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“consistently agreed accounting treatments of transactions that served the interest of RM”
“ and not those of the trustees or the beneficiaries of the pension scheme”.
Collusion—that is what it is about. We end that with rotation of auditors.
Rotation of partners is not the same and is not good. Enhancing the independence of auditors requires a new auditor. How likely is it that partner B, on taking over from partner A, will say, “Scandalous practices! We can’t to this. We can’t do that. We must change
that”? It is not going to happen, is it? If the auditors are partners in the same firm they are unlikely to abuse each other or check each other’s performance closely. Most of the audit is, in fact, done by teams lower down whose turnover is rather rapid, so even a new partner does not produce the continuity of contact and skill that is claimed. We want rotation of auditors on the grounds that longevity leads to collusion, carelessness and the kind of situation that developed in the Maxwell case. The research indicates that that is a failure.
Amendment No. 759, tabled by my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) and me, seemed to scandalise the hon. Member for Putney by calling for the auditor’s report to
“be accompanied by a statement stating the regulatory action, if any, taken against the firm or any member of the audit team during the preceding five years, together with the outcomes.”
Why not? Why should we not know the reputation of such firms and what action has been taken against them? Why should we not be able to judge the quality of their work from what they have done in previous cases where regulators have taken action against them? This should be public information and it should be available so that we can understand the judgment of the auditor in the light of the performance of that firm and the regulatory action taken against the firm.
Justine Greening: I understand why the hon. Gentleman is setting out this argument, but does he really think that it is an appropriate one in respect of, for example, only one audit in one office in one part of the world? Does he really think that it is a proportionate response, in respect of every single company in every other part of the world that might be audited by teams and offices that have never come into contact with the team that audited that office and that might or might not have had successful regulatory action against it, for every single audit report to include that point? If that means that some businesses might have to have a fresh audit, or even go out of business because investors simply say that they are unwilling to use their accounts any longer, does he really think that that is proportionate response?
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Mr. Mitchell: That is a fairly far-fetched picture. It is ridiculous to suggest that, because auditors report that action was taken against them in one jurisdiction, clients will flee from the firm that is being audited.
However, on the hon. Lady’s basic point, I simply answer that the international composition that she talks about applies primarily to the big four, which are multinationals. They market themselves as multinationals and as having a common reputation: “We are PriceWatersCooperhouse”—or whatever it is called. I forget whether it is PWC, which sounds fairly obscene to my ears, or PCW. I think it must be PWC. It markets itself as a multinational team, maintaining common standards and providing services on an international basis. If it does that, it is answerable in respect of its offices in other jurisdictions, and we should know what has happened to it in other jurisdictions.
An astounding number of cases are relevant to my point. For instance, in the United States of America in 1995, Ernst and Young gave undertakings to
“comply with standards and guidelines issued by the...SEC...and the accounting profession regarding the independence of public accountants”,
but when a case came up about it not having done that, the judge said that
“the evidence shows that EY has an utter disdain for the Commission’s rules and regulations on auditor independence...EY committed repeated violations of the auditor independence standards by behaviour that was reckless, highly unreasonable and negligent.”
That is what the judge said about Ernst and Young, which markets itself as a multinational providing services all over the world.
We are obliged to publish performance and league tables for every other kind of organisation—such as schools—so why should we not have similar information on the firms that are auditing the accounts of public companies and putting their reputations on the line? Those firms do 99 per cent. of the audits of the FTSE 100 companies.
All our proposals in amendments Nos. 684, 686 and 759 are important, because we do not accept that there is any threat to those big multinationals and their behaviour. Their reckless pursuit of profit endangers the reputation of sound, efficient, effective, respectable and reputable accountants and auditors, which are smaller and are not going in for the same kind of behaviour as the big four.
Mr. Weir: I did not intend to speak on this matter, but I have been moved to do so by the comments of the hon. Member for Putney (Justine Greening). She seemed very concerned about auditors, but I have a concern for those who rely on the audit report. It is not only the company that relies on that report: an audit report in a company’s accounts will be important to those who are thinking of investing in the company and those who have an interest in it—not least pensioners in the company. The hon. Member for Great Grimsby (Mr. Mitchell) highlighted the Maxwell situation, and the disasters that followed from that.
The hon. Member for Cambridge (David Howarth) talked about civil negligence against auditors. I have been racking my brains, but I cannot think of any major cases where anyone successfully sued an auditor in such circumstances, although I think that there was an attempt in the Equitable Life case that failed. If an audit goes wrong, that can lead to very serious circumstances.
