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We find that branches of all four organisations in the United States have been involved in various undesirable practices. KPMG has been fined $456 million in the States for tax evasion that was described as the biggest tax fraud in American history. The head partner confessed to the fraud and thus pulled the rug out from under all the other partners who were contesting the accusations. Ernst and Young was banned for six months from taking on new business for breaking the rules on independence. PricewaterhouseCoopers was asked to use a self-reporting system to give some account of violations of the rules. In one month, there
were 8,000 violations. The big four are the bodies that we are trusting, but they have all been sued by federal and state authorities. Here, however, we concede more and more power to them. We make no effort to limit their power or to stop them selling other services to audit clients, which must be a form of collusion between the auditor and chief executive, or certainly the top executives.
Lorely Burt: Will the hon. Gentleman give way?
Mr. Mitchell: If the hon. Lady does not mind, I will not, because with my back condition I feel that if I sit down I shall never get up again—and that would be a disservice to the House. Once I am standing up, I would rather stay stood up.
Effective regulators such as the SEC can strike and strike hard. The Enron cases came to court within about five months of the company’s collapse. The two men who were mostly involved have now gone on to serve long prison sentences. The same happened in the cases of WorldCom, Tyco and other offenders. However, our country’s machinery of regulation allows cases to drag on for ever. There have been no inquiries into the Accident Group, Equitable Life, Barings, Resort Hotels, Mayflower or Langbar, which is a Yorkshire company. There were no effective inquiries into the Bank of Credit and Commerce International and Maxwell, and the insolvency matters are still proceeding after all this time, so fees continue to be earned for insolvency practices. In fact, because we do not have a machinery of effective independent regulation in this country, scandals emerge only when a company goes belly up and everything emerges. However, inquiries are still not held to show what the root of the problem was and to build up a body of information that will tell us how British companies are following the mistakes and malpractice of American companies.
All the procedures that were involved in the failure of Enron—the use of offshore companies, shell companies and off-balance-sheet accounting, which is part of this country’s system of government—are available and sanctioned here. They are used widely by British companies, but we do not know the damaging effects of that because as long as a company does not go bankrupt, we never find out what has been going on.
I fear that there has been a change in the climate, in that corporations are no longer entitled to the respect that they once had as national champions, the producers of British products and the employers and trainers of a work force to serve their purposes. That is all failing, and they are becoming money-spinning machines instead. That is happening because of the unchecked and uncontrolled power of chief executives and boards. There is no restraint on their activities and no effective control by shareholders, but how could there be? We have no Sarbanes-Oxley requirement, but that should have been provided for in the Bill. People should have the personal responsibility to pledge their position on the authenticity of the accounts of their company. That should be the responsibility of chief executives and chief financial officers.
We have not done anything about it, and we should. As far as I am aware, there has been no inquiry into the subordinates of Enron, Parmalat and all the other companies that have gone bust, including those in this
country. The financial interest is increasingly dominant. The means of financial manipulation by uncontrolled chief executives and boards are becoming more and more numerous and more and more common. This is because accountancy houses, especially the big ones, are selling all sorts of services to directors. They are telling them how to hype the share price and how to use various ways of increasing profit. They tell them how to use tax havens, share options, trusts and subsidiaries for their own purposes.
The top 100 companies in this country have 15,000 trusts and subsidiaries. The US Treasury and the general administration office have both said that trusts and subsidiaries of that kind, which have multiplied, are the biggest source of criminal activity and tax fraud, because they are a means of hiding profits. That development has gone a long way in this country.
Admittedly, the deterioration into financial self-interest and into regarding a company as a money-spinning machine to put into the back pockets of top people has gone further in the United States than here, but here it has gone a lot further than in Germany, where there is still a pride in building up a company, building up its production, serving the customer and making a better product more cheaply. That has led to a real revival of German companies, with which we are competing. Instead of doing all that, our companies bathe in financial froth.
There are too many instances of companies, rather like Vodafone, that are run by a self-interested clique at the top, which owe a duty of care to no one—not to stakeholders, employees or shareholders. That is why there are obscene salaries, with the gap widening between salaries at the top and those at the bottom. It is why we get such fat-cat pension schemes showering money on those who have got enough already. At the same time, there are raids on company pension schemes. Companies did that in the 1980s by taking pension holidays. In fact, they took £19 billion from company pension schemes by giving themselves pension contribution holidays. The moneys went directly into profits and into the pockets of the top board.
