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Session 2005 - 06
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Standing Committee Debates

Nineteenth Standing Committee on Delegated Legislation

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Nineteenth Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mrs. Janet Dean

†Allen, Mr. Graham (Nottingham, North) (Lab)
†Arbuthnot, Mr. James (North-East Hampshire) (Con)
†Clarke, Mr. Tom (Coatbridge, Chryston and Bellshill) (Lab)
†Clark, Ms Katy (North Ayrshire and Arran) (Lab)
Cryer, Mrs. Ann (Keighley) (Lab)
†Dhanda, Mr. Parmjit (Gloucester) (Lab)
†Fabricant, Michael (Lichfield) (Con)
†Gardiner, Barry (Parliamentary Under-Secretary of State for Trade and Industry)
†Hillier, Meg (Hackney, South and Shoreditch) (Lab/Co-op)
Lamb, Norman (North Norfolk) (LD)
Luff, Peter (Mid-Worcestershire) (Con)
†Miller, Mrs. Maria (Basingstoke) (Con)
†Mole, Chris (Ipswich) (Lab)
Ottaway, Richard (Croydon, South) (Con)
†Reid, Mr. Alan (Argyll and Bute) (LD)
†Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Ian Cameron, Committee Clerk

† attended the Committee

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Thursday 14 July 2005

[Mrs Janet Dean in the Chair]

Draft Companies Act 1989 (Delegation) Order 2005

2.30 pm

The Parliamentary Under-Secretary of State for Trade and Industry (Barry Gardiner): I beg to move,

    That the Committee has considered the draft Companies Act 1989 (Delegation) Order 2005.

Mrs. Dean, I am delighted to introduce the order under your chairmanship or, rather, chairwomanship—I need to get my ships in order. That aside, it is a great pleasure to see you in the Chair, and I am sure that you will keep us in good trim. I understand that the Lords dealt with this matter with great dispatch earlier today, and I hope that we can match them in diligence and efficacy.

The order delegates the Secretary of State’s statutory functions in relation to auditors under part II of the Companies Act 1989 to the Financial Reporting Council’s Professional Oversight Board for Accountancy—POBA. It is important that the United Kingdom has an effective framework for corporate activity that gives confidence to shareholders, business and other stakeholders and ensures that capital markets are efficient and effective. A key part of that framework is better company reporting.

The provisions that we introduced in the recent Companies (Audit, Investigations and Community Enterprise) Act 2004 supported better reporting by strengthening accounting and audit regulation. The order continues those reforms by providing for the more efficient and effective oversight of audit regulation.

The main purpose of the audit regulation provisions in part II of the 1989 Act is to ensure that only properly supervised and appropriately qualified people can carry out audits of companies and that audits are carried out properly and with integrity and a proper degree of independence. The Act achieves that by setting out a statutory scheme for the regulation of auditors, under which the Secretary of State for Trade and Industry recognises certain accountancy bodies as capable of training and supervising auditors.

It is essential for the integrity of the UK’s audit regulatory regime that there is proper oversight of the work of accountancy bodies that are recognised to supervise auditors and that audit qualifications are of a sufficiently high standard. Those oversight functions are currently carried out by the Secretary of State, but the 1989 Act also allows them to be delegated. That delegation power was originally drafted to allow
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delegation to a body that was established by the delegation order itself. However, that was too restrictive, and the power was never used.

We therefore amended the power in sections 3 to 5 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 and made it more flexible by also permitting delegation to a body that already exists. We did that because delegating the statutory functions will bring a number of benefits. That view was confirmed by respondents to our consultation on the regulatory regime of the accountancy and audit professions. Delegation will result in more effective oversight of audit supervisory bodies and audit qualifications because it will enable the functions to be carried out by a body with audit and professional oversight responsibilities and, therefore, with a practical understanding of audit issues. The synergies achieved will significantly improve the overall independence of the regulatory regime and the effectiveness of the oversight provided by the supervisory bodies.

The body that we propose to carry out the delegated functions—the Professional Oversight Board for Accountancy—is an operating body of the Financial Reporting Council. It is the successor to the Review Board of the old Accountancy Foundation, although its remit has been significantly changed. POBA will have three main roles. As well as exercising the delegated functions, it will oversee both the new audit inspection unit that has been established to monitor major audit work and the self-regulatory activities of the major professional accountancy bodies in relation to their members. The fact that POBA has those other audit and professional oversight responsibilities means that it is in a good position to take advantage of the synergies that I mentioned, which will improve the effectiveness of statutory oversight and the overall regulatory regime.

