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Draft Statutory Auditors (Delegation of Functions etc) Order 2008

The Committee consisted of the following Members:

Chairman: Ann Winterton
Burt, Lorely (Solihull) (LD)
Clappison, Mr. James (Hertsmere) (Con)
Dobson, Frank (Holborn and St. Pancras) (Lab)
Dowd, Jim (Lewisham, West) (Lab)
Duddridge, James (Rochford and Southend, East) (Con)
Etherington, Bill (Sunderland, North) (Lab)
Grogan, Mr. John (Selby) (Lab)
Murphy, Mr. Denis (Wansbeck) (Lab)
Pound, Stephen (Ealing, North) (Lab)
Prosser, Gwyn (Dover) (Lab)
Seabeck, Alison (Plymouth, Devonport) (Lab)
Spink, Bob (Castle Point) (Con)
Teather, Sarah (Brent, East) (LD)
Thomas, Mr. Gareth (Parliamentary Under-Secretary of State for Business, Enterprise and Regulatory Reform )
Trickett, Jon (Hemsworth) (Lab)
Whittingdale, Mr. John (Maldon and East Chelmsford) (Con)
Wilshire, Mr. David (Spelthorne) (Con)
Hannah Weston, Committee Clerk
† attended the Committee

Seventh Delegated Legislation Committee

Thursday 7 February 2008

[Ann Winterton in the Chair]

