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Madam Deputy Speaker (Sylvia Heal): Order. I call Dr. Reid.

Dr. Reid: I thank my hon. Friend. I agree with many of his points. He makes a point of which it is worth reminding everyone. Northern Ireland is not only part of the United Kingdom but a greatly valued part—[Interruption.] Sorry about the distraction, Madam Deputy Speaker. I repeat that Northern Ireland is not only a part but a greatly valued part of the United Kingdom. That is one reason why I want all the representatives from Northern Ireland taking part in the debate here, which is where it should be held.

I also want all the representatives here to consider whether they should go to Northern Ireland to discuss matters with people locally. I know that my hon. Friend has done that, as have many Labour Members. My hon. Friend the Member for Hamilton, South (Mr. Tynan) has been across, and I hope that Conservative Members will also continue to make visits. Not only is that good for the House's knowledge of events in Northern Ireland, it is good for the people of Northern Ireland to see that representatives in the House exercise a continuing close interest in their affairs.

Mr. Andrew MacKay (Bracknell): May I gently put it to the Secretary of State that, in the light of the level of paramilitary violence in both communities in north and east Belfast and following the robust comments again from the Prime Minister a few minutes ago, it is inevitable that there will be great disappointment that no concrete proposals have been made this afternoon? We should particularly bear in mind the fact that the very limited apology that we had from the Provisional IRA last week took us only a tiny way forward with its weasel words about non-combatants. Does the Secretary of State agree that it should have said that the war was over? Then we would be making real progress.

Dr. Reid: Of course I would like the IRA to say that the war is over. I suspect, however, that the British Secretary of State demanding that would make it rather less likely to happen than the other way about. None the less, we would welcome such a statement. I welcomed last week's statement because of the strength of the apology and, if it was not an apology, it was at least an acknowledgement of the suffering of what it called the non-combatants. It is a step in the right direction.

Many little steps are being taken in Northern Ireland, including by the republican movement and by the loyalists. I am disappointed that, after the no-first-strike statement and my visit to speak to a Loyalist Commission audience, the events of the weekend should have happened. They were dreadful, and I am sure that everyone else regrets them.

If that process continues, it will bring lots of disappointments to lots of people, and I will perhaps be one of those who has my fair share of them. Finally, I thank the right hon. Gentleman for approaching me "gently" for the first time in his parliamentary career.

Kevin Brennan (Cardiff, West): Was my right hon. Friend as sickened as I was by the comments attributed to the so-called Ulster Freedom Fighters that the murder of Mr. Lawlor at the weekend represented a measured

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military response? Was it not, in reality, a brutal and blatant attempt to wreck the peace process and the Belfast agreement? Is it not the responsibility of every democratic politician to work in a quiet, statesmanlike and calm way to ensure that such groups do not succeed?

Dr. Reid: I agree entirely. It was, to use the words of an Ulster Unionist Member, an act of pure naked sectarianism. It was an appalling act, and several appalling acts were committed over the weekend by the loyalist organisation that my hon. Friend mentioned or, in the case of another shooting, possibly by the Irish National Liberation Army. All were dreadful acts and they were motivated by the cancer of naked sectarianism that so often afflicts Northern Ireland society.

Rev. Martin Smyth (Belfast, South): The Secretary of State will be aware of the promise in 1998 that was given in my constituency, and I know just how folk have reacted to the failure to live up to it. The right hon. Gentleman paid tribute to the Prime Minister by comparing him to Gladstone, but to whom would that give comfort in Northern Ireland?

May I press the Secretary of State specifically on the statement which talks about preparation for a terrorist campaign in Northern Ireland or elsewhere? In a recent answer that I received from the Prime Minister, I was told that home-bred terrorism is not looked upon as international terrorism. International terrorism is just al-Qaeda. Does "elsewhere" refer only to the United Kingdom or to those who are engaged in sharing as they prepare for campaigns in other places?

Dr. Reid: First—the hon. Gentleman may have misheard me—I did not compare the Prime Minister to Gladstone. Even I would not be as sycophantic as that. I said that my right hon. Friend had shown more leadership on this issue than any Prime Minister since Gladstone. I can see how the hon. Gentleman's mind is working: Gladstone—home rule; Blair. I must clarify the point that I did not compare them.