The POBA board is chaired by Sir John Bourn, the Comptroller and Auditor General. It has a lay majority whose members have experience in companies, investment and regulation. In addition, there are qualified accountants on the board whose expertise includes audit. That is a change from the old review board, whose members could not be practising accountants. It reflects the new audit-focused responsibilities of POBA. However, none of the present board members are working as an auditor or employed by an audit firm.

The order transfers the vast majority of the Secretary of State’s functions to POBA. The most important are those concerning recognition of bodies for the supervision of auditors and audit qualifications. Recognition of new bodies is rare, but it is not all that POBA will do. The principal focus of its work will be monitoring the performance of supervisory bodies and audit qualifications against the criteria for recognition as set out in schedules 11 and 12 to the 1989 Act. There will also be work in respect of approval of overseas qualifications under section 33.

The order contains several requirements for how POBA should carry out its work. They cover consultation, record-keeping and notification of
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information to the Secretary of State. For example, article 4 requires POBA to consult for at least 12 weeks. Schedule 13 to the 1989 Act also contains a number of requirements. In particular, paragraph 10 requires POBA to report annually to the Secretary of State, and the Secretary of State to lay the report before Parliament. In addition, POBA will be bound by the Financial Reporting Council’s regulatory strategy, which was recently agreed with the Government and which commits it to the Better Regulation Task Force principles of proportionality, targeting, consistency, transparency and accountability.

The order is an important further step in our work on improving the regulatory regime for auditors. Delegation to POBA will mean more effective oversight of audit supervisory bodies and audit qualifications. It will further strengthen the corporate framework and give confidence that capital markets are efficient and effective.

2.37 pm

Mr. James Arbuthnot (North-East Hampshire) (Con): Mrs. Dean, it is a pleasure to spend a hot July afternoon in a Committee Room with you and with other right hon. and hon. Members. I hope that the next hour and a half will be as enjoyable as the time we have just spent listening to the Minister.

My main concern about the proposals relates to the burdens that they might put on businesses. Therefore, I ask the Minister to continue to be as helpful as he has been already and to reassure businesses that they will not face a great deal of extra red tape and cost. One of the problems that businesses face is not just the existence of red tape but the fact that each time regulations change, they have to learn about the changes and their consequences. A change in regulations is itself a burden on business.

In its response to the consultation on the proposals, the Financial Services Authority stated:

    “We are concerned about the complex structure proposed for the POB to enable its members to carry out both statutory and non-statutory functions.”

Will the Minister comment on that? After all, the FSA knows all there is to know about unnecessarily complex structures.

As our auditing procedures have not suffered the sort of scandals that occurred in the United States with Enron and WorldCom, some people have suggested that they ain’t bust so the need to fix them is not completely apparent. I believe that legislation is probably a necessary evil, but we must always remember that it is an evil, and that sometimes it is necessary to justify changing the rules if only a marginal benefit will be obtained. On the whole, we consider that there may be such a benefit from this proposal, because it introduces the independence that the Minister talked about, but it is only probably a good thing and the Minister must answer the questions about costs raised by a number of businesses.

Paragraph 6.1 of annex A to the explanatory memorandum says:

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    “One respondent expressed concern that full statutory control could lead to a more bureaucratic and costly system.”

That is precisely the point. The Government answer appears at paragraph 6.2:

    “We have no reason to believe that . . . would significantly increase the costs to, or otherwise adversely affect small audit firms and small businesses.”

The word “significantly” is important in that context, because in paragraph 5.11 the suggested costs for a typical business will be unlikely to be substantial in comparison with the turnover charged by the firms. Turnover is important, but it is not the only thing that affects the continued viability of small companies; profit and cash flow are also important. Therefore, costs and red tape are important in determining whether this statutory instrument should be agreed.

Paragraph 10.4 says:

    “A number of respondents considered that the proposals might reduce the number of firms which would be likely to engage in audit work which could impact adversely on consumers of audit and accountancy services.”

The Minister needs to answer that serious worry and I shall listen with interest to what he says, because we need considerable reassurance.

2.42 pm

Mr. Alan Reid (Argyll and Bute) (LD): It is a pleasure to serve under you, Mrs. Dean.

I support the principle of the Secretary of State delegating the functions in the order to an independent body, such as the Professional Oversight Board for Accountancy. It is right that the supervision of auditors should be carried out by an independent body, rather than by Ministers. However, I am concerned, like the right hon. Member for North-East Hampshire (Mr. Arbuthnot), about the cost implications, particularly for small businesses.