Draft Statutory Auditors (Delegation of Functions etc) Order 2008
8.55 am
The Parliamentary Under-Secretary of State for Business, Enterprise and Regulatory Reform (Mr. Gareth Thomas): I beg to move,
That the Committee has considered the draft Statutory Auditors (Delegation of Functions etc) Order 2008.
Thank you, Lady Winterton, for the opportunity to serve again under your chairmanship. We seek to make the order under section 1252 of the Companies Act 2006, which delegates the Secretary of State’s functions in relation to auditors under part 42 of the Act to the Professional Oversight Board of the Financial Reporting Council. The order will replace the existing order of delegation to the board, which was made in 2005 under the Companies Act 1989.
The regulation of audit was reformed following a number of corporate scandals in other countries earlier in the decade. A key element of the reforms was the Companies Act 1989 (Delegation) Order 2005, which provided for independent oversight of the work of the professional accountancy bodies in the regulation of the audit profession. Independent oversight is also required by the European Union’s audit directive, adopted in 2006.
Since 2005, the work of the Professional Oversight Board has been a central part of the regulation of audit in the UK. It has provided clear and assured oversight of the accountancy institutions’ statutory functions, and I take this opportunity to pay tribute to its work. The existing audit regime meets most of the requirements of the new audit directive, but some adjustments are required. The necessary new provisions are largely in the 2006 Act and in the Statutory Auditors and Third Country Auditors Regulations 2007, which were made in December. A new delegation order is needed, to come into effect on 6 April, to reflect those changes. A small number of changes are also required to reflect changes in the corporate structure of the Financial Reporting Council.
The audit regulatory structure is set out in the 1989 Act, as amended in 2004, and restated, with a few amendments, in part 42 of the 2006 Act. The essence of the regime is that, to be eligible to be appointed as a statutory auditor of a UK company, an auditor, whether an individual or a firm, must be a member of a recognised supervisory body and subject to its rules. The recognised supervisory bodies are those professional accountancy organisations recognised by the Professional Oversight Board to regulate auditors. A key statutory role of the board is to approve those bodies and oversee how they carry out their statutory functions. Under the delegation order, the board also has the power to make regulations on the register of auditors, audit qualifications and information to be made public by auditors, known as transparency.
Some of the powers that we propose to delegate to the board go beyond its existing responsibilities, and they largely result from the requirements of the EU’s audit directive. The first is new provisions for co-operation with EU and third country audit regulators and the second is the registration and regulation of third country auditors. The delegation order will also have the effect of making the Professional Oversight Board subject to the Freedom of Information Act 2000. The board has full discretion in the exercise of most of the Secretary of State’s functions.
There has, of course, been full consultation ahead of the new delegation order, as there was before the 2005 order was made. Last July, the Department published a draft for consultation, and no concerns were raised. Prior to that, the then Department of Trade and Industry consulted on the general approach to implementing the audit directive. All the response to that consultation supported the Government’s approach of making only the minimum changes required by the directive to the UK’s existing audit regime, including the established principle of delegation.
9 am
Mr. James Clappison (Hertsmere) (Con): It is a great pleasure this morning to serve under your chairmanship once again, Lady Winterton. I do not intend to detain the Committee for long.
What the Minister said about the nature of the order is correct—we do not dispute it. The order delegates many of the functions of the Secretary of State under the Companies Act 2006 relating to the regulation of statutory auditors to the Professional Oversight Board of the Financial Reporting Council, as the Minister said. The first batch of the Government’s consultation produced supportive responses, and the second batch did not produce any responses at all.
Independent oversight and supervision of audit is important, and it would appear that the board will, in effect, be the supervisor of the supervisors, with regard to audit. It will take over the Secretary of State’s powers to recognise supervisory bodies of auditors and professional qualifications.
I have one comment and one question to put to the Minister. I would be grateful if the Minister could say a little about the line of accountability of the board itself. In particular, in what way will it be accountable to the Secretary of State? Article 4 states that the functions transferred
“remain exercisable concurrently by the Secretary of State.”
Another paragraph of the same article states that the transfer
“is subject to the reservation that the functions are exercisable only with the consent of the Secretary of State.”
We would be grateful if the Minister would spell out just what the board’s accountability will be to the Secretary of State.
9.2 am
Lorely Burt (Solihull) (LD): The order is straightforward. The Companies Act 2006 provided for legislation to transfer certain specified regulatory powers from the Department of Trade and Industry, as it was then—the Department for Business, Enterprise and Regulatory Reform as it is now—to some other authority. As a veteran of the many debates during the Committee stage, although I cannot remember this precise aspect of the Act, I know that it does do that.
The statutory instrument specifies that the delegations are to take place, and that the recipient is to be the Professional Oversight Board, a body already established under the auspices of the Financial Reporting Council. I consulted the Association of Chartered Certified Accountants, which is an accountancy body that will be subject to the new rules. It is happy with article 6, which states that the board must consult before bringing in any rules. That seems to be a sensible approach.
