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Lord Hodgson of Astley Abbotts: My Lords, I am grateful to the Minister for having returned to the issues that we raised in Committee and for kindly discussing them with us during a briefing.

I understand the argument about deliberately choosing to move overseas to try to escape the provisions of this legislation. I accept that argument. However, we are trying to achieve a level playing field. The Government have not accepted that argument. We need to find a way to ensure that in each case employees, who may not know the place of
 
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incorporation of their employer, are treated in a fair way. I do not believe that the Government have managed to achieve that and I do not believe that they have shown sufficient readiness to meet the objective that we are seeking, as expressed by the noble Lord, Lord Sharman. I would like to test the opinion of the House.

On Question, Whether the said amendment (No. 5) shall be agreed to?

Their Lordships divided: Contents, 71; Not-Contents, 125.


Division No. 1


CONTENTS

Arran, E.
Astor of Hever, L.
Blatch, B.
Bowness, L.
Buscombe, B.
Byford, B.
Campbell of Alloway, L.
Carlisle of Bucklow, L.
Carnegy of Lour, B.
Chan, L.
Colwyn, L.
Cope of Berkeley, L. [Teller]
Craig of Radley, L.
Cumberlege, B.
Dean of Harptree, L.
Denham, L.
Dixon-Smith, L.
Dundee, E.
Elles, B.
Elliott of Morpeth, L.
Elton, L.
Flather, B.
Fookes, B.
Glentoran, L.
Hayhoe, L.
Higgins, L.
Hodgson of Astley Abbotts, L.
Howe of Aberavon, L.
Howell of Guildford, L.
Jellicoe, E.
Jenkin of Roding, L.
Jopling, L.
Kingsland, L.
Laidlaw, L.
Laird, L.
Lang of Monkton, L.
Lucas, L.
Lyell, L.
Marsh, L.
Masham of Ilton, B.
Miller of Hendon, B.
Molyneaux of Killead, L.
Monro of Langholm, L.
Monson, L.
Montagu of Beaulieu, L.
Montrose, D.
Murton of Lindisfarne, L.
Naseby, L.
Noakes, B. [Teller]
Norton of Louth, L.
O'Cathain, B.
Park of Monmouth, B.
Peyton of Yeovil, L.
Plumb, L.
Rawlings, B.
Rees, L.
Rogan, L.
Rotherwick, L.
Saltoun of Abernethy, Ly.
Selkirk of Douglas, L.
Selsdon, L.
Sharples, B.
Shaw of Northstead, L.
Soulsby of Swaffham Prior, L.
Strathclyde, L.
Trenchard, V.
Waddington, L.
Wakeham, L.
Weatherill, L.
Wilcox, B.
Windlesham, L.

NOT-CONTENTS

Acton, L.
Ahmed, L.
Amos, B. (Lord President of the Council)
Ampthill, L.
Andrews, B.
Archer of Sandwell, L.
Ashton of Upholland, B.
Bach, L.
Bassam of Brighton, L.
Berkeley, L.
Blackstone, B.
Blood, B.
Boothroyd, B.
Borrie, L.
Brookman, L.
Brooks of Tremorfa, L.
Burlison, L.
Campbell-Savours, L.
Carter, L.
Christopher, L.
Clark of Windermere, L.
Clarke of Hampstead, L.
Clinton-Davis, L.
Condon, L.
Corbett of Castle Vale, L.
Crawley, B.
David, B.
Davies of Coity, L.
Davies of Oldham, L. [Teller]
Dean of Thornton-le-Fylde, B.
Dixon, L.
Drayson, L.
Dubs, L.
Elder, L.
Evans of Parkside, L.
Evans of Temple Guiting, L.
Falconer of Thoroton, L. (Lord Chancellor)
Falkender, B.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Filkin, L.
Finlay of Llandaff, B.
Fyfe of Fairfield, L.
Gale, B.
Gavron, L.
Gibson of Market Rasen, B.
Giddens, L.
Goldsmith, L.
Gordon of Strathblane, L.
Gould of Potternewton, B.
Grenfell, L.
Grocott, L. [Teller]
Harris of Haringey, L.
Harrison, L.
Hart of Chilton, L.
Haskel, L.
Haskins, L.
Hayman, B.
Hogg of Cumbernauld, L.
Hollis of Heigham, B.
Howarth of Breckland, B.
Howie of Troon, L.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Irvine of Lairg, L.
Jay of Paddington, B.
Jones, L.
Judd, L.
King of West Bromwich, L.
Kirkhill, L.
Lea of Crondall, L.
Lipsey, L.
Lockwood, B.
Lofthouse of Pontefract, L.
McCarthy, L.
Macdonald of Tradeston, L.
McIntosh of Haringey, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
Mackenzie of Framwellgate, L.
Mallalieu, B.
Massey of Darwen, B.
Maxton, L.
Merlyn-Rees, L.
Mishcon, L.
Morgan of Drefelin, B.
Morris of Aberavon, L.
Patel, L.
Patel of Blackburn, L.
Pendry, L.
Peston, L.
Pitkeathley, B.
Plant of Highfield, L.
Ponsonby of Shulbrede, L.
Prosser, B.
Prys-Davies, L.
Ramsay of Cartvale, B.
Rea, L.
Rendell of Babergh, B.
Richard, L.
Sainsbury of Turville, L.
Sawyer, L.
Sheldon, L.
Simon, V.
Slynn of Hadley, L.
Stoddart of Swindon, L.
Strabolgi, L.
Symons of Vernham Dean, B.
Temple-Morris, L.
Thornton, B.
Tomlinson, L.
Triesman, L.
Truscott, L.
Tunnicliffe, L.
Turnberg, L.
Turner of Camden, B.
Uddin, B.
Wall of New Barnet, B.
Warner, L.
Watson of Invergowrie, L.
Whitaker, B.
Wilkins, B.
Williams of Elvel, L.
Williamson of Horton, L.
Woolmer of Leeds, L.


