| Previous Section | Index | Home Page |
LOCAL GOVERNMENT FINANCE (SUPPLEMENTARY CREDIT APPROVALS) BILL [MONEY]
Queen's recommendation having been signified--
Motion made, and Question put forthwith, pursuant to Standing Order No. 52(1)(a),
That, for the purposes of any Act resulting from the Local Government Finance (Supplementary Credit Approvals) Bill, it is expedient to authorise the payment out of money provided by Parliament of any increase attributable to the Act in the sums payable out of money so provided under any other Act.--[Mr. Graham Allen.]
Question agreed to.
17 Jun 1997 : Column 218
Auditors (Regulation)
Motion made, and Question proposed, That this House do now adjourn.--[Mr. Graham Allen.]
10.17 pm
Mr. Austin Mitchell (Great Grimsby): I congratulate my hon. Friend the Minister on his appointment and on being able to share with me the fun and excitement of this evening's Adjournment debate. Audit is not often regarded as a fun subject: indeed, auditors are supposed to be accountants who cannot stand the excitement of working in the profession.
The debate arises because the Government are about to publish a Bill to allow accountancy partnerships to set up limited liability partnerships. That would ensure that all the partners in a practice, who are currently liable down to their last Jaguar and their last yacht, could evade those liabilities. It seems curious that such a limitation of liabilities should be proposed by a Labour Government because it is a major concession to a huge vested interest: the big accountancy firms.
Such firms have a statutory monopoly of audit, which is given to protect the stakeholders. Stakeholders are identified by the various Companies Acts over the years as shareholders, creditors, employees--even journalists, as well as the public and markets. It is the job of auditors to provide information to all those stakeholders, invigilate the performance of firms and audit the accounts on their behalf. They are failing in that responsibility.
Such failure has been clearly demonstrated by a number of scandals--Bank of Credit and Commerce International, Maxwell, Levitt, Polly Peck, MTM, Queens Moat Houses, British and Commonwealth, Barings and Resort Hotels. There is an enormous list of failures and scandals, about which in each case the cry has gone up, "Where were the auditors?" Now we know. They were busy lobbying the Department of Trade and Industry for protection from liability for the consequences of their own failure.
If auditors want to avoid such liability, they can turn themselves into limited liability companies. When I was serving on the Standing Committee of the Companies Bill in 1989, I remember auditors lobbying for such a prerogative. They said that it was extremely important that they should be allowed to turn themselves into limited liability companies. We agreed to it at the behest of the then Government. Having agreed to it, the auditors now do not want to become limited liability companies because they want to remain partnerships.
There are various tax perks and advantages of being a partnership. There is also the great advantage of secrecy--auditors do not have to publish anything about their affairs, performance or activities. They want to keep the tax perks and secrecy, but they want protection from the liability that is supposed to be conceded by a partnership, making the partners liable for everything in each case.
Such limitation of liability seems a curious principle for a Labour Government to enact. It is anti-consumer to do so. After the Caparo judgment, the consumer has all too little redress or rights against auditors. If we concede limitation of liability, such redress will be even more limited.
The principle is curious, too, in the light of the very dubious and dodgy tactics used by big accountancy houses to try to get such limitation of liability.
They lobbied first through Ian Greer Associates and attempted to persuade the then Minister of Corporate Affairs, Neil Hamilton, to concede the principle. He ran up against a small obstacle when the Law Commission ruled that the proportion of liability that they were then asking for was against the public interest, so that avenue was blocked off.
Price Waterhouse then decided to transfer its lobbying activity to Jersey, work on the tin-pot legislature there in order to get the prerogative and then come back and blackmail the British Government into conceding the principle so as to stop competition from Jersey. In effect, it bought legislation in Jersey, and fast-track legislation, too: it was rushed through with very little debate. The legislation cost £1 million to draw up, and through a series of murky deals of the kind that go on in Jersey, it achieved its goal.
Price Waterhouse did not want to use the privilege that it had been given to set up in Jersey because who in their right mind in this country would use dodgy auditors set up in a tin-pot jurisdiction in Jersey to audit the accounts of a major public limited company? It wanted to blackmail the British Government into conceding what it had already bought in Jersey. It is an interesting legislative procedure to go overseas, buy legislation, then come back and say to the British Government, "Do the same for us." The tactic seems to have worked under the previous Government, since here we are, as a Labour Government, bringing in legislation that was obviously prepared under that previous Government.
Such limitation of liability is curious because if we are to have fair trading the privilege must be extended to all partnerships of all kinds and to all firms that compete with big accountancy houses but do not audit, such as management selection and tax advice and consultancy services. It would be anti-competitive to make such a concession to just one section--the auditors--and not to all partnerships and all firms that compete with partnerships.
