Companies (Audit, Investigations and Community Enterprise Bill [Lords]

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Mr. Mitchell: I am extremely disappointed in the Minister's response. I tabled a range of reasonable amendments that would have improved the legislation. That, after all, has been how the Opposition have approached the Bill in the other place and here. In keeping with the special bond that exists between my parliamentary neighbour, the hon. Member for West Bromwich, East (Mr. Watson) and me, I give notice that I shall seek to divide the Committee on amendments Nos. 4, 5 and 7. I want to record the Minister's intransigence in the face of such a reasonable proposition. I sense from the remarks of the hon. Member for Tweeddale, Ettrick and Lauderdale, and from the quizzical looks on the faces of some Government Back Benchers, who followed what the Minister said with care, that they may have some sympathy for the points that I have made.

I remind the Committee of what we are discussing. It is about requiring independent monitoring of audits of listed and other major companies. It deals with any

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company whose securities have been admitted to the official list, which is within the meaning of part 4 of the Financial Services and Markets Act 2000, and with any other company in whose financial condition there is a major public interest. The provisions are too broadly drafted. We need to avoid excessive regulation and supervision where they are not warranted.

This definition, which the Government appear today to want to maintain, would cover more than 1,200 companies. Limiting the compass of the term ''major audit'' to the constituents of the FTSE 350 index would cover 96.5 per cent. of the whole market capitalisation. That is to say that the FTSE 350 covers £1.26 trillion of expenditure out of a total FTSE all-share amount of £1.31 trillion. The difference is small, but the effect of my amendments on the business community would be significant. That is the reason for amendment No. 7. This would mean that attention and resources were focused on the areas in which an audit failure is likely to have the most significant adverse impact on the economy. Some 85 per cent. of listed companies not in the FTSE 350 would not face the additional burden of independent monitoring, but there would be relatively little risk to the economy.

The Government's decision to include all listed companies seems to be purely arbitrary. Their cut-off point appears to have been selected purely because it is neat rather than justified. This is a choice not between monitoring and not monitoring, but between an independent body that monitors audits of major companies and the regulatory bodies that continue to regulate the audits of other companies. As the law stands, accountancy firms have a statutory obligation to carry out company audits in accordance with the rules set down by the recognised supervisory body. The body has a duty to monitor that. This situation will continue.

Definition B, to which I referred, is even more troublesome. It can be seen only as a Government back-up definition to cover all eventualities. It is woolly and ambiguous. There must be at least an attempt to pin down a definition of public interest or we run the risk of abuse, especially when it is uncertain who will decide if there is a major public interest. Obviously, as the Minister said, listings cannot be the sole criterion of whether an audit is major or not, but it is vital that there is certainty as to the scope of the independent monitoring and disciplinary arrangements, for which the Bill does not provide.

For those reasons, I seek to put my amendments to the test this afternoon.

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 6.

Division No. 1]

AYES
Mitchell, Mr. Andrew
Moore, Mr. Michael

NOES
Efford, Clive Farrelly, Paul Love, Mr. Andrew
Smith, Jacqui Soley, Mr. Clive Watson, Mr. Tom

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Question accordingly negatived.

Amendment proposed: No. 5, in

    clause 2, page 3, line 33, leave out paragraphs (a) and (b).—[Mr. Andrew Mitchell.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 6.

Division No. 2]

AYES
Mitchell, Mr. Andrew
Moore, Mr. Michael

NOES
Efford, Clive Farrelly, Paul Love, Mr. Andrew
Smith, Jacqui Soley, Mr. Clive Watson, Mr. Tom

Question accordingly negatived.

Amendment proposed: No. 7, in

    clause 2, page 3, line 33, leave out from 'securities' to 'or' in line 36 and insert

    'are a constituent of the FTSE-Actuaries 350 share index'.—[Mr. Andrew Mitchell.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 6.

Division No. 3]

AYES
Mitchell, Mr. Andrew
Moore, Mr. Michael

NOES
Efford, Clive Farrelly, Paul Love, Mr. Andrew
Smith, Jacqui Soley, Mr. Clive Watson, Mr. Tom

Question accordingly negatived.

3.15 pm

Mr. Mitchell: I beg to move amendment No. 8, in

    clause 2, page 4, line 7, leave out from 'be' to end of line 8 and insert

    'conducted fairly and except where the interests of justice otherwise require held in public'.

The Chairman: With this it will be convenient to discuss the following:

Amendment No. 9, in

    clause 2, page 4, line 15, at end insert

    ', and

    (f) for ensuring that all defendants are properly represented.'.

