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Mr. Tim Yeo (South Suffolk): I welcome this early opportunity to address some of the issues that have recently caused great concern on both sides of the Atlantic. I am glad that the Secretary of State decided to announce the publication of the interim report by way of an oral statement to the House, a practice that I hope she will continue to follow wherever possible. I am also grateful for a copy of the statement, which I received about an hour ago, and for the chance to glance at the report. I have obviously not had time to read the report from cover to cover but, from what the Secretary of State said, I am sure that there is much on which we will agree. I welcome the broad tenor of those aspects of the report to which she referred.
For the sake of clarity, will the Secretary of State confirm that what she said today refers only to listed companies? I hope that before long she will be able to say whether the Government accept the need to raise the turnover threshold above which unlisted companies are required to undertake an audit to a more realistic level.
Events in the United States have inevitably caused anxiety in Britain among employees, shareholders, creditors, customers and the general public. I agree that our accounting and auditing practices are sufficiently different from those followed in the United States to give us confidence that the problems that have arisen there are less likely to occur here. The vast majority of British businesses are honestly run and the vast majority of audits are responsibly conducted. We should not proceed on the assumption that the actions that occurred at Enron, which are the subject of criminal investigations in the United States, are widely practised in Britain.
It is right, however, to review matters from time to time. We should never be complacent about the risk of uncovering a damaging financial scandal in this country. The restoration and maintenance of full trust in accountancy, reporting standards and audit procedures is important to ensure that business continues to have access to the funds that are needed to sustain growth.
The overriding need is for the response to the current anxieties to be proportionate to the risks involved. It is important to distinguish between the more onerous requirements rightly imposed on listed companies and other categories of companies which, although subject to audit, do not need to meet similar demanding standards.
I have reservations about the idea that firms should be compulsorily rotated after a relatively short period. The costs would be substantial and would fall on the businesses concerned, and therefore on their shareholders and customers. Furthermore, an audit firm taking on an audit for the first time is not necessarily better able to scrutinise the operations of its client. However, rotation of audit partners and senior staff is a very different matter, and, subject to proper recognition of the special or different circumstances of smaller accountancy firms, I welcome the report's recommendations.
I agree with the concerns that have been expressed about separating audit work from consultancy. It is important that there should be a clear statement, breaking down into individual categories of work the fees that are received for non-audit work, which are paid to firms that act as auditors. I hope that the Secretary of State will give her support to that.
With reference to the Secretary of State's decision to conduct a review of how the accountancy industry is regulated, will she indicate its likely terms of reference and the timetable that she envisages for its completion?
On the development of international accounting standards, does the Secretary of State accept that however desirable that may sound, Britain should not abandon our principles-based approach in favour of a rules-based system merely in pursuit of harmonisation? I would welcome a review of the accounting treatment of share options, however, and I hope that that would reflect the fact that share options are effectively a form of employee remuneration.
Where the employees of an audit firm wish to join their client's payroll, proportionality should again be the watchword. It is clearly right that partners in charge of the audit should be subject to a cooling-off period before being able to move across to the former client. Restrictions on more junior staff who have worked for an auditor would not be justified.
On the question of whether there is sufficient competition between accountancy firms, I am sceptical about the value of an OFT inquiry. It would be expensive, time consuming and possibly unproductive. Will the Secretary of State say whether her Department has received any complaints from businesses about the alleged inadequacy of competition between accountancy firms?
The Secretary of State rightly distinguished between the United States' approach, which is rules-basedas long as all the boxes have been ticked the requirements appear to be satisfiedand the British approach, which requires the auditors to present a true and fair view. Does she agree that the Chancellor of the Exchequer has adopted the United States' rules-based approach in his concealment of substantial public liabilities arising from PFI and PPP schemes? That dishonesty and off-balance-sheet accounting sits ill with the Chancellor's consistently repeated claims that large sums of public debt have been repaid. Surely the British people as shareholders in all public projects, however financed, deserve to be treated in at least as open a manner as shareholders of the companies about which the Secretary of State has spoken.
More generally, the loss of trust in the audit process, whether in the public or the private sector, weakened confidence when financial markets were already vulnerable. The effects of that weakening of confidence range widely, extending to pensions, jobs, endowment mortgages and many other matters. Nevertheless, despite those risks, our response should always be in proportion to the dangers involved. The essence of what is now needed is not necessarily more regulation but better regulation.
On the issue of large versus small companies, some of the proposals that we are making apply only to large companiesfor instance, the proposal for an operating and financial review, which will really apply only to the 1,000 largest companies. Of course, the greatest impact of the proposals that I have announced this afternoon will, rightly, be felt by the listed companies. I remind the House that a few years ago we raised the threshold for statutory audit to exempt a large number of small firms from that onerous requirement.
The hon. Gentleman is right to say that there are arguments for and against rotation of audit firms. I observe that the Australian and the Irish Governments, who recently reviewed that issue, both came down against proposals for mandatory rotation of audit firms, but, as I said, we will consider that in more detail before arriving at a final view.
I hope that I made it clear in my statement that I entirely agree with the hon. Gentleman about the need for much greater transparency about the purchasing of non-audit services from the audit firm. We will consider that matter further, but I think that the proposal that we have already acceptedthat audit committees should approve the purchase of non-audit services from their auditorswill be helpful.
When reviewing the regulatory framework we shall look at the entire structure. I shall in due course publish more detailed terms of reference, but we want to conduct that review as quickly as possible, building on the work that is already being done by the various bodies. I hope to be able to report on that piece of work around the end of the year.
Of course, share options should properly be regarded as part of the pay package of employees and directors of a firm, but it would be wrong of our country to act in isolation in that respect. That is why I welcome the fact that Sir David Tweedie and his colleagues at the international board have said that they will deal with the issue and propose appropriate standards.
The hon. Gentleman raised the specific question of skills and training for non-executive directors. As part of his wider review, Derek Higgs is to consider the skills required for non-executive directors and how we can widen the pool of appropriately qualified people. However, it is disturbing that there appears to be no properly agreed definition of the competences that are required of members of audit committees in particular. That is certainly a matter to which the regulatory and professional bodies should pay attention.
On the issue of competition, the Office of Fair Trading will, naturally, want to consider both the report published today and the Select Committee's report published yesterday. As far as I am aware, no complaints about lack of competition in the market for audit services have been made to my Department.
On the hon. Gentleman's final point about broader Government issues relating to accounting practices and public finances, let me make it clear that since he became Chancellor of the Exchequer, my right hon. Friend has ensured that, for the first time, the assumptions that underpin each year's Budget are independently audited by the National Audit Office. Public-private partnerships are properly accounted for in line with international best practice. When it comes to transparency and robustness of the fiscal framework, we are among the best in the world, and I am sorry that the hon. Gentlemanin an otherwise welcome responsedid not acknowledge that.