Paragraph 6 of annex A to the explanatory notes, which deals with “the small firms’ impact test” that the Minister sets great store by, says that many small businesses have expressed concern that the proposals will lead to an increase in fees, the consequence being that smaller audit firms could leave the market and make it more difficult for small companies to obtain the services of auditors. I hope that the Minister will respond to those concerns, because it is important that small firms can stay in the market and obtain the services of auditors.

If the order is approved, will the Government agree to assess its impact after it has been operating for a year, so that we can find out whether the concerns about cost have been justified?

2.44 pm

Barry Gardiner: We have had an interesting, if critical, debate this afternoon that has given rise to some important points from both the right hon. Member for North-East Hampshire and the hon. Member for Argyll and Bute (Mr. Reid), which should be addressed.

The right hon. Member for North-East Hampshire spoke about the cost for business. He talked of the FSA and its query about complexity in the regulation. I want to set that in context. He is correct; the response
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to the consultation of March 2003 expressed concern about the complex structure proposed for the POBA. The consultation document envisaged that delegation would be to a body established by a delegation order under section 46 of the Companies Act 1989 and that that body would be a statutory body with the same membership as POBA, but largely legally distinct from it.

We concluded that the method outlined in the consultation document was unnecessarily complex—the very point that the right hon. Member for North-East Hampshire has raised. That is a good example of the success of consultations. The point was raised by the FSA at the time, and was listened to by the Government and taken on board. We believed that the most appropriate way of achieving the policy aim of delegation to POBA was to widen the delegation power in section 46 to allow delegation to an existing body as well as to a body created by the delegation order. That was achieved through sections 3 to 5 of the Companies (Audit, Investigations and Community Enterprise) Act 2004.

I hope that that reassures the Committee that on occasion the Government listen to, take account of and act on consultation. I know that some people who write in response to consultation believe that everything is set in stone and that the Government will not take note, but that was not so on this occasion.

The right hon. Member for North-East Hampshire also used the expression, “If it ain’t bust, don’t fix it.” Although he helpfully and generously acknowledged that there is probably marginal benefit in the order, he, and the hon. Member for Argyll and Bute, made it quite clear that their support would be contingent on my being able satisfactorily to answer the question about costs and the burden that they would put on business. Yet again, the hon. Member for Argyll and Bute referred to my concern, in my wider role in Government, as a champion of regulatory impact assessments and of small business. He is right; I take that very seriously. I confirm that that was one of the first questions that I asked officials when I was presented with the papers for the Committee. It was made clear to me that the only impact on costs would be to take £17,500 a year off the Government’s costs; there would not be any addition to the burden on small business.

Mrs. Maria Miller (Basingstoke) (Con): Mrs. Dean, I am pleased to be serving on the Committee. I want to echo the point that my right hon. Friend the Member for North-East Hampshire and the hon. Member for Argyll and Bute made about the possible impact on smaller businesses. That is of particular interest to me
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as my constituency has 69,000 jobs and a number of companies in the area are smaller accountancy firms. Will the Minister consider talking to POBA about clarifying the impact that the measure will have on smaller businesses before the delegation goes ahead and about how POBA might keep the issue under review after delegation?

Barry Gardiner: I always try to be as helpful as possible, particularly in Committee, where we are trying to establish how best to pass legislation. That is not a suggestion that I can take up, because the measure has been delayed for some time. The measure, which is small, has hung over from the previous Parliament. Many of the points in the consultation document related to the wider Act, which is now on the statute book, and not to the specific measure that we are considering.

I return to the issue of costs. There is no reason why the provisions that we are considering, which would increase the independence of audit regulation, would mean any significant increase in costs or would adversely affect small businesses at all.

We have no reason to believe that the charges will lead to increased registration costs for audit services for customers or for small business, for the reasons that I stated.

Mr. Reid: The Minister mentioned that the cost of £17,500 that currently affects the Department of Trade and Industry will no longer be a cost on the DTI. Obviously, the person who was being paid that £17,500 was doing some work. Will the Minister explain why that work is either no longer necessary or can be done at no cost?

Barry Gardiner: POBA is in existence and has other functions in the area. The hon. Gentleman will be aware that there have been few—if memory serves me, only two—applications before POBA for a number of years. The task that we are dealing with is not onerous. As the body exists and is taking on that less than onerous task, we do not need to designate someone in the DTI to the specific role of keeping the Secretary of State informed.

I hope that the Committee accepts this small piece of legislation. It will improve the efficacy of our accounting practices and procedures. The day after our newspapers were full of the news that the gentleman from WorldCom was sent down for 25 years, that is no bad thing.

Question put and agreed to.


    That the Committee has considered the draft Companies Act 1989 (Delegation) Order 2005.

Committee rose at seven minutes to Three o’clock.


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