Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 480-492)



  480. Is it not odd, that this idea of compulsory rotation is now being trailed in the newspapers as having a very high probability, whereas only a few months ago, UK representatives at the European Commission were saying that it would be an unwise decision because there was no evidence that it improved auditing.
  (Mr Grewe) That probably reflects comments quite a long time previously to that. Most of this was discussed in 2000-01.

  481. So you have changed your mind now.
  (Mr Grewe) I do not have a personal view on this. It is right that the issue is looked at in the way it is. In a sense you have to wait for the interim report of the co-ordinating group to see what position is taken. It is very difficult to anticipate that or indeed how Ministers will then react to that.

  482. May I clarify one thing with Mr Loweth? Under questioning from Mr Mudie earlier on, you did say that you would be taking up the suggestion that Sir Howard made earlier and that you would be referring this issue of the Big Four and their position on to the Competition Commission. Who is actually going to do that referral?
  (Mr Loweth) We will have to discuss with Ministers.

  483. Will it be a Minister who refers it on?
  (Mr Loweth) It will be approved by Ministers. It can either be the Minister making the referral or the Minister approving officials.

  484. You said that you were going to be doing that referral.
  (Mr Loweth) We will put advice to Ministers on that.

  485. You will advise Ministers to refer it to the Competition Commission.
  (Mr Loweth) Yes.


  486. So it is your advice to Ministers which is going to be referred.
  (Mr Loweth) That on the basis of what Sir Howard says there is concern about the fall from the Big Five to the Big Four, that there are competition issues which need to be looked at.

  487. Your advice is to put it on to the Competition Commission.
  (Mr Loweth) Yes.

  488. What is the Government's position on making compulsory an operating and financial review for listed companies? What role does the Government see for the auditors in relation to the contents of such statements?
  (Mr Rogers) The operating and financial review is a proposal which has emerged from the company law review. The aim from the review was that it would be good to impose an additional requirement on large companies of economic effect to require them to provide a discussion and analysis of the performance of the business and the main trends and factors, essentially to enable users to assess the strategies adopted by the business and the potential for successfully achieving them. That was the review's recommendation, following much consultation and it has actually been a proposal which has been pretty warmly welcomed by a large number of people. As to the Government's response, I fear you will have to await the promised White Paper on this subject to learn what the Government is going to respond on that.

Mr Mudie

  489. If three of you were in the room, you must have heard Sir Howard speak about the listings and negotiations which are going on in Brussels. You must have heard his pessimism about the outcome and that in his view there would be the need for legislation if they left out of the proposals arrangements we have for good regulations which are dealt with through listings. Do you share that analysis? Are you preparing a safety net of legislation to come through fairly quickly if Sir Howard's pessimism is proved correct?
  (Mr Lawton) The listing rules over the years have been used as a relatively flexible mechanism for enforcing a number of corporate governance positions which might have sat elsewhere in the UK legislative framework but listings will provide a relatively flexible and speedy method of enforcement. The Commission is bringing forward a stream of legislation to update the way that listing and financial reporting arrangements apply across the Union. The first plank in that has been the Prospectus Directive which deals with initial disclosure requirements.

  490. We do know this and we have been briefed on it. We are simply asking whether at the end of the day the legislation knocks out some safeguards. Sir Howard thought it would and he thought it would need legislation. Are you as the Government preparing for that, to bring legislation through quickly if that happens? It is a straightforward question.
  (Mr Lawton) Forgive me, I will get to the answer but the context is important with respect. The Prospectus Directive is the first plank of that. Subsequent directives will deal with ongoing disclosure requirements, which is where most of the key provisions in the listing rules currently sit. Those directives have yet to be tabled by the Commission and negotiations have not even begun. We have a process of 12- to 18-months' worth of negotiations to go. Certainly the scenario Sir Howard painted is a possibility, given where the Commission started with the Prospectus Directive, but it is by no means a certainty. The Commission elsewhere are looking very seriously at corporate governance across the EU, so those two strands will need to come together at some point. This is the answer to your question: Ministers will not want to see financial disclosure and corporate governance arrangements in the UK being diluted. If that looks like it is happening, they will argue strongly against it in Brussels and it will be sensible to look at contingency arrangements for delivering things which we currently now deliver in the listings rules through other mechanisms. The review of the listings rules might provide a very timely vehicle for doing that.


  491. There are 23 regulatory bodies. One of our previous witnesses, Professor Prem Sikka, said there were too many with their fingers in the pie. You do not get close co-operation and co-ordination with a system such as that. Is that issue on the agenda? What progress has been made on it?
  (Mr Grewe) We referred earlier in relation to the Foundation to a review which is built in after a certain time, after it has been running for a little while. That provides an opportunity to look at some of the structural issues. In a sense, the important point is that although clearly, if you add up numbers, it is 24, if you look beneath this it is not simply a question of numbers. You have to look at whether they are effective and their responsibilities are clear and there is something to be said for having a clear body with a clear responsibility. There are also clear elements within this. If you really want to list them you have the Financial Reporting Council and its bodies which form a coherent whole, we have seen the ASB today, the Accounting Foundation and its bodies, which have this oversight function over the accountancy bodies and you have the professional accountancy bodies themselves which still have a number of important self-regulatory functions. A separate issue: where does that go in the longer term? You have our Department which has statutory responsibilities in relation to the accountancy profession. There is a coherent and clear picture. I think it is possible by tossing in a simple number to overplay the extent of the complexity. I accept there are issues there which can be looked at. Whether now is the right time with the Foundation up and running, getting into its stride, is another matter.

  492. It is not on your agenda presently.
  (Mr Grewe) We will have to see to some extent what the report of the co-ordinating group to Ministers says. It is difficult for me to anticipate that at this stage. It is on the agenda in the sense that it has been discussed, considered. There is a question as to whether now is the right time to start to dig up some of these things by the roots in terms of structures, but I would not pretend that if you had a clean sheet of paper you would necessarily create what is a rather peculiarly British system.

  Chairman: With that clarity, we will finish the session. Thank you very much for your attendance.

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