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Mr. Mitchell: My right hon. Friend makes an extremely good point.

The support expressed by the CBI also comes from the Hundred Group of Finance Directors and many individual businessmen. It is thus clear that the Government's second condition has been met.

1.15 pm

The Government's third requirement was support from the investment community. The Association of British Insurers, the National Association of Pension Funds and a substantial number of individual investment houses have made it clear that they support the principle of auditors being able to limit their liability by proportionality. However, they have said that they would need to see the fine detail of how such a proposal would work before finally committing themselves to it. That is perfectly reasonable, yet it provides absolutely no excuse for the Minister's failure to amend section 310 of the 1985 Act.

It had always been envisaged that the Financial Reporting Council, on which investors, businesses, the audit profession, the Financial Services Authority and the Government are represented, would oversee the detailed terms of clauses in an audit contract to limit liability, so there would be no question of anyone signing up to the proposition before seeing the detail. Furthermore, given that the appointment of auditors is subject to a shareholder vote at an annual general meeting, investors would always have the last word on the matter, so, as I say, the legitimate requirement of investors and others to see the fine detail before making a commitment should not be used as an excuse for failing to introduce enabling measures today.

I have always found it rather strange that the Government thought that enhancing competition in the audit market was a prerequisite for auditor liability reform. We need the UK's capital markets to be competitive and highly regarded. Sound financial reporting, backed by high-quality auditing, is a prerequisite for that, and it is clear that liability reform would improve the work of auditors. Contrary to the assertions of the Office of Fair Trading, it is clear that competition in the audit market would improve if liability reform were embraced. It would improve the chances of the existing big four avoiding catastrophic litigation, which could ultimately destroy them, and increase the likelihood of mid-tier firms being prepared to take on audits about which they had specialist knowledge and for which they had global reach, if necessary.

The final condition laid down by the Government was that liability reform should improve the quality of auditing. I understand that several useful discussions have taken place between the Institute of Chartered Accountants and the users of accounts on how there could be more innovation in audit reports, how further assurance could be provided and how better information for capital markets could be given within an appropriate liability regime. However, audit quality fundamentally depends on the quality of people in the auditing profession. There is no doubt that the risk of catastrophic litigation is a deterrent for high-quality people, so it is possible that quality will reduce if we do not have liability reform.
 
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All the conditions that the Government laid down have been met, so if they prevaricate there is a risk that great damage could be caused to not only auditors— I accept that that might not worry every hon. Member—but financial stability, which should worry each and every one of us. Immensely damaging consequences would arise from the collapse of one of the big four or if a company were unable to find an auditor simply because the perceived risks associated with undertaking its audit were too great. Permitting auditors to limit their liabilities would not avoid those risks completely, but would significantly reduce their likelihood. The Government's failure to legislate is thus as irresponsible as it is disappointing.

It has reached my attention over the past few days that the situation might be getting even worse. I understand that the European Union transparency obligations directive will make the position and liability of auditors and directors more uncertain. It is arguable that the directive might make them liable to investors in general rather than just to existing shareholders, as is the case under current English law. Auditors can cap their liabilities in other states of the European Union. The Minister will know that in Germany the cap is set at €4 million per audit, which is £2.5 million. In Austria, it is a lesser sum of €350,000. In Greece, the cap is set at five times the salary of the president of the Supreme Court.

Auditors are liable to existing shareholders if they are negligent in their audit, but the transparency directive means that there is a risk that auditors could be liable to an investor who was not a shareholder when the audit certificate was given, but who became one subsequently on the basis of those accounts. In other words, a far bigger group of people could join in an action against the auditors.

These are dry but extremely serious matters. We have tried to help the Minister in Committee and today. We did not vote on the subject in Committee and are shocked at the way in which she and her colleagues have been treated by the Chancellor of the Exchequer and Treasury Ministers. If she can give a copper-bottomed assurance of action, with a time scale that satisfies us, that will suffice, but if she cannot, we shall put new clause 1 to the vote.

Mr. Cousins: I apologise to you, Mr. Speaker, and to the hon. Member for Sutton Coldfield (Mr. Mitchell) for missing the first two or three minutes of his speech.

The debate is remarkable in that the Conservative party seeks to entrench the powers of a cartel by embedding new principles in legislation. To pray in aid the company laws of Greece to allow that to happen is a double conversion to more badness of an extraordinary kind.

I shall be frank. I see little requirement or necessity to consider the idea of limiting auditor liability. None the less, having regard to the debate on Second Reading and some of the discussions in Committee, it is clear that the Government are at least willing to consider the principle of limiting auditor liability in some form.

Mr. Andrew Mitchell: The hon. Gentleman opposes limiting auditor liability. Will he therefore explain why new clause 10, which he has tabled, does precisely that?

Mr. Cousins: I am about to do so.
 
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That limit on auditor liability could be achieved by one of the three methods outlined by the hon. Gentleman: proportionate liability, a cap on the sum or a system of contract between the company and its auditors. I remind him of the intervention by the hon. Member for Sevenoaks (Mr. Fallon), who explained to him some of the risks and dangers in a system of limiting liability in a contract between a company and its auditors which could give the company's auditors an even greater control of its workings and their activities within it. That is a new and unfortunate principle. To entrench a cartel is one thing, but to entrench a cartel by giving it new rights over companies to enforce its will is wrong.

It is clear that the Government are considering the matter. We all know the way in which debates work. I thought that it might assist the Government, who are coming under intense pressure from one side of the argument, to consider opposite views and the factors that might be relevant were they minded to consider proportionate liability in the future. I have set out some of those factors in new clause 10 as a contribution to the debate.

I referred to a cartel, which is perhaps unkind but not untrue. The hon. Member for Sutton Coldfield said that the FTSE 100 companies are audited by the big four auditors. I am informed that all but eight of the FTSE 250 companies are audited by the big four. That looks like an embedded, entrenched and powerful cartel that has a stranglehold on the current marketplace, effectively barring access to smaller companies, many of which are not small by any normal judgment but small by comparison with the big four.

Mr. Greg Knight: If limited liability were in place, might not the auditing work be more attractive to the smaller companies, which would enter the market?

Mr. Cousins: Not if the limit on liability was carried out in the form of a contractual relationship between the auditor and company. That method of limiting liability gives the mechanism to entrench the existing cartel.

As for the financial cap, the Opposition's new clauses set a cap that would be way too high for most medium-sized firms to enter into if money were a consideration. So that is not a powerful argument. We are talking about a fundamental principle of British company law since at least 1948. In that year, the Government of the day—a Labour Government—agreed to the requirement that audits would be acceptable only if they were carried out by a limited range of firms. In effect, that gave the auditor firms a professional monopoly over such work.

The other part of that understanding, however, was that the moral hazard that was thereby created would be dealt with by exposing those auditor firms to the full test of absolute liability. That principle has guided the House in its discussions of the issues and through the company legislation of the 1980s steered by the Conservative party. That approach recognises that once we remove the fact of moral hazard, and if we are also prepared legally to entrench a cartel, we are moving in a profoundly wrong direction.

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