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29 Jan 2003 : Column 893—continued

Mr. Jim Cousins (Newcastle upon Tyne, Central): I congratulate my right hon. Friend on what she has said about the move away from self-regulation, but I want to return to the point about possible conflicts between audit and non-audit services, which is now being raised by hon. Members on both sides of the House. Does she not see that in sending out rather confusing signals about what may or may not be acceptable in future, she has lost the opportunity to make a clear-cut separation between external audit services, internal audit and consultancy? That distinction could help to create more competition, and to prevent the dangerous possibility of regulatory conflict for listed companies in Britain that also list in the United States.

Ms Hewitt: I entirely agree with my hon. Friend about the importance of that point, but I do not think that we are sending out confusing signals. The report from the combined group is absolutely clear about that, and I have no doubt that the FRC will respond positively to the recommendations. I also stress to my hon. Friend the fact that the steps that we propose should be taken to ensure that there is much greater transparency in relation to where the audit firms get their income from.

All the recommendations about an annual report, about the disclosure of the fees received from a client where those exceed 5 per cent. of a firm's total fees, and about audit firms publishing information on how they manage auditor independence within the firm, together with relevant management and reward structures, will shine a bright spotlight on the practices of audit firms. They will also, I think, ensure that the separation of functions and the preservation of the independence and integrity of the audit, which is at the heart of both my hon. Friend's concerns and my own, will be delivered.

Mr. John Greenway (Ryedale): Will the Secretary of State monitor the growing practice of the qualification of audit certificates, which is having adverse consequences for small businesses? I learned only this week that the Civil Aviation Authority is refusing to accept for the purposes of ATOL—air travel organisers' licensing—bonding accounts that have had a qualified audit statement. We understand why the auditors are doing that, but what is the small business supposed to do when its own auditor says, "I can only give a qualified statement, because that's what my professional body says I must do"? That is very difficult, and I would like the Secretary of State to look into the problem

Ms Hewitt: The hon. Gentleman raises an important point. There is no doubt that since Enron, auditors

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have, not surprisingly, been much more cautious, so there is a much greater readiness to qualify accounts. I have not come across the particular problem that the hon. Gentleman raises concerning small firms that need ATOL bonding; of course I will look into that and also draw it to the attention of my right hon. Friend the Secretary of State for Transport.

Angela Eagle (Wallasey): I congratulate my right hon. Friend on her determination to bring forward quickly these sensible changes in the aftermath of the financial scandals that became apparent in the United States. Will she undertake to keep the new regulatory system under constant review, because ways of getting round regulations often demonstrate much more innovation among the rogues than we would like to see. If my right hon. Friend keeps such matters under constant review, we shall know that we have the best possible protection in this country, and that shareholders and investors can proceed with confidence.

Ms Hewitt: I am grateful to my hon. Friend for her comments. I hope that the new structures that we are putting in place, especially the merger of the Accountancy Foundation and the FRC, will simply be able to settle down and get on with the job. It would be a great pity if we had to change those structures again in just a year or two. Within that framework, however, I agree that we must monitor the impact of the changes that we are making. The new unified regulator and the overarching council that we are establishing will be well placed to ensure that they are constantly monitoring and reporting on the impact of the strengthened ethics and the independent standards that are being put in place, as well as the strengthened and much more proactive enforcement and monitoring system involved.

Mr. Michael Moore (Tweeddale, Ettrick and Lauderdale): As a member of the Institute of Chartered Accountants of Scotland, I believe that the Secretary of State's proposals for audit and accountancy deserve strong support. In the current climate, however, does she not agree that public confidence in the reforms, particularly in the capital markets, will depend on their having an early statutory underpinning, and a funding basis independent of the accounting profession that is to be subject to the revised regulations?

Ms Hewitt: I am grateful to the hon. Gentleman, with his expertise in such matters, for the welcome that he gives the proposals. Confidence in the system is crucial, and I think that we will achieve that. There is enormous consensus, especially with the regulators—the independent bodies—about what needs to be done, and that this package is the right one. He makes a strong case, as does the combined group, for a statutory underpinning for the new package, and the combined group has sketched out what that might look like. As he will know, there are very different views about which bits of the system should be underpinned by statute. I am sure that the House will groan if I announce yet another consultation—but we do need to take views on the details of what that statutory underpinning should concentrate on; we do not want to legislate

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unnecessarily. We will consult on that, and if we decide that it is necessary, we shall make proposals as quickly as we can.

Mr. Nigel Beard (Bexleyheath and Crayford): I congratulate my right hon. Friend on the statement, which I think will make a major contribution to securing the integrity of corporate finance. In the light of what happened with Equitable Life, and other difficulties in the insurance industry, will she consider whether the special risks of insurance require special treatment, both in accounting and in auditing?

Ms Hewitt: That, of course, is a matter for the Financial Services Authority and I understand that it is looking at it already.

Mr. John Bercow (Buckingham): Given that more than 100 companies with a full listing have a market capitalisation of less than £10 million, how does the right hon. Lady expect those businesses to comply with the Higgs requirements on non-executive directors?

Ms Hewitt: As I said earlier, in some cases those companies will not comply with every aspect of the Higgs recommendations, and Derek Higgs makes it very clear that that is what he expects. His recommendations are drafted with proper regard for the fact that they will not fit those smaller listed companies, and the comply-or-explain provision works very well in enabling companies to say, "This particular recommendation"—on the number of independent directors, perhaps—"does not fit our circumstances, for this reason, and this is what we have done to ensure that we still have very strong corporate governance," which of course is what our shareholders expect.

Ross Cranston (Dudley, North): I very much welcome the package that my right hon. Friend has announced. It is a sensible and measured approach. However, may I press her on the progress of the company law review? Although one always starts with self-regulation and the improvement of professional standards, at the end of

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the day one needs a modern legal framework to underpin directors' duties and to ensure that auditors' conflicts of interest are properly addressed.

Ms Hewitt: I entirely agree with my hon. and learned Friend about the need for complete reform of our archaic company law, but it is of course a huge undertaking. It is very complicated. I am glad to say that the whole process of drafting the legislation is making very good progress and, as my hon. and learned Friend will be aware, we are consulting on many different aspects of the company law reform package at the moment. I hope that we shall be able to legislate on it just as quickly as possible.

Mr. Mark Hoban (Fareham): I have a declaration to make in that I am a non-practising chartered accountant. What estimate has the Secretary of State made of the additional costs that companies and auditors will have to bear as a consequence of the proposals? It strikes me that these, in addition to some of the proposals in the company law White Paper, will actually increase the costs of compliance to many businesses, and perhaps the extent to which those costs are disproportionate to the benefit that they bring.

Ms Hewitt: The initial reaction that we have had, particularly from the large companies that are most affected, is that in most cases they are already in compliance with the bulk of, for instance, the Derek Higgs recommendations. I do not believe that the additional compliance costs will be substantial in most cases, if indeed there are additional compliance costs at all, but of course the FRC will be undertaking a proper regulatory impact assessment of the changes that it will be bringing forward.

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