minister
share my concerns that the reforms will discourage candidates,
due to the increased and unnecessary liability? Further, does he
agree that companies will face greater regulation, higher
directors’ fees and indemnity costs at a time when the noble
Lord, Lord Hill, is, sensibly, attempting to improve access to
capital markets?
(Con)
I do not agree with my noble friend. As I said earlier,
accountability for directors applies only to those in the largest
businesses—that is, those with revenues in the hundreds of
millions of pounds and potentially thousands of employees. The
new sanctions will apply only in cases where directors have
clearly failed in their duties as set out in law, so I do not
believe that there is a conflict with the proposals made by the
noble Lord, Lord Hill.
(Con)
My Lords, I declare an interest as set out in the register.
Companies are staying private for longer and entrepreneurs are
not always in a rush to go public. Will Her Majesty’s Government
consider simplifying trading in private company shares, possibly
even introducing electronic trading, so that founders and
employees can access the liquidity they need?
(Con)
My noble friend makes an interesting point. Although this White
Paper does not include proposals on trading in companies’ shares,
the listings review of the noble Lord, Lord Hill, does include
some recommendations, including making it easier for private
growth companies to make the jump to a public listing.