Resolved in the negative, and amendment disagreed to accordingly.


 
7 Jul 2004 : Column 813
 

[Amendment No. 6 not moved.]

Lord Sainsbury of Turville moved Amendment No. 7:

On Question, amendment agreed to.

Lord Hodgson of Astley Abbotts moved Amendment No. 8:

The noble Lord said: My Lords, this is a new amendment, which comes about because of conversations that we have had with the Institute of Chartered Accountants in England and Wales. The fear is that if this clause is not amended as proposed there may be unintended consequences. It is argued that it may
 
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upset the status quo under which auditors currently obtain the information that they need to perform their audit. It is something that I doubt the Government would intend at a time when the whole thrust of the Bill is to strengthen the quality of audit so as to underpin the operation of markets in the public interest. As I understand it, there is an established way by which relations between lawyers and auditors are managed at present in order to ensure that shareholders receive sufficient information about a company's financial affairs.

This relationship has been developed over a number of years and works well. It is based on an agreed statement of guidance, statement 903, between the Council of the Law Society and the Institute of Chartered Accountants, which was supplemented by Audit 2/95 issued by the Audit Faculty of the Institute of Chartered Accountants, and more recently developed in international standards for audit, ISA 501. The purpose of these instruments is to ensure that, taking account of legal professional privilege, auditors and lawyers can have conversations about matters that are material to an audit, such as pending litigation. Those discussions can result in an agreed file note, which the auditor would then consider as sufficient file evidence to support the related disclosures in the financial statements. There is now a concern that Section 389A(7) could upset this balance.

Clearly, the directors have the primary responsibility to ensure that the accounts present a true and fair view, and the Act rightly provides no exception to that regarding legal privilege. However, the auditor may then need further information about the underlying circumstances in order to judge whether the amounts and disclosures in the accounts give a true and fair view. If this exclusion for privileged information is introduced, lawyers will no longer be able to co-operate without expressly receiving a waiver of privilege from the directors, who may instead decide to protect their own position. Auditors would then be left to make a judgment on the disclosures without having access to the necessary information, which in turn is likely to increase the likelihood of auditors needing to qualify the scope of their reports or the reports themselves, and result in shareholders not receiving a true and fair view of the company's affairs.

There is also a concern that this exclusion would create a loophole that would allow an unscrupulous management to hide its dealings from auditors and therefore, ultimately, from shareholders. Indeed, in Europe's largest accounting scandal, the Parmalat scandal, a "legal factory" firm of New York lawyers with only one client is alleged to have been one of the main tools used to mislead the auditors.

We understand and agree that there is a need for privilege. We suggest that the best way forward is to rely on existing instruments that govern the relations between lawyers and accountants on these matters. That would mean deleting Section 389A(7) from Clause 8 to continue to allow privileged information to be made available to auditors under existing arrangements. Alternatively, the legislation could be amended to make clear that such privileged
 
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information should not be passed any further by the auditors. This is an important issue that needs to be clarified. I beg to move.


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