There are also share options and manipulation of moneys overseas—all being carried on at a time when companies are trying to increase their profits by downsizing, by transferring production overseas and by squeezing the salaries and conditions of their employees. It is an indecent spectacle. It is even more indecent that a Labour Government—I shall try to echo Neil Kinnock’s intonation of that phrase, “a Labour Government”—are not doing anything much about it in this Bill, which is our first opportunity to do so since 1997.
It is odd that the DTI seems to have consulted so little with the Treasury. Here we have the Chancellor of the Exchequer waging a campaign against tax evasion and the use of tax havens to launder profits so as not to pay tax in this country. Companies are using more and more such devices to avoid their obligations to this country, where their profits were generated.
We have only to look at how slowly the Government’s revenue from corporation tax is rising compared with their revenue from income tax. One is rising rapidly, but the other very slowly. Why? Because so much money is being laundered overseas so that tax is not paid in this country. We have only to look at
News Corporation and how little corporation tax it pays in this country. Why do not we do something about that, given the enormous profits that the company generates here? People are being cheated.
The Chancellor’s aspirations are good, and we need to help him. The Sunday Times estimated recently that we are losing tax revenues of between £97 million and £150 million a year, and that the loss is increasing exponentially. The Bill does little to help the Chancellor control that, determined as he is. I suggest that we should have a requirement, as proposed by Lord Lea in the other place, to publish the names, locations, profits and tax liabilities of all the trusts and subsidiaries run by a company. Why should that not be part of the information provided to shareholders and hence to the public?
The head of the inland revenue service in the United States has expressed his desire for such a framework of legislation, as has Henderson Global—a big investor—which says that such legislation would make it much easier to understand the affairs of a company. Why should it not be provided? Why should companies not publish their tax—
Mr. Stephen O'Brien: Will the hon. Gentleman give way?
Mr. Mitchell: I am sorry, I must decline to give way. I do not know whether the hon. Gentleman wants me to advise him on the machinery of tax evasion. If so, I am not qualified to do so. I would rather not sit down, as I would have to if I took an intervention; I apologise.
Why should companies not be required to publish their tax computations? At present, companies keep at least two sets of books. There is one set to fool the shareholders and another set to fool the tax authorities. Perhaps there is another set of books to set out the true state of affairs, so that it is known how much to loot from the company. Why should not those books be published? Why should the tax computations not be published at the same time as the official financial publications? That would allow non-government organisations and the public to invigilate and investigate what companies are doing. It would seem that the task is too great for Revenue and Customs.
Companies should also be required to publish in their reports their transfer pricing policy. That is the way in which money is fiddled and laundered from one section of a company to another.
The Bill is supposedly to deal with openness and accountability. We are all told that we have a shareholder democracy and that it is the responsibility of shareholders to ensure that their companies are properly run. That is a myth, because only the big funds can take a close interest in and have influence in a company, but they have much more interest in spreading their investment than in invigilating any particular company. The small shareholders are not organised and do not have the time or information—and are also steamrollered by proxy voting. It is useless to think of shareholder democracy being effective. We must therefore strengthen reporting requirements so that the public, NGOs, the universities and the press have access to what is going on, and can therefore comment and report on it.
Various suggestions have been made about environmental duties, responsibilities to the developing world and to world trade—and fair trade. It is my view that there should be publication of wages and salaries from top to bottom, with the numbers in each grouping. We should have information about training policies and investment policies, because a company is responsible for improving its work force. We should have information about perks and pay-offs. Mainly, we should have information about all the things that contribute to building up a strong, healthy and competitive company that involves its workers and makes a contribution to the economy and to the nation. I am disappointed that there is so little requirement to increase reporting in all those respects. Changes to that effect should be moved, and no doubt will be moved at a later stage.
The Bill is useful in small ways. It will accomplish some things, but my main feeling is disappointment that it does so little, particularly in tackling the major problems of the transformation of British companies from production machines to money-spinning machines in a financial bonanza. Unless we ensure that there is better, more effective control and regulation, we are paving the way for a series of scandals. If auditors, companies and boards are kept up to the highest standards they will cheat, and the resulting failure and collapse will be blamed on the Government, and our failure to intervene at this stage and regulate effectively.