The real problem with the proposal is whether it is responsible government to confer such an enormous privilege on the auditors without the quid pro quo of a drastic change in the regulatory framework for auditing, which at present is totally inadequate. The regulation of auditing has always been kept privileged by the big accountancy houses and the professional bodies. The present structures are inefficient, ineffective and pathetic.
We have a structure of so-called self-regulation which essentially means that the mafia regulate the mafia. In other words, a trade association regulates itself. It would be unacceptable if a trade union asked to regulate industrial relations, but, because the regulator is a professional body, responsibility is conceded.
There is a proliferation of overlapping bodies. Regulation is mostly done by professional bodies as recognised supervisory bodies. The professional bodies are themselves dominated by the big accountancy houses, which give their partners and staff time off to run the professional institutes, whose powers are pathetic. For example, one of the biggest fines imposed by the regulatory structure was on Messrs. Jordan and Stone of Coopers and Lybrand for their infringement of the guidelines in accepting work on the liquidation of Polly
Peck when their firm was already involved. They were fined £1,000 each. What a massive, terrifying fine that was: the fees from the insolvency were £17 million, so the firm must have been terrified at such horrendous fines from the regulatory bodies. Only one partner has been disqualified by the regulatory procedure--and he retired to Switzerland. If that is regulation, I do not know what real discipline would be like.
The structure includes no compensation for defrauded consumers, and no investigation of audit practices is undertaken. Several major audit firms have been criticised by Department of Trade and Industry inspectors and inquiries. The buck is passed back to the professional bodies, which do nothing. However often one writes to them, nothing happens. They have not investigated the standards of any of the big accountancy houses. The Securities and Exchange Commission in the United States is planning to investigate Coopers and Lybrand, which has been involved in a series of headline scandals there, but we cannot hope for such an investigation here. What chance is there that one of the big firms will have its standards investigated by such a light-touch regulatory regime?
The regulatory bodies never report on audit failure. There were failures of the audit in Maxwell, Levitt, Polly Peck, Wallace Smith, Homes Assured and London United Investment. None of them was investigated. In the United States, the Kerry committee investigated the audit of the Bank of Credit and Commerce International. Price Waterhouse, which is an international body, said that it could not co-operate with an investigation in the US because it was a firm of British auditors. The fact that it sells its services internationally was apparently not relevant: because it is a British firm, it can refuse to give any evidence to the Kerry inquiry. It is no wonder that the Kerry Brown report states--for the Minister's information, it is in chapter 10--that the partnership structure inhibits international regulation. If someone has a case against Union Carbide, the case can be pursued in the American courts, but if someone has a case against Price Waterhouse UK, it cannot be pursued in the American courts. The same problem arose with KPMG and the Ferranti affair.
The Financial Reporting Panel has been set up and on 23 occasions it has found that published audited accounts were defective. The auditors had drawn a fee, established that the accounts were true and fair and given their approval; yet the Financial Reporting panel said that they were defective. There has never been an investigation of any of those 23 audit firms, and action has been taken against none of them. This is not regulation--it is a farce.
It is disastrous, as audit is dominated by the big firms which do 90 per cent. of audits for plcs and are in intense competition with each other as the sellers of services. They want to sell other services which are more profitable than audit. To do that, they want to get a foot in the door by cutting the price of the audit. They get the contract with the firm, and then use that as a market stall to sell other services. A classic example four years back was when Price Waterhouse--or half-Price Waterhouse, as it should be called--offered to cut the audit fee for the Prudential by £900,000 to get that work so that they could sell other services.
Such competition must debase the audit. It imposes pressure, as unqualified people are used, corners are cut and time is reduced. It produces a potential for disaster,
but firms are getting away with it because of the lack of regulation and effective inquiry, and because auditing standards are effectively under the control of the audit industry, whereas the licensing, monitoring, complaints, investigations and appeals are under the control of the accountancy bodies, which are, in turn, dominated by the big firms. It is a lovely little racket.
Trade associations cannot be regulators, and the only people excluded from all this are the consumers of accounts, the stakeholders, the public and anyone who loses money in the scandals produced by this situation. The last Government believed in self-regulation. The present Government believe in independent regulation--the principle that we are establishing in financial services and which we promised in the 1992 manifesto for accountancy and audit. We need independent regulation which will ban the sale of other services to audit clients, enforce the rotation of auditors, require auditors to report and detect fraud as they do in local government--they just do not want to take it on in the big firms--and acknowledge the public interest.
| Next Section
| Index | Home Page |