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On terrorism at home or abroad, I have been as clear as I can. What has been suggested, not least by the hon. Gentleman's colleagues, is that the Government have been encouraging a belief in certain quarters that certain types of activity would be acceptable. The reason why we made today's statement—which I hope gives him a little more confidence—is that my publicly declaring my position means that anyone who required clarification or had suffered from any illusions in the past need do so no longer.

Mr. Iain Luke (Dundee, East): The Secretary of State referred to Back Benchers who have recently had the chance to visit Northern Ireland, of whom I am one. I visited Stormont to speak to members of all the parties and visited the police. I also visited both sides of the divide in east Belfast to speak to community activists and representatives. Having been involved in community activity in my constituency in Scotland, I was very much taken by the need and ability of those people enthusiastically to discuss the prospects for peace in both their communities.

Does the Secretary of State agree that there is a wider role for Back Benchers of all parties in visiting Northern Ireland, taking the message of peace, acting as a catalyst for discussions and encouraging people from the parties that are represented by Members here at Westminster—irrespective of whether they take their seats—to act as a joint body to discuss the prospects for bringing the two communities together by building bridges instead of sheltering behind the peace barriers, which actually separate them?

Dr. Reid: My hon. Friend illustrates how much he has benefited from not only taking an interest in, but visiting, Northern Ireland. It is beneficial to the House when hon. Members can bring to it the experience that they have gained from doing so. It is also reassuring to people in Northern Ireland that, having achieved the principle of consent in deciding their constitutional status, and being a valued part of the United Kingdom, hon. Members take the time and trouble to visit Northern Ireland as they would other parts of the United Kingdom.

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Accounting and Auditing Issues

4.48 pm

The Secretary of State for Trade and Industry (Ms Patricia Hewitt): With permission, Madam Deputy Speaker, I should like to make a statement about the interim report of the co-ordinating group on audit and accounting issues, which my right hon. Friend the Chancellor and I are publishing today.

The world's capital markets rely on timely, true and fair financial reporting, underpinned by high standards of auditing and accounting. We have all been shocked by the major corporate failures in the United States at Enron and WorldCom. It is incumbent on the Government to be vigilant and to take the necessary action where required.

Audit and accountancy standards in Britain are different from those in the United States: different and, as is now widely acknowledged, in some respects better. That is partly the result of changes made here following the UK's own corporate scandals of the late 1980s. However, there is no room for complacency. The millions of people who invest in our companies, whether as individuals or through their pension funds, look to the Government to ensure that our own financial reporting regime is as transparent and effective as possible.

That is why the Chancellor and I set up a co-ordinating group on audit and accounting issues in February, chaired by the Under-Secretary of State for Trade and Industry, my hon. Friend the Member for Welwyn Hatfield (Miss Johnson), who has responsibility for competition, consumers and markets, and by my hon. Friend the Financial Secretary, and comprising the principal regulators. The interim report shows clearly what needs to be done to build on the strengths of the current system. The Government welcome the group's proposals.

We are extremely grateful to the group for its hard work in producing the interim report, copies of which have been placed in the Libraries of both Houses.

In responding to the interim report, let me stress that this is not about piling unnecessary regulation on the vast majority of companies that are honestly and properly run. But the actions of a few are damaging the reputation of all, and by taking sensible steps to strengthen corporate governance and financial reporting, and thus to restore investor confidence, we will benefit business and our economy as a whole.

I turn now to the proposals contained in the interim report and the Government's response. A key recommendation is for tougher mechanisms to reinforce auditor independence.

First, the group proposes, and we agree, that we must strengthen and enhance the role of audit committees. The audit committee should act more clearly on behalf of the shareholders. It should make recommendations to the shareholders on the appointment of the auditors, and underpin auditor independence; for example, by approving the purchase of non-audit services from the auditor. We welcome the work that the Financial Reporting Council will oversee to develop improved guidance in the combined code.

We need to ensure that audit committees are effective and can act independently of the executive directors. Audit committees should therefore be made up entirely of independent non-executive directors. Derek Higgs's

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review of non-executive directors is obviously crucial in that respect. We need also to develop the competence of audit committee members; for example, by developing available training.

