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Dr. Vincent Cable (Twickenham): I welcome the statement, as far as it goes—which is not all that far—in making proposals on the tightening up of audit and accounting practice, especially the tentative moves towards rotation of auditors and separation of audit and consultancy practice. However, does the Secretary of State agree that if changes such as rotation are to be meaningful, there must be far more competition? It is impossible to envisage real competition in an industry dominated by only four companies. I welcome the move to the Office of Fair Trading reference, but does the right hon. Lady agree that the only logical outcome that would increase competition is the break-up of one or more of the large accounting companies? Is that an outcome that she would welcome?

I welcome also the move to strengthen the independence of audit committees in companies. Does the right hon. Lady agree that for that to become effective, there must be much more far-reaching reform of independent directorships following the Higgs review? Does she agree also that at present the largely self- selecting group of non-executive directors means that a few individuals hold far too many directorships and are unable to provide the focus and professional supervision that companies need?

The right hon. Lady has not referred to fraud. Is she consulting the Law Officers on how to introduce a tougher approach to real financial fraud? Are there not still too many cases, such as Allied Carpets a few weeks ago, where crooked directors who steal from their shareholders are treated far more leniently by the criminal justice system than criminals who rob the same amount from a bank? There must be a tough and consistent approach.

Finally, I turn to international standards. If it is correct, as the Secretary of State says, that British standards of practice are exceptionally high, how does she intend to protect those standards when harmonisation takes effect in 2005? Will she explain why it is, if British standards are relatively high, that in the months that have passed since the Enron crisis, the FTSE index in London has fallen even more precipitately than the Dow Jones index in New York?

Ms Hewitt: We shall reduce the period for audit partner rotation from seven years to five, and extend the requirement of rotation to other senior members of the audit team. Those are two specific and, I believe, thoroughly desirable actions that we are taking as a result of the interim report.

On competition, the hon. Gentleman will be aware that the Office of Fair Trading recently conducted a review of the market for audit and accountancy services. It reported on that in its report on competition and professions. As I am sure the hon. Gentleman will acknowledge, it found that small and medium-sized companies in the United Kingdom have an extensive choice of auditors and accountants. As the hon. Gentleman and the OFT acknowledge, there is much less competition in the market for large company audit and accountancy services. However, there was no indication in the OFT report that that produced a problem of inadequate competition.

It is worth stressing that when we talk about this relatively concentrated market, we are talking about the largest firms—some national, but most of them international—that increasingly buy their audit and

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accountancy services from multinational firms in an increasingly global marketplace. It is not an issue for the United Kingdom alone, but one which the OFT will be examining and which I and my colleagues in the Treasury will be discussing with it.

I agree with the hon. Gentleman about the need to broaden the pool from which companies recruit their non-executive directors—far too few are drawn from too narrow a pool. That is precisely why my right hon. Friend the Chancellor and I invited Derek Higgs to conduct a review of the role and recruitment of non-executive directors. We await his findings with interest, and I shall return to the House on the matter in due course.

As for fraudulent, criminal behaviour by a small minority of company directors, my Department acts with great vigour in investigating complaints that are brought to us, or of which we have become aware. Where necessary, we disqualify directors whose behaviour makes them unfit to hold such office. In the past two years, we have disqualified a couple of thousand company directors in pursuit of our powers.

The hon. Gentleman referred to international standards. Our own Accounting Standards Board is already working closely with the international board, and with our partners on that board, to ensure that we get the best possible standards at an international level so that companies in the UK, in an increasingly global and interdependent economy, have the benefit of best-practice standards at an international as well as a national level. In this global and interdependent economy, although the problems on which we are particularly focused have arisen in the United States, the shock waves are felt in stock markets right across the world, and despite the underlying strength of our own economy here in the United Kingdom our own stock market is not immune from those shock waves.

Mr. Martin O'Neill (Ochil): I thank my right hon. Friend for her statement. It is important that we all recognise that the Government are being seen to try and restore a sense of confidence and trust in a profession that has taken, perhaps, an undeserved battering, but a battering none the less in recent months.

On the rotation of auditors, we must also take account of the audit office with only one client. Over-dependence on the one office was part of the problems of Enron, apart from the illegality involved. In Italy, firms are rotated for auditing purposes, but often the staff remain the same, because in a particular location there are not the people to undertake the work. We must be sensitive to the problem. It is not just a matter of partners and senior staff; there must be a more comprehensive look at the issue to avoid that situation.

Lastly, does my right hon. Friend hope to incorporate in the new companies legislation, which has been circulated in draft form, the constructive proposals that will come out of the consultative process? Is it intended that before this time next year, we may have a companies Bill nearing Royal Assent, which will include the very creditable proposals that she made in her statement today?

Ms Hewitt: I am grateful to my hon. Friend for those comments. On audit rotation, he is right to draw attention to the practical difficulties, in some cases, and the competition implications of the proposal for compulsory firm rotation. That is why we want to consider that and

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have the group consider it in more detail before we make a final decision. In any case, it is very important that commentators do not get fixated on one particular item that is being considered, when there is a package of measures that needs to be considered as a whole, because that is how it will have its effect.

On the companies Bill, the Minister with responsibility for competition, consumers and markets, my hon. Friend the Member for Welwyn Hatfield (Miss Johnson), published the White Paper last week, including 200 or so draft clauses for a future companies Bill. We will, of course, examine closely the responses to that consultation and we will move ahead as speedily as we can to publish further draft clauses for what will be a major piece of law reform—certainly, one of the largest Bills that my Department or probably any other Department will have introduced. My hon. Friend will understand that I cannot pre-empt future Queen's Speeches, but I can say that we are determined to introduce that Bill as soon as we can, and to make that law reform in this Parliament.

Mr. David Ruffley (Bury St. Edmunds): There is much to welcome in the right hon. Lady's statement. She will be aware of the report of the Select Committee on the Treasury this week, and its proposals on audit committees. We proposed that audit committees should be required every five years to consider whether the audit firm should be rotated, and that if the audit committee decided that there should be no such rotation, the reasons for that decision should be made clear to shareholders in a statement. Is the Secretary of State attracted to that proposal, and if not, why not?

Ms Hewitt: I am grateful to the hon. Gentleman for his welcome for the statement. He is a long-standing member of the Select Committee. We will want to respond in detail to the Committee's report, which was published yesterday. I noticed in particular the proposal that the audit committee should consider rotation of the audit firm after five years and should report fully on why, if it does not do so, it has chosen not to do so. That seems a helpful and practical suggestion, and I have no doubt that the group will consider it carefully, as we shall.

Mr. James Plaskitt (Warwick and Leamington): I welcome my right hon. Friend's statement, and I am pleased that she has found time to read the Treasury Committee's report, as it has only just become available. We took important evidence from Sir David Tweedie, who chairs the International Accounting Standards Board, especially on the way in which the industry is financed, which is by raising income from companies. He gave examples of companies that have tried to put pressure on accounting firms, because they are paying the fees for the operation. That led us to conclude that an alternative structure for financing the accountancy industry should be examined, and we suggested that it be done on a similar basis to that which applies to the Financial Services Authority. Has my right hon. Friend had time to think about that recommendation?

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