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Mr. Fallon:
In new clause 10, the hon. Gentleman seems to accept a diminution of the moral hazard that he is now championing, as it refers to "exemption, indemnity or limit". Could he elucidate?
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1.30 pm
Mr. Cousins: If the Government were tempted to limit liability a wide range of market actors should be able to contribute to that decision. Also underlying new clause 10 is the principle that the auditors owe a duty of care to people concerned with the company that they are auditing. I shall discuss the duty of care later, as it is a legally contested principle with a bearing on our debate. Finally, if we wish to limit liability, new clause 10 would give the regulator full and automatic right of access to all the documents and working papers of both the company and the audit firm. If, therefore, we go down the route of limited liability there must be an exchange—there must an increase in both the regulator's power and the ability of other market actors to contribute to the debate, and the duty of care that ought to guide the new relationships that are created should be much clearer.
Among the motives that underpin new clause 10 is a recognition of auditors' duty of care. Auditors' responsibility has been eroded by case law. Under the Caparo Industries judgment of 1990, auditors generally owe a duty of care to the company only as a legal person rather than to individual shareholders. The Law Lords further decided that the audit report was prepared to enable shareholders to exercise their rights as members of the company, and not to enable them to make any investment decisions. That reversal of the principle of the duty of care has had some unfortunate effects. It is doubtful whether we can always rely on audit reports to provide public actors, market participants, investors in the market and shareholders with a guide to what is going on in a company. Another legal judgment in 1996 held that auditors may be liable to third parties beyond the company and the auditor where
"the purpose of audit work has been widened so that it is no longer confined to the statutory one . . . and the auditor in all the circumstances ought to have regarded himself as carrying out the audit for the plaintiff's purpose as well as the company's."
Such circumstances, however, are rare, which is why I have sought to revisit the auditor's duty of care in new clause 10. If the Government wish to limit auditor liability, in exchange we should at least be able to re-establish the broad principle of the duty of care that existed before the Caparo judgment.
The Law Commission reviewed those issues in 1993 and 1996, and rejected the call for a cap on auditor liability. It concluded that
"we can find no principled arguments for a 'capping' system . . . that . . . cuts across a principle that a wrongdoer should compensate the plaintiff for loss caused by its tort or breach of contract".
It also said that a capping system would
"put the plaintiff at a disadvantage, since the cap would represent the upper limit in negotiations for a limit".
That demonstrates the unfortunate implications of the new clauses tabled by the hon. Member for Sutton Coldfield. The sum of £75 million in new clause 3, for example, would be significant in discussions and negotiations between companies and auditors. The Law Commission regarded
"the policy objections to joint and several liability to be at worst unproven and, at best, insufficiently convincing to merit a departure from the principle".
It responded to propaganda from the big four accountancy firms by arguing that it was
"misleading to say that defendants can currently be called on 'to provide 100 per cent. of the damages even though they are only 1 per cent. at fault' since the principle of joint and several liability is . . . relative to the plaintiff".
I made that point in an intervention on the hon. Gentleman.
The Limited Liability Partnerships Act 2000 passed by the Government increases the concessions and protection given to accountants. We have already moved a long way from the 1948 bargain, but very few of the concessions made in the intervening period have been accompanied by a compensating quid pro quo to increase the rights of companies, shareholders, employees and other market actors. If the Government embrace limited liability, new clause 10 would create a clear quid pro quo so that powers and rights are given to participants other than the big four accountancy firms.
Mr. Greg Knight: I am listening carefully to the hon. Gentleman's argument, but what is the rationale in new clause 10 for extending the duty of care to existing shareholders, but not future shareholders who may rely on a previous auditor's report?
Mr. Cousins: That point was covered backhandedly in the speech of the hon. Member for Sutton Coldfield, who rightly drew a distinction between the liabilities of auditors in mainland Europe and those of their British counterparts. In Europe, there are shallow financial penalties, but auditors can cast a wide net. The UK has evolved a different principle—auditors' rights and obligations are narrow but deep. I have therefore framed new clause 10 in a way that respects the traditional narrowness of obligation at the heart of the British approach. I do not want to move towards a mainland European system in which obligations are shallow but responsibilities are much wider. I want to maintain the traditional British principle of a network of narrow auditing obligations that are specific to a limited range of actors but have a deep application. I hope that that is helpful to the right hon. Gentleman.
Some of the mainland European principles that guide the connection between auditors and companies were prayed in aid by the hon. Gentleman to support his new clauses. However, they are full of bad consequences and under future legislation could allow all sorts of people to pursue action on various grounds against company auditors. My purpose, however, is to defend the traditional British principle of maintaining a pattern of narrow but deep obligations.
I do not want to detain the House too long. I have sought to put a contrary view to that being expressed by Conservative Members, and I have sought to introduce into the debate some discussion of issues that might be helpful to the Government when they consider their next moves on these matters. We should all bear in mind as legislators that major accountancy firms are sometimes fairly adept at non-co-operation with regulators. In the case of Parmalat, an Italian company, we heard recently that the UK parts of Parmalat were audited by a firm called Grant Thornton, but the firm says that the real auditor was Grant Thornton International, an Italian
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firm, and that the UK firm would not share its working papers and files with the regulators. That illustrates some of the mechanisms that auditors currently use to defend their position, without the House being motivated to entrench their powers still further.
I could go on at length, discussing some of the disciplinary schemes and some of the issues of Enron that have guided American legislation. I will not do so. Suffice it to say that when the hon. Gentleman says that the Institute of Chartered Accountants in England and Wales supports the principle of Parliament adding to the entrenchments of limits on auditor liability, it is difficult to avoid the conclusion that they would say that, wouldn't they?
If the House is minded to consider moving in the direction of further entrenching the powers of a cartel, it must also consider what additional rights it gives other actors in the situation to defend themselves and their interests. It must also make sure that we do not accidentally contrive a situation in which we agree to limitation by a contract between a company and an auditor that could result in new forms of blackmail being applied to companies in order to secure an audit. That would be wholly wrong. The House should never engage lightly in the entrenchment of cartels. When it does so, it should seek new rights and obligations in exchange.
Mr. Peter Atkinson (Hexham) (Con): The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) mentioned Parmalat. I would have cited Parmalat as one of the special reasons why the Government should reform the present arrangements and support my hon. Friend the Member for Sutton Coldfield (Mr. Mitchell) on new clause 1.
The hon. Member for Newcastle upon Tyne, Central also said that all our new clauses would strengthen what he described as the cartel of the big four companies. If that were the case, why would the organisations on the other side of the fence—the Federation of Small Businesses, the Institute of Directors and the CBI—be enthusiasts for reform of the law in this area? They would surely not campaign for a change if they thought it would be disadvantageous to them and strengthen the monopoly that the four major players had in the market.
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