6 pm
Mr. John Gummer (Suffolk, Coastal) (Con): It is almost impossible to follow the hon. Member for Great Grimsby (Mr. Mitchell), who is the authentic voice of Labour. He expressed his party’s real view of companies—not the view that is generally expressed—which is entirely false and unacceptable. I declare an interest as a company director and as the chairman of a company that helps major businesses to discharge their corporate social responsibility. The hon. Gentleman described a world that does not exist, as companies do not behave like that and auditors could not behave as he suggested. That does not mean that all companies are perfect or that auditors are delightful—some of them are not—but we ought to live in the real world.
The Government sometimes fail in the detail of what they try to do in the real world. I want to agree with the Trade Justice Movement, but its proposals are wide of the mark. I do not wish to suggest that its members are not good-hearted or that they do not want to do the right thing, but—and I am embarrassed to admit that I agree with the right hon. Member for Cardiff, South and Penarth (Alun Michael), which I rarely manage to do—they have chosen the wrong vehicle to achieve their ends. People who care about trade justice—no one would suggest that I do not—must remember that it is extremely important to get the facts right and achieve the correct mechanisms to avoid the reverse effect. I am sorry that we cannot go along with all the Trade Justice Movement’s proposals, but I hope that we can find a way of incorporating in the Bill those that are applicable. The large majority of its proposals can be examined on another occasion.
We should look at what can be done, and at what the Government have failed to do. I have some sympathy with Trade and Industry Ministers, who have been sidelined by the Chancellor’s discussions of the issues. Yesterday, he made a speech that took one’s breath away, in which he talked about globalisation as though it were wholly beneficial. The way in which he discussed globalisation, which is a fact of life, not a good or a bad thing, was intolerable to anyone who genuinely understands the way in which it affects poor communities throughout the world. If I were a member of the Trade Justice Movement, I would be very cross if I thought that there was a chance that he would run the country, because he entirely lacked sensitivity to the issues about which most Conservatives feel strongly. I hope that every member of the Labour party will read the Chancellor’s speech to the CBI yesterday, because if that is what he believes, I do not think that many of them will vote to make him leader of the Labour party. If they do so, they have not read the speech, which expressed a view of capitalism that has long been out of fashion, except among the neo-Conservatives of the United States of America. I heard the tones of Mr. Perle in every sentence of that speech, and there is little one can say that is ruder.
Embarrassingly, for the second time I must agree with the right hon. Member for Cardiff, South and Penarth, who said that we are all shareholders now. That is true: we have shares or pensions based on shares, but we also live in a country where the effects of share prices and the efficacy of company performance change our lives for better or worse. We are all shareholders—I prefer that word to “stakeholders”, which is a self-defining word. I can claim to be a stakeholder in anything, and I may, or may not, have grounds for that claim. The people who matter are shareholders, and that means everyone, because we are all shareholders. In those circumstances, we must look carefully at the Bill. As shareholders, we require the information necessary to make a proper judgment about the companies in which we have shares, which is why we have a raft of financial regulation, some of which is improved and made clearer and less onerous by the Bill. I welcome those provisions.
Curiously, the Government have not taken the opportunity, as the hon. Member for Kingston and Surbiton (Mr. Davey) pointed out, to reintroduce the operating and financial review. There is a simple explanation for that. When the OFR was introduced, Conservative Members and others were concerned that it would be onerous and difficult to implement. I did not share that attitude, but it was widespread and reasonable. After five or six years, however, it became clear that the OFR was not onerous or difficult—companies generally found it perfectly possible to implement and almost all of them were ready to do so, particularly after the work done by the Accounting Standards Board, which the hon. Member for Cheltenham (Martin Horwood) mentioned.
Suddenly, out of the blue, in incredible circumstances, the Chancellor of the Exchequer announced to the CBI that he would ban or abolish the OFR as a deregulatory measure. I cannot vouch for the accuracy of the story about how he reached that position, but Friends of the Earth is usually accurate in its understanding of such matters. Many members of the Government were only
too ready to tell Friends of the Earth precisely what happened, so furious were they about the manipulation of Government systems. Interestingly, a representative of Hermes initiated the event—what a pity that the civil servant concerned did not talk to Henderson or another fund manager, who would have said that it is a matter not of deregulation, but of obfuscation. Without the OFR, an increasing number of investors and investment funds that look at corporate social responsibility and the way in which people deal with non-financial risk as an important guide to investment are in a difficult position. The OFR was not a matter of over-regulation, as it provided the transparency necessary for their work.
