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Jacqui Smith: With the leave of the House, Madam Deputy Speaker.
We have had a useful debate that was probably more interesting than some people thought that it was going to be, although it ranged a little wider than the Bill. I am pleased that the House has had the opportunity to devote some attention to the subject of company law. Companies are an essential feature of our lives and it is crucial that we do not leave this area solely as the preserve of specialist lawyers—or even accountants, notwithstanding the very good speech by the hon. Member for Fareham (Mr. Hoban).
I want to respond to some of the issues that hon. Members raised, but we will return to some of the more detailed points in Committee. Several Members asked about the progress that we are making on the company law review. As I said in my introduction, we are the Government who undertook that review, which spelled out the comprehensive nature of the reform that is
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necessary. Let me be clear that we are working on and will make proposals that will enhance shareholder engagement, foster a long-term investment culture, help to ensure better regulation, enshrine the principles of "think small first", make it easier to set up and run a company, and ensure that the law remains flexible for the future.
As the hon. Member for Weston-super-Mare (Brian Cotter) said, we have already started our consultation on the new powers to reform and restate company law. Taking forward that detailed work is no small task, but we will ensure that we get it right by drawing on expertise in business and elsewhere to help us. We will legislate as soon as parliamentary time allows and publish a draft Bill beforehand to allow for further full consultation.
Several hon. Members referred to the operating and financial review, which represents an important opportunity to develop the information that is available to shareholders and the market and to enhance financial statements to allow much broader discussion and analysis of the business. We consulted widely on that. The consultation closed on 6 August, and we received more than 130 responses. We will soon introduce regulations to ensure that we make progress on that important aspect.
Interestingly, almost all hon. Members commented on audit liability. The voices of the hon. Members for Sutton Coldfield (Mr. Mitchell), for Fareham and for Weston-super-Mare, on one side of the House, and of my hon. Friends the Members for Great Grimsby (Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins) on the other, identified the difficult challenges involved in taking that matter forward.
I am somewhat averse to calling the hon. Member for Sutton Coldfield a Johnny-come-lately to this issue, but not so averse that I will not. It was this Government who undertook the review that led to the changes that brought in limited liability partnerships, and this Government who undertook the consultation to which we have received several detailed responses. Although some respondents will have asked for confidentiality, I will ensure that those responses that we can make available are placed in the Library. Subsequently and rightly, we asked the Office of Fair Trading to consider the competitive impact of proposals for a cap on auditor liability. Let me reiterate our objectives for progress on that: to ensure access to high quality audit provision for our businesses; to ensure that we continue to drive up the quality of the audit; and to ensure competition in the audit market. I believe that I am—dare I say it—the voice of reason in the discussion. We shall keep the objectives at the centre of our consideration.
As my right hon. Friend the Secretary of State made clear in the statement, we will not ignore the advice of the independent OFT, which has made clear its view that the proposals for a cap on auditor liability as proposed in the consultation may be competitively neutral. However, we shall consider seriously ideas for limiting liability proportionately by contract. As I said earlier, the challenge is for us all, including auditors, investors and business, to come together to ascertain whether that would work, whether it would be desirable and whether it would deliver the objectives that I outlined.
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The hon. Member for Sutton Coldfield mentioned directors' liability. Our objective is to maintain the necessary pool of expertise to direct our businesses. He asked some specific questions. He asked why we were changing that law but not the law on auditor liability. As I said earlier, changes should be considered on their merits. There is stronger and clearer consensus that the need for reform is more urgent in respect of director liability and greater agreement exists on the proposed reforms, which are not a cap on directors' liability but provide the ability for businesses to indemnify some of the costs that might confront directors when facing action.
On shareholder approval, the proposals will provide shareholders with information. They will not require prior shareholder approval specifically because we do not propose a cap on liability in the way in which the hon. Gentleman expected.
The hon. Gentleman criticised us both for not taking action quickly enough and for bringing forward action on community interest companies in advance of the Charities Bill and the proposals for a charitable incorporated organisation. As my right hon. Friend the Member for Leeds, West (Mr. Battle) ably pointed out, the introduction of the community interest company is an important part of the Government's programme for support for social enterprise and will complement the other available options. Work is well advanced on it and many community and social enterprises will benefit from its introduction. It is therefore right to take that forward.
Charitable incorporated organisations come from a different direction, although both they and community interest companies were recommended by the strategy unit and both were supported in consultation. As my right hon. Friend said, although charitable incorporated organisations provide some of the restrictions, they come from the charity sector and are therefore subject to some of the restrictions of charity law, whereas community interest companies come from the enterprise end, take the form of a company and therefore do not have some of the restrictions but bring with them other responsibilities. There is a distinction between the two and it is therefore logical to bring forward community interest companies in a way that will help to promote social enterprise and create many of the benefits that my right hon. Friend rightly identified.
The benefits include communities' ability to develop not only socially but economically, therefore facilitating the establishment of the asset lock and ensuring that entrepreneurs do not need to reinvent the wheel when determining an asset lock. The hon. Member for Sutton Coldfield appeared to suggest that they should have to do that on each occasion. We believe that the measure will help us to help entrepreneurs and to develop the social enterprise sector.
