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'(1) Section 310 of the Companies Act 1985 (c.6) (provisions exempting offices and auditors from liability) is amended as follows.

(2) At the end of subsection (1) add—

 
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"; but before considering any exemption, indemnity or limit on auditor liability, the auditors shall prepare a statement of terms for the approval of shareholders and the information of employees.

(2) A statement prepared in pursuance of subsection (1) shall—

(a) recognise a duty of care owed to each individual who is a shareholder or employee;

(b) recognise the auditor's duty to detect material fraud; and

(c) set out how the audit working papers and files to which any exemptions, indemnity or limit of liability is applied will be made fully available to the listing and regulatory authorities.".'.

Mr. Mitchell: I begin by drawing the House's attention to my interests, which are declared in the Register of Members' Interests. This is an interesting, complex and much discussed Bill, and on Second Reading I specified the matters of concern that the Opposition wished to discuss in Standing Committee. The matters that we have not brought back to the House for discussion on Report today include the independent monitoring of major audits, the levy, and the unduly burdensome and onerous obligations that the Bill places on those below board level.

In Committee, we also discussed the nature of disciplinary hearings, the effect on them of the European convention of human rights, and individuals' right to representation. The Committee divided on a number of these matters and in the votes on independent monitoring of major audits and on fair disciplinary hearings the Conservative Opposition had the support of Liberal Democrat Members. Unfortunately, we were not successful in either.

Conservative Members forced a vote on the levy without the support of Liberal Democrat Members. We believe the levy to be very burdensome for business, and the Government have said already that they expect there to be a 400 per cent. increase in the level. I am sorry to say that we were again unsuccessful in persuading the Government to move on that matter.

Many important matters were raised in the two days of Committee sittings, but the Minister showed herself to be unflinching, and she remained unmoved by the arguments that we presented. However, since then I have received a very decent letter from her, in which she accepted that the Opposition had identified one lacuna—as she called it—that will be put right today. Obviously we are grateful to her for that.

Today, we shall bring to the Floor of the House the issue of auditor liability, which is covered by these new clauses. We shall then spend some time on the extremely important question of the investigatory powers available to officials of the Department of Trade and Industry. Also, given that lack of time meant that we were unable fully to discuss part 2 of the Bill in Standing Committee, a probing amendment has been tabled to allow the House to discuss the question of community interest companies, if they so wish.

In general, the Bill is unexceptional and modest, but it does not touch on the really big question of auditor liability, even though the DTI consulted on it. The issue is rather like the elephant in the drawing room, in that the Government seem to want to ignore it.

The Opposition's concerns about liability have nothing to do with the auditing profession, which, as far as I know, is not a specific target for the Conservative
 
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party at the next general election. Indeed, I have spoken out on the Floor of the House against various tax schemes invented by auditors that deprive the Exchequer of national insurance and tax funds to which it is entitled. I yield to no one, therefore, in my vigorous distaste for sophisticated avoidance schemes. It is wrong, for example, for a doctor earning £60,000 or £70,000 a year to pay 40 per cent. income tax while a well paid and heavily bonused American banker working in the City does not.

The comments that I make today about auditing are not so much about the position of the auditing profession, but about the good and proper management of the UK corporate system. Apart from auditors, I can think of no other group in commercial life in Britain that can neither limit their liabilities through insurance nor by contract with their customers. Auditors, as far as I know, are the only group stuck in that position. They are in that position because of section 310 of the Companies Act 1985. The measure was first introduced in 1929—some 75 years ago—under a Conservative Government, as the Minister was kind enough to remind us in Committee, and was designed to deal with collusive relationships between companies and their auditors. Those relationships were at the expense of the shareholders and Parliament rightly decided that action should be taken.

It is bizarre that men and women in the auditing profession are asked to take on personal risks that the insurance market, with all its resources, experience and analysis, now says are unacceptable.

Mr. Greg Knight (East Yorkshire) (Con): My hon. Friend is developing a powerful case. As I recall, the Government undertook a consultation online on the very issue of auditors' liability, which ended in March this year. If so, why have the Government not introduced any provisions in the Bill in that regard? One would have thought that they would have had ample time to have reached a conclusion on the consultation and included some provisions in the Bill, making new clause 1 unnecessary.

Mr. Mitchell: My right hon. Friend pre-empts much of my argument. It is at the heart of the Opposition's concerns about this Bill that the Government have yet to take action, which we believe is urgently needed, not in defence of auditors but in defence of the good governance of the British corporate system.

Mr. Jim Cousins (Newcastle upon Tyne, Central) (Lab): I remind the hon. Gentleman that the 1997 Labour manifesto contained a commitment to introduce limited liability partnerships. Such partnerships go a considerable way towards addressing some of the issues that he raises, and that commitment was put into law in 2000.

Mr. Mitchell: The hon. Gentleman is correct on those two points, but as I explained in Committee, they do not resolve the problems.
 
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There are four major auditors left. It is common ground on both sides of the House that we need more auditors to enter the market. The big four audit all of the FTSE 100 companies and not quite all of the FTSE 350. We would like more of those who audit at the bottom end of the FTSE 350 to compete with the big four. The law, as the hon. Gentleman just pointed out, allows audit firms to be limited liability companies or limited liability partnerships. That provides some protection for firms and the capital invested by the partners. However, audit firms are funded entirely by their partners' capital, which has often to be borrowed from banks or through leasing agreements. Those frequently have to be guaranteed by the partners and that is why the legislation, although welcome, is not adequate.

I want to make two other points at this juncture. The first is to do with the law of joint and several liability and the second relates to the fact that only four firms in the world are capable of auditing our largest multinational companies.

The law of joint and several liability means that the audit firm is liable not only for its own negligence but also for that of other parties if it is unable to pay for the loss those other parties have caused. That is what hugely increases the jeopardy facing an audit firm. As there are only four firms, we need to ensure that they survive and prosper and, preferably, that others make the necessary investment, as I have just described.

Lynne Jones (Birmingham, Selly Oak) (Lab): The hon. Gentleman may be aware that in the United States the Federal Reserve has banned Ernst & Young from practising for six months, which has left only three of the major companies available in the US. As a consequence, that has helped smaller and medium-sized audit firms to expand their business. Is not that the opposite approach to the one he advocates?

Mr. Mitchell: Were one of the big four to go under, or be banned, in this country, I have no doubt at all that, within a short period, major public firms, with many shareholders and many pension funds invested, would be unable to secure an audit, so it would be most unwise to draw the hon. Lady's conclusion.

Let me give the House an example of the problem that must be addressed. Let us suppose that a major company is bankrupted because its directors either followed a disastrous strategy or had engaged in fraudulent behaviour, notwithstanding the era of shareholder activism, the work of the auditor and, of course, the new corporate governance codes that have been greatly strengthened by this and the last Government. Let us assume that the liquidator successfully sues the auditors and the directors for £1 billion—by no means the largest amount claimed by liquidators in broadly similar circumstances. Let us further assume that, between them, the directors have some insurance and some limited private assets but that that does no more than cover the legal costs and that the auditors are left with a bill for £1 billion, so they, too, are bankrupted.
 
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It is clear that the directors in that case are to blame; they bear the greatest responsibility for having embarked on a strategy that failed and, in the circumstances I described, for perpetrating a cover-up.

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