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Mr. Cousins: The hon. Gentleman should also consider the comments of the hon. Member for Sutton Coldfield that some of the support given by those trade organisations to the idea of further limiting auditor liability is accompanied by all sorts of caveats about the need to consider the details. What will probably not commend itself to them is the principle of limiting auditor liability by a contract with the company.

Mr. Atkinson: I agree that the trade organisations will want to see the small print of the Government's proposals, but that does not affect the broad principle that all the organisations on the business side of the fence are keen on a change in the law. The hon. Gentleman cited the 1993 Law Commission report. The world has moved on considerably since 1993. Equitable Life, Enron and Parmalat are all major events that have happened since the Law Commission reported in 1993, and it must be right for us to look again at the issue.
 
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I cannot say whether the Government will go for new clause 1, 2, 3, 4 or any other of my hon. Friend's new clauses, but it is a matter of considerable urgency.

1.45 pm

Much of the debate so far has revolved around the big four companies, the FTSE 100 and the FTSE 350 companies. However, the issue has an impact on many other companies in the wider market, particularly small and medium-sized business, organisations and charities, all of which must have their accounts audited. The additional costs of the risks involved flow down the chain to the prices that are charged by the medium-sized and even small firms of auditors. As we heard earlier, many partners in the large audit companies are required to borrow large sums in order to take up their partnerships. Because of the higher risk involved, the cost of borrowing that money is greater. The costs of auditing therefore rise, not just for the big firms, but for firms down the line.

For those reasons the Government should consider urgently the reform of the law. The Minister will know what businesses are saying to the Government. Every small and medium-sized business is complaining about additional cost and additional regulation. This year has been a vintage year for that, with the costs of meeting the requirements of the disability regulations, the costs of all the new employment regulations that have been heaped on businesses and the soaring costs of audits. Many medium-sized businesses are paying thousands of pounds a year in auditors' fees. That unnecessary burden should be addressed, which is why I support my hon. Friend's new clauses. For the benefit of the health of the smaller companies in our economy, reform is urgently needed.

Mr. Fallon: I remind the House of my business interests recorded in the register.

Like the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins), I initially found the new clauses somewhat unappetising. My hon. Friend the Member for Sutton Coldfield (Mr. Mitchell) is vulnerable to the charge of entrenchment. No Member of the Opposition likes to be in the business of reinforcing cartels, and the hon. Member for Newcastle upon Tyne, Central was right to draw our attention to that.

It is dangerous to legislate because of a particular case: that of Equitable Life, which is before the courts. We should not legislate in advance of the case—my hon. Friend the Member for Sutton Coldfield assured us that the measure would not come into effect in time—and we should not legislate alongside it. If we did, we might well be asked why liability should be limited for auditors, rather than for the unfortunate shareholders in the event of the sort of catastrophic business failure to which he referred. However, I do not disparage my hon. Friend's motives. Clearly, if the big four were reduced to the big three, that in itself would reduce competition and choice for the large companies. There may well be other work that needs to be done to improve the audit marketplace, and the banks, insurance companies and lawyers may need to be better educated as to the merits of the mid-cap firms.

My hon. Friend the Member for Sutton Coldfield is in that position because we are not where we would like to be. Her Majesty's Government have, of course, reneged
 
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on their commitment, have not followed through on the consultation and, although we have yet to hear from the Minister, do not appear to be in a position to legislate. If the Department of Trade and Industry has failed to win its battle with the Treasury, and if the Government, who have a massive majority, cannot make up their mind on auditors' liability, my hon. Friend the Member for Sutton Coldfield is right to step into the breach and offer the House a range of alternatives.

I sympathise with new clause 10, which was tabled by the hon. Member for Newcastle upon Tyne, Central. However, the definition of the recognition of the duty of care is unclear, so I cannot support it without further detail as to how it would work, although I certainly applaud the motivation behind it.

On the alternatives—we are being offered a menu of hot and cold food—I do not set much store by new clause 4, which is naive. Perhaps my hon. Friend the Member for Sutton Coldfield has spent too long in merchant banking rather than the business world. In the real world, auditors would simply to say to firms, "This new companies legislation has come in, and unless you sign this kind of contract, you will lose us as your auditors." New clause 4 would put auditors in the driving seat.

Mr. Greg Knight: The flaw in my hon. Friend's argument is that if new clause 4 became law, a thrusting, up and coming firm might say, "We will offer better contractual terms than the four auditors in the cartel." That would weaken the cartel, rather than strengthen it, and more big players would enter the arena.

Mr. Fallon: My right hon. Friend and I share the objective of widening the audit marketplace for companies that are outside the FTSE 100, so I hope that that scenario would occur. Because firms do not change their auditors that often, however, the equal and opposite danger is that the auditor who holds the contract with a particular firm would simply go to the directors and say, "We are offering you this new contract because the new companies legislation has come in. We want you to put it to the general meeting in these terms; otherwise we will no longer be your auditor." My hon. Friend the Member for Sutton Coldfield has clearly toiled hard in the kitchen over his menu of options, but new clause 4 is not his best offering.

Mr. Andrew Mitchell: I say to my hon. Friend what I said to the Minister: it does not matter which of my new clauses you do not like, so long as you like one of them. We have tried to lay every possible option before the Commons today, so that hon. Members can make a decision. Saying nothing, a policy to which the Minister has been getting perilously close, is not an option, and that is the lacuna that we seek to address today.

Mr. Fallon: I applaud my hon. Friend's hard work, but I want to comment on the individual options. We must choose one of the options, but new clause 4 is not the strongest.

I am not particularly attracted by new clauses 2 and 3, because a cash-terms cap is vulnerable to changing circumstances and nobody knows exactly how the mid-market audit firms will evolve. I am always suspicious
 
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when PricewaterhouseCoopers or any of the other large firms proposes a cash ceiling, and handling matters on a fee-related basis would not work either.

If the Minister does not come up with a solution, which she has promised and to which the Government were initially committed, the House must choose one of the options. As my hon. Friend the Member for Hexham (Mr. Atkinson) said, new clause 1, which is based on proportionality, has received support from not only PricewaterhouseCoopers, but across the business community and is therefore the least worst option. If my hon. Friend the Member for Sutton Coldfield were to press new clause 1, I would support him.

Brian Cotter (Weston-super-Mare) (LD): I congratulate the hon. Member for Sutton Coldfield (Mr. Mitchell) on new clause 1. It is an acceptable response to the issue of proportionate liability, which, as we all know, must be addressed.

In a moment, I hope to congratulate the Minister on making a clear commitment to a solution along the lines of new clause 1, which, as the hon. Member for Sevenoaks (Mr. Fallon) said, is supported by much of the business world. I hope that the Minister will make such a commitment, because, as she knows, we need such a solution, which is why it is incumbent on her to accept new clause 1 or to make a precise commitment on when and how the solution will be produced.

We are all taken by the galaxy of choices offered by the hon. Member for Sutton Coldfield, who, like Father Christmas, has many tempting trinkets that glitter in front of our eyes, but a solution based on new clause 1 is the prize that we want. I hope that the Minister will respond positively; she knows that she should respond positively and that everybody is calling for such a response.

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