What is proposed will not put an undue burden on auditors. The phrase we are talking about is “knowingly or recklessly”. I am not an auditor. I was a fairly lowly solicitor before I entered this House, and in law there is a clear and well-established difference between carelessness and recklessness. Even in areas such as road traffic, we talk about careless driving and reckless driving. Recklessness is a very high burden for the prosecution to prove. I accept what the Minister said: the vast majority of auditors are honest, hard-working and do a good job. They have little to fear. The very small minority that for whatever
reason—being too close to the company or for their own reasons—do not do the job to anything like the standard of a reasonable auditor are the only people who would have anything to fear. To add “dishonestly or fraudulently” would make it almost impossible for anyone to prosecute successfully. As the hon. Member for Cambridge said, it would have to be proven that the auditor had in some way benefited from the fraudulent activity, which would be almost impossible to do.
This is a sensible move. It means that auditors will have to think about the impact of an audit report outwith the company and adhere to proper standards. If they do not adhere to those standards, to the extent that it is reckless, it is right that there should be the option of a prosecution against them.
Jim Cousins (Newcastle upon Tyne, Central) (Lab): The House has a brief opportunity this afternoon to consider how to deal with certain remarkable financial institutions that we have developed, which have huge market power and huge global reach, namely the big four accountancy firms. We have the opportunity to consider the domination they have over the auditing of all our great companies, for which they have an effective monopoly among themselves, and also the influence that they have over government.
Some estimates suggest that, since 1997, the Government have spent almost £2.5 billion on commissioning consultancy and advice from the big four accountancy firms. Many Members are concerned with issues such as the new localism. It would be a very bold councillor indeed who would gainsay it, if an officer produced some advice that had been endorsed by the local branch of one of the big four accountancy firms. The point made by the hon. Member for Putney (Justine Greening) emphasised the global reach of those companies. KPMG is said to have 140,000 partners worldwide.
The internal organisation of these companies is far from clear, as our colleagues in the United States found when they attempted to investigate BCCI. They chased one of the big four accountancy firms across the globe, only to end up at an office in Bermuda with which no one had information-sharing agreements and no more could be said or done. The hon. Member for Cambridge (David Howarth) clearly set out to the House the very limited legal remedies that apply and can be brought against such massive financial institutions, even were it not the case that some of the very biggest law firms in the City of London have already made it clear that they would not contemplate any kind of legal action against the big four accountancy firms.
To deal with that situation, the Government have proposed the very blunt instrument that is the reason for the Conservative amendments. Here, I have some words of comfort for the hon. Member for Putney. It is almost inconceivable that there are any circumstances in which the powers set out in the Bill will be used. When in government, her party introduced the crime of insider dealing, which was on our statute book for nearly 20 years. I invite the Foss and Harbottle tendency among us to tell me whether there was ever a successful criminal prosecution for insider dealing under that legislation. No, there was not.
We can effectively dismiss the possibility that the situation that the hon. Lady is inviting us to discuss would ever arise. What public prosecutor would be bold enough to bring a criminal case against a big accountancy firm, in the light of the Chancellor’s very clear statement yesterday that he will resist—I doubt whether he will be successful—the importation of Sarbanes-Oxley. Following the outcome of the so-called “Plumber” case in the Financial Services Authority, the number of such cases that any agency will bring will be very limited indeed. That is why we should not seek this blunt instrument of criminality in order to create a cultural change in behaviour. Any 18th century squire would have been able to tell this House that there is no prospect of a hanging party changing its behaviour unless it actually hangs someone. No one is going to be “hanged”, so the prospects of changing behaviour do not exist.
The hon. Member for Putney said that it would be entirely wrong to separate audit from non-audit services. In 1982, a Conservative Government introduced just such a requirement into the auditing of local government, and it has worked very successfully for 25 years. In April, the public company accountancy oversight board introduced a requirement for the complete separation of tax advice from the auditing of companies. In due course, that will be introduced into our own rules through the Auditing Practices Board. Nothing is more certain, because for the big firms, there has to be consistency between us and the United States. How much more sensible to introduce our own arrangements, rather than passively importing into this country requirements and regulations from the United States. If, by chance, one of the big firms was required to tell a company what each one of its 140,000 partners across the world might or might not have done, what a very important discipline that might be. What clarity that might bring to the internal organisation of these big firms, and how helpful it would be to the members of the company and to the wider world.
Vera Baird: I shall begin by discussing Opposition amendments Nos. 439 and 440. I will then turn to the three amendments tabled by my hon. Friends, and to the six Government amendments that make up the balance of this group.
This new offence has been debated extensively—hyperbole is a tool that is frequently used, but “extensively” is probably an understatement—and I do not suggest for one minute that the hon. Member for Putney (Justine Greening) is trying to defend the bad auditor. Rather, she is considering the possible impact on the good and honest auditor, and I accept that it is right that she do so. But frankly, the dismal picture that she paints is based on the misunderstanding that we are criminalising negligence by auditors. I agree with her entirely that to do so would be counter-productive, but that is not what we are doing: the Bill does not criminalise negligence. Recklessness and negligence are well-established legal concepts, and they are very different. I explained this at tedious length in Committee, and most members of it seemed satisfied with my explanation. I am grateful to the hon. Member for Cambridge (David Howarth), who indicated that I satisfied him on that point. As the distinction is so central, let me explain its elements one more time.