If there is an issue, it is that we must be satisfied that the board is properly resourced and competent to exercise the delegated functions, and that it is properly accountable to Parliament for its actions. As far as I am concerned, it probably fulfils those requirements, but I would be grateful for some assurance from the Minister. On that basis, my party has no objection to the order.
9.5 am
Mr. John Grogan (Selby) (Lab): It is a great honour to serve under your chairmanship, Lady Winterton. My brief contribution to the debate is inspired by listening to the hon. Member for Maldon and East Chelmsford down the years. I want to say a little about choice, innovation and competition in the audit market, and whether the Professional Oversight Board will have any role in looking at the report by the Financial Reporting Council market participants group, “Choice in the UK Audit Market”. I shall detain the Committee for only a few minutes. I am grateful to the Whips for putting me on this Committee.
Mr. John Whittingdale (Maldon and East Chelmsford) (Con): I am most grateful for the hon. Gentleman’s kind remarks. Given his belief in the importance of audit, could I tempt him to go a little further and to say whether he believes that the BBC should be subject to the National Audit Office’s scrutiny? I know that that issue is dear to his heart.
The Chairman: Order. Before Mr. Grogan takes the floor again, that last comment was a little wide of the order.
Mr. Grogan: I am most disappointed, Lady Winterton, but I will remain in order. I hope that you will allow me to thank the Whips for putting me on this Committee. A few weeks ago, we had to fill in a form stating our interests for career development. I forgot to fill mine in, so my career development days are probably behind me. It was good of the Whips to realise that I am concerned about the audit market. Somehow, they realised that, and I thank them. They could have put me on the Committee considering the draft Cornwall (Structural Change) Order 2008, which is the alternative this morning and is fascinating. I spent many happy family holidays in Cornwall, but I am pleased that I am a member of this Committee.
Very briefly, there is an important report under the auspices of the Financial Reporting Council market participants group, and I understand that this order is before us because of a European directive aimed at encouraging competition among auditors in the European Union. There is much potential business for British firms, but is the British audit market competitive enough? The report found that a FTSE auditor appointed today could expect to remain in place until 2055, and that audits are rarely put out to tender. For example, a report by Oxera for the then Department of Trade and Industry found that
“more than 70 per cent. of the FTSE 100 have not held a competitive tender in the last 15 years.”
That is not a sign of a healthy competitive market. Choice is closely interwoven with competition, and audit committees of the largest listed companies have found that the number of firms that are perceived to be a genuine alternative to their current auditor are limited, particularly when one eliminates those with a conflict interests because of the provision of other services to the business.
All I am asking is whether the Minister is satisfied that the Professional Oversight Board, given that the report was made by the Financial Reporting Council, will take those issues forward. For example, will the board look at joint audits? Will that come under its purview? That was mentioned in the report, and many of us are secretaries of trusts and political bodies with the principle of joint audits. Will the Professional Oversight Board look at that? There are many advantages of joint audits—for example, a group audit opinion that is formed jointly by the joint auditors ensures that contentious issues have been considered and agreed by both firms, and enables work within the audit to be rotated periodically between the joint auditors, and so on. I will not try the Committee’s patience by reading out the 23 advantages, but this is an important issue. Is the Minister absolutely satisfied that in transferring the important functions of the Professional Oversight Board, the important report commissioned by the Financial Reporting Council will not be forgotten, and will be progressed?
9.9 am
Jon Trickett (Hemsworth) (Lab): I, too, welcome the opportunity to speak under your chairmanship, Lady Winterton. I also wondered why I have the distinction of being a member of a Statutory Instrument Committee on a Thursday morning when no votes are envisaged in the House. I had thought that my hon. Friend the Member for Selby and I had a number of things in common, but an interest in this statutory instrument was not necessarily one of them. We have done things together that might have drawn the Whips’ attention to our behaviour, and I wondered whether that might have been a factor. You may rule me out of order for speculating, Lady Winterton, and I hesitate to speak on a matter about which I know relatively little when compared with a renaissance man such as my hon. Friend.
I am drawn into the debate, because my hon. Friend is right to say that the regulatory process that we are being asked to agree to raises questions about the character and structure of the industry. I want to probe that matter a little further, because, frankly, the Minister needs to do more to persuade me to vote for the order.
The audit sector is effectively an oligopoly. That is not only my view, but the view of KPMG, one of the companies to be scrutinised by the new board. The internet is a wonderful thing. This morning, while idly preparing for this exciting debate, I discovered from the internet that KPMG asked serious questions about the state of the market when Price Waterhouse merged with Coopers and Lybrand, to form PricewaterhouseCoopers, which resulted in more than 50 per cent. of all FTSE companies being audited by a single company. KPMG described that as a crisis in the audit profession, because of the possibility that someone such as myself or, more importantly, others outside this place, might regard that as oligopolistic.
