Examination of Witnesses (Questions 1340
TUESDAY 4 DECEMBER 2007
Q1340 Jim Cousins: Can you tell the
Committee whether they did happen about Northern Rock?
Mr Sexton: Yes.
Q1341 Jim Cousins: In your relationship
with the FSA where do your duties lie? Do they lie to Northern
Rock who are paying you £300,000 or to the FSA and the wider
Mr Hitchins: The £300,000
referred to was to report on regulatory returns to the FSA where
we have a duty of care to both the company and FSA.
Q1342 Jim Cousins: Could you spell
out what your duty of care is to the FSA?
Mr Hitchins: In terms of regulatory
reporting, our duty of care is to make sure the information in
the regulatory returns is consistent with the information we have
Q1343 Jim Cousins: Did you ever draw
to the FSA's attention that in terms of assets and liabilities
over three months Northern Rock's liabilities were four times
Mr Hitchins: I do not know whether
we specifically did so.
Mr Sexton: That information is
included in the regulatory returns and therefore is brought to
the attention of the FSA.
Q1344 Jim Cousins: It is up to the
FSA to spot it?
Mr Sexton: The FSA has a very
well developed procedure.
Q1345 Jim Cousins: You are not under
any duty to point it out?
Mr Sexton: Not explicitly, no.
Q1346 Jim Cousins: What is your duty
as auditor to the depositors?
Mr Sexton: Our duty as statutory
auditors to any UK plc is primarily to the shareholders; it is
they with whom we contract through their board.
Q1347 Jim Cousins: So, you do not
have any duty of care to depositors?
Mr Sexton: We have no duty of
care to depositors.
Q1348 Jim Cousins: What are your
fees so far for preparing the documents for the sale of Northern
Mr Sexton: I do not know that
number. It is an ongoing process and as the bid process proceeds
as auditors we will almost certainly be involved in providing
opinions on historical financial information predominantly in
relation to periods already reported.
Q1349 Jim Cousins: Perhaps you could
let the Committee know in due course what those fees are.
Mr Sexton: Those fees will be
thoroughly disclosed in the annual report and the prospectus.
Q1350 Jim Cousins: Can you let the
Committee know what the fees are so far?
Mr Sexton: Those fees will be
thoroughly disclosed under regulatory requirements.
Q1351 Jim Cousins: In preparing those
documents obviously your duty is to the board of Northern Rock.
Mr Sexton: The duty in preparing
a prospectus-related document will be to the shareholders of the
companywe contract with the companyand to the purchaser
to the extent we contract with the purchaser. It will depend entirely
on with whom we contract.
Q1352 Jim Cousins: One of your former
colleagues, Rosemary Radcliffe, was a director of Northern Rock
and served on the audit committee.
Mr Sexton: That is correct.
Q1353 Jim Cousins: Did you raise
any issues about that?
Mr Sexton: We did. That was why
she stood down from the audit committee in December 2006 and only
after we had obtained explicit clearance with the regulators that
her independence was not impaired, she having left our partnership
in 2001, did she go back onto the audit committee.
Q1354 Jim Cousins: Therefore, you
sought the assurance of the regulators that it was perfectly proper
for her to be on the audit committee and she went back onto that
Mr Sexton: She did. The specific
arrangement is that she steps out of any discussion involving
PricewaterhouseCoopers and its appointment to Northern Rock.
Q1355 Jim Cousins: What about her
involvement with the regulatory returns that you prepared?
Mr Sexton: I am afraid that is
a matter for the company. I do not know the answer to that.
Mr Hitchins: We do not prepare
the regulatory returns and effectively we provide an assurance
opinion on them.
Q1356 Jim Cousins: In your reporting
to Northern Rock shareholders in the annual report you say that
you are not required to consider whether the board's statements
on internal control cover all risks or form an opinion on risk
and control procedures. Do you think you should be required?
Mr Sexton: The requirements of
the combined code which drive the work we do and do not do have
been subject to repeated review involving all market participantsregulators,
companies and standard-settersand the conclusion they have
reached is that the best use of auditors is to focus upon financial
reporting controls, which is what we do, not provide an overall
opinion on internal control in the way the American environment
Q1357 Jim Cousins: I was asking you,
not them. Do you think it would be right for you as auditor to
report on the risk and control procedures of the bank? Do you
think you should be required to check out the board's statements
on its internal controls on risks?
Mr Sexton: What I am saying to
you is that the regulators dictate the work we do as statutory
auditors, so if your question is directed to us as statutory auditor
I can answer only as to the nature of what the regulators might
require us to do.
Q1358 Jim Cousins: This is dissembling.
I am asking for your view about this. Do you think it would be
sensible if you were required to report on these risks? Either
you do or do not.
Mr Sexton: I think that firms
like my own can add value when they look at all kinds of control.
It is one of our areas of expertise, so we could certainly add
value to companies if they requested us to do that work.
Q1359 Jim Cousins: To be very clear
about what you are saying, that would be additional to your work
as auditor and it would be a specific new task for which you would
charge an additional fee, presumably.
Mr Sexton: If it were requested
by the company outside statutory regulation that would be the
7 Ev 341 Back
Note by witness: For completeness, the regulator I was
referring to in my reply was the Securities and Exchange Commission. Back