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Mr. Fallon: The Minister has explained at some length and helpfully some of the prevailing arguments about the difficulty of following the route of new clause 1. However, we are considering a companies audit measure. Is she genuinely claiming that it is not possible to propose such a package before the Government's Bill, which deals with audit, is passed?
Jacqui Smith: I have pointed out some of the problems involved, and I am now going to talk about some of the possible solutions. While I cannot support any of the amendments that are before the House today, I am personally determined to make progress on these issues, not least because of the importance of maintaining confidence in the operation of our capital markets.
Since the House last debated this issue, in Committee on 14 September, the Government have taken the lead by bringing together all the parties involved. Our goal in doing that was to see whether a joint approach could be developed which would meet the different concerns of the parties, as well as meeting the Government's objectives of ensuring that all companies that require them can readily obtain audits, that further improvements in the quality of audit are delivered, and that competition in the audit market is improved. These discussions have resulted in some progress being made, and they are continuing.
In particular, it is crucial that we should be able to address the issues of competition as well as some of the issues raised in report of the Office of Fair Trading. It is only right, when we set up an independent competition authority, to take seriously the issues raised in such a report. The job now is to move from the principle that the approach involving proportionality by contract could well be the appropriate way forward, as the Government believe—I acknowledge that there is agreement in this regard—to the detail of how that will work, and the consequences that will ensue. To ensure that that happens, following further discussions involving officials, I plan to meet the key players personally soon, and I hope to gain an agreement that meets all their concerns. Urgent though the issue is, it is also important that we get this right.
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If an appropriate package of reforms can be constructed in time—I reiterate my concern to ensure that that happens—the Government will aim to consult further next year on the details of proposals to be included in the forthcoming companies Bill. We have the opportunity to legislate at that time, and I will certainly work hard to ensure that we move from the principles on which there is agreement to the details that will enable us to take this issue forward.
I want to turn to the points raised by my hon. Friend the Member for Newcastle upon Tyne, Central. He has made clear his objectives. While he opposes caps on auditor liability, he believes that the law may be changed to permit auditors to limit their liability at some point in the future, and he is seeking to establish a framework within which any such limitation would operate. I agree with his desire to protect the interests of groups other than auditors, and I hope that I made that clear when I described the process that we have undertaken and will undertake as we go forward on these issues. He is not alone in having concerns in this regard. I have also explained that the Government are determined to protect the interests of all key stakeholders, including shareholders, in this work. The representatives of investing groups will also be fully involved and consulted.
My hon. Friend expressed his concern that proposals to limit auditor liability could lead to the entrenchment of cartels. I have made it clear on every occasion on which I have talked about this issue that the reason that we have already ruled out many of the more simple, unsophisticated limits and caps is that they would not help to improve competition and would therefore not fulfil our objective in that regard. I can assure my hon. Friend that the proposals that we introduce will ensure that competition is sustained and improved. The whole point of an approach involving a contract that limits liability proportionately with respect to responsibility is that it would not introduce a crude limit that would entrench or over-protect the position of auditors. Instead, it would enable liability to be more effectively divided in proportion to responsibility. That seems to be a reasonable way of going forward.
I am also grateful to my hon. Friend for raising the issue of audit working papers and files. He rightly said that, in order to maintain the quality and regulation of audit that we need, it is important that such documents should be available to the regulatory authorities. The work of all audit firms and individual auditors is subject to monitoring by their supervisory body, and part of the monitoring process consists of the review of audit working papers and files.
Clauses 1 and 2 of the Bill will ensure that the monitoring of the audits of listed companies, and other companies in whose financial condition there is a major public interest, is carried out independently of the supervisory bodies. We expect that this independent monitoring will be carried out by the audit inspection unit which will report to the professional oversight board for accountancy of the Financial Reporting Council. Clause 1 specifically requires supervisory bodies to have rules to ensure that the auditors registered with them
"take such steps as may be reasonably required of them"
to enable their performance as auditors to be monitored. This will include making available audit working papers and files where these are required by the audit inspection unit.
The new power contained in clause 12 of the Bill will give the financial reporting review panel—the body authorised to investigate departures from the accounting requirements of the Companies Act 1985—the power to obtain information and explanations from, among others, the auditor of a company. I can confirm that auditors could be required to disclose audit working papers to the panel if those papers are reasonably required by the panel to carry out its statutory functions.
Mr. Cousins: I thank the Minister for many of the things that she has said. May I press her, however, on whether the provision of a framework for the auditors' duty of care will form part of the debate that she expects to take place before the next companies Bill is introduced to address these issues?