Are the Government satisfied that that situation has been resolved, or do they envisage that the board, to which we will pass these auditing functions, if we agree to the statutory instrument, will look carefully at the structure of the industry? I find it disturbing that so many of the largest companies in the UK and Europe—this crisis extends to Europe—are audited by a very small number of companies. As KPMG said, in describing this situation as a crisis, it would take only one further company to collapse, as Andersen did, for us to be down to three companies dominating the European market and beyond, into the United States, Australia and elsewhere. That is a disturbing situation, and, frankly, I had hoped that the Minister would refer to it in describing activities in which the body could engage.
A second matter of equal importance is that the board will be asked to address auditing ethics, which are referred to in the order. Each of the companies, which I described as forming an quasi-oligopoly—oligopolies are anti-competitive—have distinct arms, one of which is auditing. However, many of their activities are engaged in providing corporate services. Even the Government have received billions of pounds of advice from the four companies on how to marketise and privatise many of our public services. There is a widespread view that there ought to be clear firewalls between their audit and consultancy functions, but occasionally those firewalls appear to be breached. If that is the case, the independence of the audit process is imperilled.
Finally, I should like some indication that members of the board will not be employees, directors or shareholders of any of the four big practices, as that would surely prompt questions about who is policing the police or, in this case, who is auditing the auditors. If members of the board may be drawn from the same narrow group of four companies that have clear corporate interest and dominate the world in some ways, certainly the UK, that will be disturbing. With those few thoughts on a subject of which I know little, I look forward to hearing from the Minister.
9.15 am
Mr. Thomas: I shall try to do justice to the range of issues that members of the Committee have raised. I start by echoing the comments of the hon. Member for Hertsmere and my hon. Friends the Members for Selby and for Hemsworth and recognising the importance of audit and of having an organisation or body to oversee the independence and capability of organisations that carry out audit functions.
In recognising the huge benefit to the British economy that UK audit firms bring, I refer to my other ministerial portfolio in the Department for International Development, in which I continually see the importance of financial management and of ensuring that strong audit regimes exist in the different country programmes for which DFID is responsible. That is important in relation to how tax revenue from both British taxpayers and from the citizens of those countries is spent. Today’s discussions are important not only to the UK economy and the way in which UK firms are audited, but to what happens elsewhere in the world.
The hon. Member for Hertsmere asked in what way the Professional Oversight Board will be accountable to the Secretary of State. Let me try to reassure him that the board is required to report annually to the Secretary of State on the way in which it discharges its functions. That report must be laid before Parliament. The Secretary of State retains the power to give directions to the board in order to ensure that we meet our international obligations under the directive.
The hon. Member for Solihull asked whether I could give her confidence in the way in which the Professional Oversight Board has operated. I refer to my opening remarks, when I noted that the board has existed for some time. In that sense, the order is not creating a new set of delegations or a new board. The board has operated for two and a half years and has considerable experience of exercising its functions. It does a good job and has the staff and resources to continue to provide the effective, independent oversight that we all want.
On the concern that my hon. Friend the Member for Selby raised about the investigation into the dominance of the big four, he will know that work on that area has been under way for some time. It is now in its implementation phase, and the Financial Reporting Council, more generally, is carrying it out. If he, my hon. Friend the Member for Hemsworth, or indeed any other Committee member, continues to have concerns about the work of the Financial Reporting Council in that area, I should be very happy to meet them to hear their concerns in more detail and to examine what we can do to give them confidence.
Lorely Burt: I am grateful to the hon. Member for Hemsworth, who raised an important point about oligopoly and the auditing profession. Will the Minister answer directly the hon. Gentleman’s query about the membership of the Professional Oversight Board, and whether delegated individuals from any of the top four auditing organisations are members of it?
Mr. Thomas: I am grateful to the hon. Lady for reminding me about that last question, which I need to answer. Let me reassure her, and indeed my hon. Friend the Member for Hemsworth, that no board member can be a current practising auditor, so I hope that that addresses the concerns of both Members, and of Committee members.
Jon Trickett: That is a helpful but partial response, because a person who is not today a practising auditor may have been practising one week ago, or six months ago, or one year ago, and they may still be employed in a non-audit function by one of the top four companies. The question was precisely phrased: will any employees, directors or shareholders—perhaps the latter are less important—of any of the big four be members of the body?
Mr. Thomas: Let me try to give my hon. Friend additional reassurance. Board members cannot be a practising auditor, and they cannot have been a practising auditor within the previous five years. There is a need to achieve the right balance carefully, because one wants people who have audit experience; however, we recognise the need to maintain independence, so I hope that that additional answer addresses the Committee’s concerns.
Question put and agreed to.
That the Committee has considered the draft Statutory Auditors (Delegation of Functions etc) Order 2008.
Committee rose at twenty-three minutes past Nine o’clock.

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