Examination of Witnesses (Questions 480-492)|
TUESDAY 2 JULY 2002
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
484. You said that you were going to be doing
(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
(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.
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
Chairman: With that clarity, we will
finish the session. Thank you very much for your attendance.