Secondly, we agree with the report's conclusion that the principle of audit partner rotation should be extended to other senior members of the audit team and that the time scale for rotation of the audit partner should be cut from seven to five years. On the rotation of audit firms, the Treasury Committee, whose report was published yesterday, argues that there is a strong case for the mandatory rotation of audit firms, as well as audit partners and teams. We, and the group, will want to consider its report very carefully. The Chancellor and I are therefore asking the group over the next few months to look more closely at audit firm rotation, including the possible implications for competition in audit services, and to report by around the end of the year.

Thirdly, the group says that we need to look in more detail at the need for a further tightening of the rules governing the extent to which auditors can provide non-audit services to audit clients. We agree, and I have asked for recommendations on that important point in the group's final report. I have also asked my Department to consult on changes to regulations under the Companies Acts to improve the disclosure by companies of the nature and value of non-audit work provided by their auditors.

The group also wants to see much greater openness and transparency by the major accountancy firms in relation to their own processes, practices and structures. We agree with that too. One approach under serious consideration is to make such transparency compulsory for those audit firms undertaking the statutory audit of major companies. We will consider that with the recognised audit supervisory bodies by the end of the year.

We also agree with the group that there should be an early review of the way in which the accountancy industry as a whole is regulated, including the role of the recently established Accountancy Foundation and its related bodies. Despite the efforts of Lord Borrie and his colleagues in the Accountancy Foundation, the new arrangements have not progressed as rapidly as we had hoped. The Chancellor and I have therefore decided to conduct an immediate review of the regulatory arrangements to see whether there are sensible structural improvements that should be made. That will include the question of future funding arrangements for the foundation and take into account the work to be undertaken by the review board on the arrangements for monitoring the work of auditors.

The group also highlights the importance of proper international accounting standards. Given the increasing globalisation of capital markets, it is essential that our own Accounting Standards Board works closely with the international board to improve the transparency of company reporting. It is particularly important that such standards are developed to address share options and other share-based payments systems, which have played a significant role in the current concerns. That issue can be dealt with only at an international level, so I welcome the fact that the international board is giving priority to developing such standards.

Of course, standards, whether national or international, must also be effectively enforced. I agree with the group that the financial reporting review panel should develop a

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proactive role as well as simply responding to complaints. I know that the panel is already looking at such a change, and we fully support moves to develop current practice. The group suggests that the Government should consider the adequacy of the current enforcement arrangements more widely, and we will do that as a matter of urgency.

Finally, the group recommended, and we accept, that the Department of Trade and Industry and Treasury consider with the Office of Trading whether there are any competition implications arising from the high concentration in the market of audit and accountancy services for the largest firms, and whether any of the other proposals in the report have competition implications.

I also remind the House of the important provisions contained in the Government's White Paper on company law reform, which my hon. Friend the Under-Secretary published last week. In particular, we have decided to introduce a statutory statement of directors' general duties; to require large companies to provide an operating and financial review, covering non-financial areas also, such as strategy and risk; and to place a legal obligation on directors to volunteer relevant information to the auditors and to give auditors the statutory right to ask for company information from employees and certain contractors.

In preparing its interim report, the group was mindful of the fact that high standards of financial reporting and audit regulation are promoted in the United Kingdom in a number of ways, ranging from statutory or independent regulation to self-regulation, voluntary codes of best practice and market pressure. The effectiveness of the UK's arrangements must be judged by considering the combined effect of those various elements. The group's recommendations, too, must be seen in the same light, as a package of measures.

This is only an interim report. The Chancellor and I have asked the group to carry on its work and to deliver a final report around the end of the year on progress made in all those areas. For our part, the Government will act quickly in response to the recommendations that fall to us to take forward. But success will require action from everyone—from the regulators and the profession. I also challenge UK companies to make a difference, and welcome the fact that many are already doing so.

As the co-ordinating group and, indeed, the Treasury Committee have both said, the status quo is not an option. The measures that I have announced today will ensure that the UK has the best possible regulatory regime that will benefit our companies, our capital markets and our economy alike.

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