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On Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 900 to 910.
Moved accordingly, and, on Question, Motion agreed to.
Lord McKenzie of Luton: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 911 to 915. The new clauses inserted by the amendments restate the law on the independence of persons who are required to value non-cash assets; for example, in connection with an allotment of shares by a public company. The new clauses have the same effect as Section 108 of the 1985 Act, but for convenience they now spell out the full statutory auditor qualification requirements, rather
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Moved, That the House do agree with the Commons in their Amendments Nos. 911 to 915.—(Lord McKenzie of Luton).
On Question, Motion agreed to.
Lord McKenzie of Luton: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 916.
Moved accordingly, and, on Question, Motion agreed to.
Lord McKenzie of Luton: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 917 to 934.
These amendments are consequential to the restatement exercise. Amendments Nos. 917 to 934 and 1014 to 1016 provide definitions of key terms used in the restated clauses and revise existing definitions where necessary. Amendments Nos. 1027 and 1028 replace the schedule of appeals.
Moved, That the House do agree with the Commons in their Amendments Nos. 917 to 934.—(Lord McKenzie of Luton.)
On Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 935, to which I have spoken with Amendment No. 255.
Moved accordingly, and, on Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 936 to 945.
These provisions address a loophole in the present law. Persons who have been disqualified from being a director, holding an equivalent position or engaging in the management of a company in another state are currently able to form a company in the UK, appoint themselves a director of that company and then operate that company either in the UK or in the state where they have been disqualified. The provisions would give the Secretary of State a power to close the loophole by making regulations to disqualify from being a director of a UK company persons who have been disqualified in another state.
Moved, That the House do agree with the Commons in their Amendments Nos. 936 to 945.—(Lord Sainsbury of Turville.)
On Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 946 to 953, to which I have already spoken.
Moved accordingly, and, on Question, Motion agreed to.
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Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 954.
Amendments Nos. 954 and 957 delete provisions aimed at applying the Freedom of Information Act 2000 to the Professional Oversight Board of the Financial Reporting Council. When we last debated this, my noble friend Lord McKenzie explained that the Government understood the arguments in favour of greater public access to information held by bodies carrying out public functions and that the prospective review of the coverage of the Freedom of Information Act to be carried out by the Department for Constitutional Affairs was the best way of addressing which public functions of which bodies should be included. This will cover the various parts and functions of the FRC, some of which it may be appropriate to cover and some of which it may not be.
At Third Reading, the House voted in favour of opposition amendments that would effectively exercise by statute an order-making power in the Freedom of Information Act to apply that Act to the body or bodies to which the Secretary of State delegates certain functions under the Companies Bill. In practice, this body is likely to be the Professional Oversight Board to which the equivalent functions under the existing law are delegated.
The Government remain of the view that it would be better to use the process provided by the Freedom of Information Act, and to take a consistent overall approach to bodies carrying out public functions, including the various parts of the FRC.
As I have said, we accept that there are good arguments for extending the Freedom of Information Act to many non-statutory bodies that carry out public functions, such as the POB or the private prisons and school academies. There are also arguments that the costs of applying the Freedom of Information Act to some bodies may outweigh the benefits. That is why Section 5 of the Freedom of Information Act provides a process and a power for adding such bodies if it is appropriate to do so.
My noble and learned friend the Lord Chancellor and Secretary of State for Constitutional Affairs is considering the impact of the Freedom of Information Act 2000 on the public bodies that are already covered by the legislation. He recently published the results of an independent report he had commissioned to look into the impact of the Act on resources in handling freedom of information requests and is now considering the conclusions of the report.
He believes that we should ensure that the Act is operating effectively first, and only then should we consider extending the coverage to further bodies, such as the POB, using the power in Section 5 of the Act, ensuring that the application of the Act does not have a disproportionate impact on their ability to carry out their functions. We should not short-circuit that process by singling out the POB to be subjected to the Freedom of Information Act through this Bill. I beg to move.
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Moved, That the House do agree with the Commons in their Amendment No. 954.—(Lord Sainsbury of Turville.)
Baroness Noakesmoved, as an amendment to the Motion that this House do agree with the Commons in their Amendment 954, leave out “agree” and insert “disagree”.
The noble Baroness said: My Lords, in moving Amendment No. 954A to Amendment No. 954, I shall speak also to Amendment No. 957A, which deals similarly with Amendment No. 957.