Jacqui Smith: I was just coming to that point. My hon. Friend has raised some important issues about the duty of care, but it is not the case that they have not already been considered in some detail by the company law review, which gave detailed consideration to the arguments—some of which my hon. Friend made—for extending the duty of care. The review consulted twice on possible ways of resolving the issues identified. Some of those were highlighted today by the right hon. Member for East Yorkshire, who said that he could see benefits in extending the duty of care but instantly provided caveats involving how broadly it should be extended and whom it should apply to.
Those are precisely the difficulties that resulted in the company law review—despite having consulted twice on ways of resolving these issues—concluding that it did not believe that the case had been made for the statutory extension of the duty of care of auditors. That is why the Government's own consultation sought further views on this matter—the majority of respondents were opposed to any change—and why my right hon. Friend the Secretary of State therefore announced to the House on 7 September that the Government were not planning to extend the duty of care at this point. That consultation was carried out at the same time as we considered the issues surrounding the limitation of auditor liability. These issues have, therefore, been given quite a considerable airing.
To conclude, I hope that hon. Members feel that we have given serious consideration to the issues raised during this debate. We have made considerable progress. I am committed to ensuring that that progress continues, and we have the ability, and I hope that we will have the wherewithal, to legislate in the draft companies Bill next year on the basis of an agreement not only on the principles but on the detail as to how we can make the proposals work.
Mr. Andrew Mitchell:
This has been a most interesting debate on an important matter. It is important that those outside the House see that such issues are properly addressed in this place.
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2.30 pm
The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins), who has a longstanding interest in these matters, mentioned the issue of duty of care. The suggestion that the auditor's duty of care should be extended has been subject to much discussion and was one of the matters on which the Department of Trade and Industry consulted. The overwhelming response, not just from the auditing profession but from business and investor organisations, was that the present system had much to commend it, and that widening the duty of care would not, overall, bring benefit to investors. As far as employees are concerned, their remedy, of course, is related to the company, and I am pleased that the Minister has wisely said that she does not intend to alter the duty of care of an auditor. On that point, I am happy to support the DTI.
The hon. Member for Newcastle upon Tyne, Central spoke about the dangers of entrenching a cartel, which was also a point made by my hon. Friend the Member for Sevenoaks (Mr. Fallon). I assure both of them that that is not my intention. I want to widen competition, and there is nothing between the Opposition and the Government on that point. My hon. Friend the Member for Hexham (Mr. Atkinson) signalled widespread support for the reforms but warned against the costs and burdens imposed all too readily, sadly, by this Government on business.
My hon. Friend the Member for Sevenoaks made several other points: he went through the menu that I put before the House this afternoon, and selected new clause 1. The concern about one of the big four going bust is that major public companies will not get an audit as a result. That has significant implications for pensioners, the work force, customers and dependants. That is at the heart of our argument.
The hon. Member for Weston-super-Mare (Brian Cotter) who spoke for the Liberal Democrats and whom I thank for his kind comments, urged the Minister to give in to my advances and also selected new clause 1. My right hon. Friend the Member for East Yorkshire (Mr. Knight) spoke up for good government, and showed that not only does he have the eye of an extremely able lawyer but, as a distinguished former Government Deputy Chief Whip and DTI Minister, that he understands the importance of the provisions that we are debating today. He said that he awaits the wider Bill, subject to the company law review, and in that respect he joins almost everyone else in the House.
The Minister came tantalisingly close to agreeing with the view put by the Opposition and the Liberal Democrats. She undertook a tour d'horizon of the argument. She went through the new clauses, which we tabled today, and gave the House a dissertation on the choice. I fully accept that she and her colleagues have seriously examined the arguments and the new clauses, and I agree with much of what she said. I accept her point that the £75 million cap might be anti-competitive—this is a case of trying to examine all the possible options in a clear-sighted way. She, like many others in the debate, came down on the side of limiting liability proportionately and by contract. But having come tantalisingly close, she then proceeded—to use
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what I believe is the military metaphor—to lay down smoke, and started talking about the number of important and fringe issues affecting the debate, and the issue of how to measure the degree of audit failure. She teased me with the fact that while in this Bill she could not come forward with a new clause, she was absolutely committed to a package of reforms for another Bill later in the Parliament.
Clearly, the House feels that new clause 1 is the best way of resolving this matter. Certainly, the business community, those who speak for the investor community and investors themselves feel that. The regulatory and professional bodies feel that. In fact, everyone apart from the hon. Member for Newcastle upon Tyne, Central feels that. If I have read the comments of the Secretary of State aright, and if I have interpreted the Minister's body language correctly, it is new clause 1 that basically takes her fancy. To strengthen her position in her negotiations with the Treasury, I hope that she and her colleagues will remonstrate vigorously with the Chancellor over the embarrassment that he is causing to the Department of Trade and Industry team and the irritation of the business community, as she knows well that the blame for the embarrassment that she is about to be caused rests fairly and squarely with him. Even so, it is right that we should test this matter out and put new clause 1 to the vote.
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