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To prove that someone has behaved recklessly, it is necessary to show that the auditor was aware that an action, or a failure to act—the latter is probably much more likely—carried risks; that they knew that the risks were not reasonable ones to take; and that despite knowing this, they went ahead anyway. I did not set the position out in Committee in quite that way; I think that I quoted pretty much the sentence structure used in the House of Lords case of Crown v. G, which dealt with the question of whether recklessness was a subjective or an objective test. The Lords made it very clear that the test is exactly as I have just set out, so I hope that the hon. Member for Putney will at last be satisfied that we have been very careful in casting this offence, and that it will not have the consequences that she fears.
The hon. Lady also said that it might not be clear in some circumstances which team member behaved “knowingly or recklessly”. If there is no evidence against a particular team member, there will be no prosecution. The offence deals with cases in which there is sufficient evidence, and absolutely nothing in the clause would allow all team members to be prosecuted in the hope that one could be caught. The provision could be used only in respect of a person against whom there was evidence that they had been in the state of mind that I have described a number of times. That is a very long way from negligence.
My noble Friend Lord Sainsbury went further. He has been faintly criticised in that regard, but he was trying to be reassuring when he said that the guidance to be issued under clauses 522 and 523 would say that for a prosecution to be brought under the new offence, there should be specific evidence of recklessness, and that one should not generally rely on an inference of recklessness from hindsight, even where such hindsight showed a judgment to have been so wrong that it was not credible that the auditor did not know the risk that they were running. We intend that, as a further protection, the guidance will make it clear to prosecutors that that should be the position.
Let me reassure my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) that this provision will be used, if necessary. It is one of a portfolio of offences, and it fills a gap. I have it on the authority of no less a person than the Solicitor-General that the insider dealing provisions led to many prosecutions and to at least one conviction while they were on the statute book.
Jim Cousins: May I just confirm that I am being assured that, in the 20 years in which insider dealing was a criminal offence, there was one conviction?
Vera Baird: No, I am saying that the Solicitor-General, in a different guise, successfully defended some of the many prosecutions that were brought, but that he, from his own anecdotal experience, can talk about one that most definitely did succeed. However, I doubt whether it was the only one that succeeded. The provision will be used, and we legislate with the intention of using the legislation.
If we accepted the amendment tabled by the hon. Member for Putney, which would insert the phrase “dishonestly or fraudulently”, it would make the
offence redundant. If an auditor behaves dishonestly or fraudulently, they are already guilty of an extant criminal offence. This is a useful new offence that will have a positive economic impact, without imposing additional burdens on those who act in good faith in carrying out their duties. We think that it is right to have that sort of legal sanction in such cases. I hope that the hon. Member for Putney will withdraw the amendment, now that we have shown yet again that her concerns are not really justified.
I turn now to the amendments from my hon. Friends the Members for Newcastle upon Tyne, Central and for Great Grimsby (Mr. Mitchell). Amendments Nos. 684 and 686 are aimed at ensuring the independence of auditors from the companies that they are auditing. Amendment No. 684 would prevent a company from employing its auditor for any work other than the audit, while amendment No. 686 would require the rotation of auditors every five years.
We entirely agree that the independence of auditors is absolutely essential, but we also have a responsibility to avoid unnecessary regulation. Tightening the regulation on auditors often ends up imposing significant costs on companies. However, over the past few years, particularly since the collapse of Enron and WorldCom, the structures in the UK within which auditors operate have been strengthened in a number of ways. We removed responsibility for auditing standards on independence from the professional bodies and passed it over to the independent Auditing Practices Board of the Financial Reporting Council. Moreover, only a couple of years ago the APB issued ethical standards on auditor independence that impose strict duties on auditors to monitor and deal with any threats to their independence. In particular, they must avoid doing other work for an audit client if that would result in their effectively having to audit their own work.
Jim Cousins: I am very glad that my hon. and learned Friend has pointed that out, as the APB’s requirements follow to the letter those introduced in the US after the Sarbanes-Oxley Act was passed and the Public Company Accountancy Oversight Board was established. She makes precisely my point—that we in this country are not setting standards for ourselves but allowing the APB to import into British jurisdiction exactly the same requirements that are introduced in the US. How feeble that is.
Vera Baird: I follow what my hon. Friend says, and he is right, at least in part. However, I hope that he will agree that substantial steps have been taken in the past few years to guarantee the independence of auditors—an aim that he and I share. The two steps that I have described are clearly highly germane to my assertion that he and I are thinking along the same lines, even though our approach differs slightly.
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