The amendments made in your Lordships’ House apply the Freedom of Information Act to two bodies to which certain audit functions of the Secretary of State will be delegated. Amendment No. 954 deals with the independent supervisor for audits carried out by the Auditors General. The more important amendment is Amendment No. 957, which deals with the Professional Oversight Board, which as the Minister has explained, deals on the Secretary of State’s behalf with all other auditors of Companies Act companies.
The Professional Oversight Board, through its Audit Inspection Unit, examines the audits of listed companies and other important entities. The audit quality reports from these investigations remain private. Only the blandest summaries see the light of day. I explained this when we previously debated the matter in the House. The corporate governance rules which apply to listed companies positively require audit committees to make judgments about the effectiveness of their auditors every year, as part of the annual process of reappointing them, and of course from time to time companies put audits out to tender and consider new auditors.
I must say that a man from Mars would think it extraordinary that we have two completely separate systems—one where individual directors have to make quite difficult decisions about audit quality and effectiveness, and another system of appraisal of audit quality, but with absolutely no connection between the two systems. As the chairman or as a member of an audit committee I can get no information from the Professional Oversight Board that helps me to make the judgments on behalf of the companies in which I am a director. Indeed, I was told by the senior partner in one of my companies that if I ask him for the report from the Audit Inspection Unit, the Professional Oversight Board tells him that he cannot reveal it. So I and my fellow directors are being asked to fly blind.
The Freedom of Information Act may not be a perfect solution to getting more transparency, but I would feel much less passionate about the need to have this additional power if I thought the Professional Oversight Board was going to move voluntarily in the direction of transparency. In June it issued a consultation document, setting out some options for releasing more information. “Consultation” is a bit of a misnomer because no attempt was made to consult directly with individual companies or their audit committees.
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A couple of months later, in late August, a letter was sent to some chief financial officers asking them to pass this so-called consultation on to their audit committees. I do not know how effective that was because I received one such communication, and I sit on the audit committees of four listed companies. The noble Lord, Lord Sharman, who is not here, has a similar story to tell on that.
4.30 pm
Putting that on one side, the consultation proposals did not come close to giving the kind of information that I have explained that we need. Auditors are not hiding behind this. At least one of the big four would value its transparency and those in the second tier would positively welcome the greater credibility that they believe that the release of those reports would give them. In the context of a very restricted audit market, that should not be underestimated.
The Minister said again that we should wait for the Department for Constitutional Affairs to make up its mind about whether that should be extended. The right time to make a decision is when we are considering individual bodies to which Secretary of State functions are directed. That is what the Bill will do when enacted. The Secretary of State will pass his functions to those bodies. When he does so, the Freedom of Information Act stops applying to his functions. We should not let that continue. I beg to move.
Moved, as an amendment to the motion that this House do agree with the Commons in their Amendment 954, leave out “agree” and insert “disagree”.
Lord Lee of Trafford: My Lords, I support the noble Baroness in her amendments. I acknowledge that I have come to this Bill somewhat late in the day, having been introduced to your Lordships' House only in mid-June—later than expected, I have to say, because, apparently, audit reports on certain prospective Peers were rather less than unqualified.
I must declare a number of interests, having been a chartered accountant for more than 40 years—albeit never in practice—and having been on the boards of a number of public companies of various sizes and the chairman and member of a number of audit committees. In recent years as a private investor I have focused on the smaller established public companies and write a regular monthly column on my portfolio activities for the Financial Times.
In preparation for this debate, I have looked back at the Hansards covering the passage of the Bill through both Houses and at the debates on the Freedom of Information Bill itself. In opening the first debate on the Freedom of Information Bill in December 1999, the then Home Secretary, Jack Straw, said:
“Moreover, the Bill will not only provide legal rights for the public and place legal duties on Ministers and public authorities, but will help to transform the culture of Government from one of secrecy to one of openness. It will transform the default setting from ‘this should be kept quiet unless’ to ‘this should be published unless’.—[Official Report, Commons, 7/12/99; col. 714.]
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We contend that the Professional Oversight Board for Accountancy—an operating body of the Financial Reporting Council—is the equivalent of a public authority. Hence, its reports on accountancy firms should be made public unless there are very good reasons to the contrary.
Having examined the record, I have not read any compelling reasons against the openness and disclosure that bringing the POBA within the provisions of the Freedom of Information Act would provide. We should be embracing ever-greater transparency.
There is an assumption that the amendments are solely about the standards and procedures of the big four accountancy firms. Although it is obviously true that they dominate the auditing landscape, especially for the larger capped stocks, in the world in which I operate, many smaller capped stocks are audited by a range of professional firms—obviously including the big four, but embracing many others. My role on audit committees, especially in the beauty parade of accountancy firms to which the noble Baroness alluded, would be considerably enhanced by independent assessment of their procedures and operations that I could access. We therefore support the amendments.