Mr. Mitchell: I tabled these amendments following a debate in the House of Lords. They deal with compliance with the European convention on human rights, and can be taken either together or apart. The purpose is to ensure that the Bill clearly sets out the minimum standards to be imposed by the Secretary of State as a condition of recognition of an auditing supervisory body, as regards the arrangements for the fair conduct disciplinary hearings following investigations in public interest cases.

Each amendment could stand alone, or both could be adopted together. Again, we submit a choice to the Minister. The first should be adopted in any event, and in my view incorporates the requirement spelled out expressly in the second. The second is proposed as a more limited but explicit provision, dealing with the particular issue of concern. The amendments concern clause 2 of the Bill, which inserts a new paragraph 20 into schedule 11 to the Companies Act 1989.

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Paragraph 20 deals with the arrangements for the independent investigation for disciplinary purposes of public interest cases.

Clause 1 of the Bill and the 1989 Act will require the audit profession's recognised supervisory bodies to participate in properly funded arrangements, meeting minimum standards as a condition of their continuing recognition by the Secretary of State, or any other body to which the Secretary of State may decide to delegate that function.

Amendment No. 8 would amend new paragraph 20 to provide explicit recognition of article 6 of the ECHR, concerning a defendant's right to a fair and public hearing in the determination of his or her civil rights and obligations. An aspect of fairness, in that context, involves the effective availability of proper legal representation for the defendant, the matter with which amendment No. 9 expressly deals. It is plain that such representation should be available in the context of a public hearing dealing with matters that are probably of considerable complexity and at which the delicate flower of professional reputation is to be exposed. Professional reputation in this area, once lost, is probably lost for ever. Politics is rather different: a thick skin and an India-rubber quality have allowed many a comeback despite a difficulty with a reputation. That is much less possible in the area that we are discussing. The Government have already accepted the force of the argument. On Report in another place, a Minister said:

    ''It is of course entirely right that defendants should have the opportunity to be represented.''—[Official Report, House of Lords, 7 July 2004; Vol. 663, c. 805.]

The explanation offered by the Government for their previous refusal to amend this clause is threefold. First and foremost, the person exercising the recognition function will need to consider all aspects of the disciplinary arrangements, including the right to representation, in order to form a view on whether the arrangements are appropriate. A failure to make any provision in respect of representation where that caused procedural unfairness could call into question whether the arrangements were, indeed, appropriate. Secondly, a disciplinary scheme for defendants, which provides for funded representation, already exists under the Accountancy Investigation and Discipline Board. The Government think it unlikely that that will ever be watered down. Thirdly, according to the Government, the circumstance in which representation should be provided, and the myriad other details concerning the functioning of the arrangement are best left to be determined under the disciplinary arrangements rather than being prescribed in legislation.

Those are the three arguments that were put up by the Government when the issue was probed in the other place. In other words, the Government have already accepted the principle behind the amendment, that is to say that compliance with article 6.1 of the European convention on human rights will be an implicit requirement for recognition, without which the disciplinary procedures will not meet the requirements for the recognition of the body. However, they refuse to amend because the drafting

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job would be too difficult for them and is best left to the AIDB. I pass over the implied insult to the Minister's officials and the parliamentary draftsmen in the argument put up by the Government in the Lords.

The Government seem content that there is already adequate provision for representation, although they have not said that they are satisfied, as the Secretary of State or his or her delegate must ultimately be, that the procedures of the AIDB, in all other respects, satisfy the requirements of fairness. It is not acceptable and, indeed, it is unnecessary that such an important and fundamental issue as the fairness of the procedures should be left to be implied without statutory expression. That is particularly so, given that proposed new paragraph 20(1)(c) of schedule 11 to the Companies Act 1989 already deals, in part, with the manner in which hearings are to be conducted by providing that they must be in public. What is the requirement to have a public hearing if that is not the manner in which disciplinary hearings will be conducted?

If that detail is worthy of statutory status, it is difficult to understand why fairness, or the right to representation, is not. It is unacceptable and unnecessary to leave the AIDB or the supervisory bodies, none of which is a statutory entity, uncertain as to what the standards are that the arrangements must meet. It is equally undesirable and unnecessary that the concept of a fair hearing—a term the implications of which are known and can be discerned from a wealth of European and English legal authority, and whose application to these arrangements the Government have already accepted—should be hidden behind the vague term ''appropriate''.

Those deficiencies in the Bill are unnecessary, because the first amendment gives statutory expression to the standard to be applied by the body performing the recognition function, but avoids the need to set it out in the Bill in great detail and in several rules, which the Government so fear. As regards the second amendment, all parties agree that the availability of representation is a necessary aspect of the disciplinary arrangements. There is, therefore, no good reason why that should not be confirmed in primary legislation.

 
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Prepared 14 September 2004