I agree with my right hon. Friend the Member for Leeds, West that we need clarity about non-profit distribution and to encourage and support growth. I hope that we can discuss in Committee, and when we consider the Department's action to promote social enterprise, how we can ensure that we not only put in place the legal framework but that CICs deliver the benefits for our communities and our economy that he ably spelt out.
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The hon. Member for Weston-super-Mare mentioned, among other things, late payment. It is a serious issue, albeit outside the Bill's remit. Of course, the Government are aware of the problems that late payment causes small firms in particular. That is why, as he pointed out, we legislated on that basis. We shall study his remarks carefully and are always open to suggestions to help smaller businesses and encourage enterprise.
My hon. Friend the Member for Great Grimsby continued his crusade, possibly against auditors and accountants, although he claimed to recognise the important role that auditors play. I look forward slightly to the time when the comments of one A. Mitchell are confused with the comments of the other A. Mitchell.
My hon. Friend made several important points. I agreed with some and disagreed with others. He mentioned competition among the big four auditors. I have already mentioned competition in the context of auditor liability. The OFT reviewed the competitive position of the big four in 2002. It concluded that the market for audit and accountancy is highly concentrated and announced its intention to keep that under review. In addition, the European Commission has announced that it intends to progress such work. We do not disagree about the importance of competition in the market for audit, but we possibly disagree about how we get there.
I disagree with my hon. Friend's comments about the nature of the regulatory structure. The Bill makes the regulatory structure more independent and coherent. The new financial reporting council will be a more effective regulator with the four clear responsibilities that I set out.
My hon. Friend the Member for Newcastle upon Tyne, Central was worried about whether we had abrogated our responsibility to the Auditing Practices Board on how to frame standards. The co-ordinating group on accounting and audit, which was not dominated by professional interests but made up of Government regulatory bodies and independent experts, gave much attention to precisely the sort of standards that my hon. Friend mentioned. The Auditing Practices Board has made constant reference to that report. There has also been the report by Sir Robert Smith on audit committees and the European Commission recommendations have been borne in mind. There has been considerable input, including considerable independent and lay input, into the progress that needs to be made in developing audit standards.
My hon. Friend the Member for Great Grimsby mentioned the enforcement of financial reporting requirements and suggested that we had not strengthened them sufficiently. The Bill strengthens the role of the financial reporting and review panel in three important ways. Clause 14 allows it to consider interim as well as annual accounts. Clause 12 grants the panel the power to require information so that it no longer relies on voluntary co-operation and opens an information gateway to enable the Inland Revenue to notify the panel in the course of its normal business when it becomes aware of instances of mis-accounting.
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On top of that—this does not need the Bill; it is already happening—the panel is taking a more proactive approach to the scrutiny of accounts. That is important in turning the spotlight on to accounts to ensure that they maintain the high standards that we expect.
A general theme outlined by some of my hon. Friends is that this package of measures does not go far enough to improve audit independence and quality. I repeat my contention that the UK system of core principles and safeguards has already proved itself to be more effective than an American-style set of rules and prohibitions. We are putting in place a whole range of measures to address auditor independence. As a result of that, the co-ordinating group report deals with the problems from various angles—those of the auditor, the company and the oversight body. That is why there will be tougher ethical standards on independence and objectivity and they will be binding on the profession. That is why the standards setter, the Auditing Practices Board, will be independent of the professional accountancy bodies. That is why the new standards will require audit partners to be rotated more frequently and will introduce a two-year cooling-off period before an auditor can be employed by a client.
Firms themselves will ensure that there is a much stronger role for the company's audit committee. Clause 7 builds on that by increasing the transparency of the non-audit services provided to permit the market itself to decide when the company audit relationship may be inappropriate. When the legislative and non-legislative measures are taken together with the independent body that is being set up through the FRC, they will provide a UK approach as well as a strong and independent approach to ensuring the quality of audit that we all want.
Whether as Governments, businesses, investors or individuals, we all have a role and a responsibility in taking forward the strengthening of the environment within which businesses operate in the UK. I strongly believe that the UK continues to offer an attractive environment for companies to operate in. It is an environment in which our regulation does not overly burden businesses and in which change is driven forward by consultation and mutually agreed solutions. This enables investors and markets to prosper, enterprise to thrive, communities to develop and jobs to be created in the knowledge that a secure supporting structure is in place that is flexible enough to respond to the concerns as they arise.
That approach is taken forward in this carefully targeted Bill. It responds to important issues that have been raised in the context of company law. It contains the legal changes identified as priorities in the light of Enron and similar scandals, and it contains measures to promote the creation and development of social enterprises that can bring significant benefits to local communities and more widely.
On Third Reading in another place, one of the Opposition spokesmen said that
"we now have a Bill that is workable and will be of great benefit".—[Official Report, House of Lords, 14 July 2004; Vol. 663, c. 1297.]
I cannot put it better myself. I commend the Bill to the House.
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