It was therefore bad luck that that civil servant should have been friendly with someone from Hermes, as he ought to have known other representatives. He shall remain unnamed, because I blame not him but the man who took him seriously, and chose to act without talking to anyone else.
That brings me to the key issue in relation to the OFR—the fact that the Chancellor of the Exchequer appears never to talk to anyone else. For example, the OFR is supposed to be of interest not only to the Department of Trade and Industry, but to that famous Department, the Department for Environment, Food and Rural Affairs. DEFRA is supposed to be responsible for the environment. I spend a great deal of time arguing that the environment should not have been shoved off in a corner with animals and trees. Much as I like animals and trees, the environment is the central issue for the entire Government.
When the Prime Minister took office, he said that he would put sustainability at the heart of his Government. Instead of that, he shoved it to one side, in a Department that no one seems to listen to at all, certainly not the Chancellor of the Exchequer. What was he doing, abolishing a matter that was fundamentally an environmental issue, without a word to the then Secretary of State for Environment, Food and Rural Affairs, now the Foreign Secretary? A word or two with her might, I should have thought, at least have been a courtesy. She is an intelligent and, I think, thoroughly nice lady. Why did he so dislike her that he did not think a word was necessary?
I can understand why the Chancellor of the Exchequer did not have a word with the Department of Trade and Industry: he could not remember who was the current holder of the office of Secretary of State. So soon do they change that I imagine it is difficult to keep up, and the telephone directory is not always up to date. No doubt that was the reason for it. But he did not talk to any of the people involved, and threw out what most people had seen as a valuable and proportionate way of bringing to the heart of businesses what the best businesses are already doing—issuing a statement that enables their shareholders to see whether they appreciate the real risks of the business.
In that respect, I find the Government difficult to understand. No one is asking for the OFR to be brought back as an incubus on business. We are asking for it to be reinstated because it is an extremely important mechanism—I referred to my declaration of interest—for the management of a business. If one does not understand one’s non-financial risks, one does not understand one’s risks. Many non-financial risks are more important than direct financial risks. If one has a large area of contaminated land, if one has
concerns about the viability of the business because of inherited costs that are not financially accounted for, one is conducting the business without revealing sufficiently to those who own the business the terms of their ownership.
Mr. Stephen O'Brien: My right hon. Friend is setting out a powerful argument. It is ironic that notwithstanding the misgivings that many of us initially had about the OFR, most businesses, especially those that are managed best, now produce such a report anyway. They conform to the aim of the OFR. My right hon. Friend is right. Control of risks identified as non-financial define whether a business is managed well or badly.
Mr. Gummer: My hon. Friend, who has considerable professional experience of these matters, is right. I hope he will go further and join me in saying that if the best businesses are doing that, it behoves the Government to ensure that those that are less good do so too. Why should our good companies, which conduct a review because it is good for them, find themselves at a disadvantage because their competitors are unwilling to do so, which may give them a short-term advantage?
Why are the Government so afraid? What is the deal that has been done in the Digbyisation of the Government? There is a closeness—a kind of relationship—with a particular bit of the CBI that I find difficult to understand. While Ministers are defending their indefensible position in the House, the leaders of British industry are in No. 10 discussing with the Prime Minister exactly the kind of attitudes that we are asking for in the Bill. All the people who really care about climate change are there, explaining to the Prime Minister why the Government must do more in that regard. All the people whom we rely upon to set the standards in British industry are there saying the opposite to what the Government are saying in the Bill.
There are, sadly, at least two Governments in the House: the Government of the public face and the Government of the Bill—a Bill that does not do what it should. It does not do what it was intended to do, and what it could do by setting a standard and giving the Government a leadership role.
Anne Snelgrove (South Swindon) (Lab): Does the right hon. Gentleman accept that there are also two Conservative parties—one in the Chamber, which he espouses, and one in the House of Lords, which sought to strip old clause 156 and current clause 158 from the Bill?
Mr. Gummer: The hon. Lady ought to read the debates carefully and see the basis on which Members of the House of Lords sought to discuss those issues. I shall come to them. I am dealing now with the non-appearance of the OFR and the belief that those bits make up for it.
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