Lord Grabiner: My Lords, this point has been fully debated at all stages in your Lordships’ House, so I shall not retrace the whole argument. I will, however, make just three points.
First, the concern of the noble Baroness, Lady Noakes, is to protect the integrity of the people at the coalface—the men and women who sit on audit committees. The noble Lord, Lord Lee of Trafford, made a similar point. That might seem to be a persuasive one until one takes into account the fact that all audit committees are in exactly the same boat. As things stand, the content of any report produced by the Audit Inspection Unit cannot be accessed by any audit committee. It follows that no audit committee could reasonably be criticised for failing to take account of what the Audit Inspection Unit did or did not say about the qualities of one or other of the audit firms. This state of affairs could not conceivably give rise to a justifiable concern on the part of individual audit committees that they will be attacked or criticised for not having done a proper job.
Secondly, I very much doubt whether the form of any report produced by the AIU will be much use to any audit committee. A report tailor-made to the circumstances with which the audit committee is confronted might be more valuable, but there is no reason to suppose that reports take or will take any such form.
Thirdly, it is worth thinking through the consequences of the independent supervisor being designated under Section 5 of the Freedom of Information Act 2000, which would be the effect of the amendment. Sections 36(2)(b) and (c) of that Act exempt information if its disclosure,
- “would, or would be likely to, inhibit ... the free and frank provision of advice, or ... the free and frank exchange of views for the purposes of deliberation, or ... would otherwise prejudice, or would be likely otherwise to prejudice, the effective conduct of public affairs”.
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Section 43(2) also provides an exemption if disclosure of information,
- “would, or would be likely to, prejudice the commercial interests of any person (including the public authority holding it)”.
The obvious implication of these provisions is that, for one reason or another, the requested information would simply not be forthcoming in any event, so there would be no practical purpose in making the designation.
There is some danger that crossing the wires between the regulatory structure that we are trying to put in place in these provisions and the possibility of aggressive requests made under the Freedom of Information Act may give some satisfaction to the legal profession but may not do much for the public interest or for better auditing standards with which we should be concerned. Apart from anything else, I fear that we will end up with anodyne reporting in an area that demands forthright honesty and absolute frankness. I respectfully urge the noble Baroness not to press her amendment to a vote.
Lord Patten: My Lords, I strongly support what my noble friend Lady Noakes said from the Front Bench and what the noble Lord, Lord Lee of Trafford, said. I should declare that I regularly read his column in the Financial Times, although I do not think that the rules of transparency demand that I should reveal whether I have ever followed his investment advice or, indeed, profited or lost as a result of doing so.
I have only two points to make. First, my noble friend Lady Noakes is surely right that it is correct to try to help audit committee chairmen and members to fulfil a very difficult and demanding task, as anyone who has served on those committees will attest. It is therefore reasonable to request that the prognostications of the Professional Oversight Board for Accountancy be made available in the way that has been suggested. Of course I accept what the noble Lord, Lord Grabiner, said about no audit committee member being able to be held to have misdirected themselves or to have behaved incorrectly because they did not take into account something that they did not know existed. I fully understand that. Turning the argument on its head, the views of the Professional Oversight Board should be made available to audit committees so that members can be informed of its conclusions.
My second point—I have no commercial interest to declare; I was never clever enough to be a chartered accountant—is that business in this country is looking at an accountancy market that may well shrink. That will be very bad for commercial activity in this country. The big four are tip-top organisations, and I have benefited from their advice from time to time, but lots of companies in the second tier—for example, BDO Stoy Hayward, Grant Thornton or Robson Rhodes—would also benefit from the dissemination of information in widening the market so that we are no longer so over-reliant on the big four companies.
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My noble friend Lady Noakes is absolutely right in wishing to press this issue. Although I will follow her guidance, as always, I hope that she will press her amendment to a Division.
Lord Sainsbury of Turville: My Lords, further to what the noble Lord, Lord Grabiner, has said, it is by no means certain that applying the Freedom of Information Act to the POB would result in all Audit Inspection Unit reports being available. One of the reasons for doubt is that the AIU may have a strong argument that its reports fall within the exemptions in the FOI Act. For example, the inspection process relies on openness and candour on the part of the inspectors and audit firms, and the prospect of reports becoming public would reduce that candour, damaging the system to an extent that would outweigh the public interest in disclosure. We have heard that argument a lot of times in different contexts, and it seems totally applicable here.
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