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Lord McKenzie of Luton: My Lords, I do not believe that there is anything in the clause as drafted that would prevent an auditor saying what he thought was appropriate if, in the terminology, he was getting close to the awkward truth.
Viscount Bledisloe: My Lords, I am not saying that he is prevented: he can say that he has been removed because they do not like his face. The question is whether the statement is made within the scope of the Act and therefore whether it is one for which he will receive qualified privilege. If he rambles on about the chairman's drinking habits or something, he is not forbidden from doing so, but it is hardly a statement within the scope of the Act. What is important is that he is allowed to make the statement that he needs to make, and to ensure that it is properly protected from defamation proceedings.
Lord McKenzie of Luton: My Lords, notwithstanding that, I still do not believe that anything in the Bill would prevent the auditor making a full statement on all the issues he believes are connected with his ability to hold office.
Clause 510 deals with the important obligation on an auditor to provide an explanation of why he is no longer going to audit a company for the benefit of the shareholders and creditors. Auditors already have this duty, and the Bill modifies it so that it is more likely that an explanation will be provided. As we explained in Grand Committee, under Section 394 of the Companies Act 1985, an auditor who ceases to hold office for any reason is required to make a statement of the circumstances only if he positively considers that there
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are circumstances that should be brought to the attention of the members or creditors of the company he is leaving. By contrast, for unquoted companies, Clause 510 requires the auditor to make a statement as the general rule, with the exception that he need not make a statement if he positively decides that there are no circumstances to be brought to the attention of the members or creditors.
As we explained in Grand Committee, we are making these changes because of the importance of ensuring that whenever auditors are leaving because they believe there is a problem with the accounts or with the management of the company, they should make that known to the shareholders and to the public. The change from the 1985 Act shifts the balance in favour of disclosure, not against it. An undecided auditor at present might persuade himself that there are no circumstances that he considers should be brought to the attention of the members or creditors. He may find it more difficult to persuade himself that there are no circumstances that need be brought to their attention.
Amendments Nos. 347 and 348 would together revert the Bill to the existing position under the Act, and the Government continue to believe that the proposals in the Bill are an improvement and help disclosure. For quoted companies, the Bill provides that auditors who are leaving are to be required to make a statement of circumstances in all cases, without any option.
Amendment No. 349 would change the content of the statement from
which is the nub of the noble Baroness's point. This can be seen as weakening the requirement unnecessarily. It goes without saying that an auditor, or anyone else making a statement of circumstances, will inevitably use his judgment in deciding what is relevant to include. I do not believe that any risk here would be avoided by the amendment. As we said in Grand Committee, there is a defence for an auditor who took all reasonable steps and exercised all due diligence, but I accept the point made by the noble Baroness on the relevance of that provision.
Given that defence, it is not clear whether there are circumstances in which the amendment would have a practical effect. I do not believe that there is a real problem to be solved. Nevertheless, in light of the opinions that have been expressed around the House, we will take this matter away and consider it further, because we want to ensure that we reach the right position. There is no disagreement about what we are trying to achieve. We do not see a need for the amendment, but, given the points made by all noble Lords who have spoken on this matter, I shall take it
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away and give it further thought, without commitment—it is an issue that we should discuss again at the next stage.
Baroness Goudie: My Lords, I thank the Minister and look forward to hearing from him at Third Reading. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 348 and 349 not moved.]
3.30 pm
Clause 511 [Company's duties in relation to statement]:
Baroness Noakes moved Amendment No. 350:
"(a) the auditor, and
(b) every person who under section 404 is entitled to be sent copies of the accounts.
The noble Baroness said: My Lords, this small amendment, which seeks to enhance the information that members receive about a departing auditor, was suggested by the UK Shareholders Association. In Grand Committee, the Government were keen to emphasise the relationship between members and the auditors; but that is something of a myth, because, in practice, the relationship is between the directors and the auditors. If the auditor leaves office for any reason, it is right that shareholders are informed.
We support in principle Clause 511, which requires the company to circulate an auditor's statements of circumstances and will be an invariable requirement for quoted companies. But the company can apply to the court not to circulate the notice. If it does so, the shareholder is left completely in the dark until the court has made its decision. That could put weeks, or even months, into the process. My amendment merely asks that the shareholders and others entitled to receive the accounts are informed of the application to the court so that they are on notice that there is an issue.
The very fact that there is a dispute between the outgoing auditors and the directors is an indication that shareholders should have concerns, especially if there should be—as the Government appear to believe—a relationship of trust and confidence between the shareholder and the auditor. It is nonsense to suggest, as the Minister did in Grand Committee, that an
That is simply not true and it is far from the truth for the vast majority of shareholders.
If the Government believe that shareholders have a genuine role in the auditor/company relationship, they should welcome my amendment. I beg to move.
Lord McKenzie of Luton: My Lords, again we do not have a complete meeting of minds on this issue. As
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I said in Grand Committee, we have sympathy with the idea behind this amendment but, on balance, would prefer to leave arrangements as they are and not adopt it. As has been explained, Clause 511 puts a duty on a company to circulate the statement made by a departing auditor. It then provides the company with an opportunity not to circulate it if it can persuade the court that the auditor is abusing his right, or—as it is intended to be amended by the very next amendment, which we have already debated—if he is seeking to secure,
There have apparently been cases where directors have gone to court for permission not to circulate an auditor's statement and not because they genuinely believed the auditor's purpose was to secure needless publicity for a defamatory matter. The directors hoped rather to delay the release of the auditor's statement because it included reasonable criticism of the directors that would be valuable to the shareholders. The directors' hope was that by the time the court had turned down their application, the auditor's statement would be stale and would not have the impact it would have had if circulated straightaway.
In considering such a case, there is an argument that the company must inform the shareholders, although it is not clear how much good it does. All they learn extra is that the directors do not want to circulate to them the statement the auditors have made. This might be of interest to them but it may not be of great value. More importantly, we should look at the main purpose of the clause, which is to enable the company not to circulate material that is unnecessarily defamatory and unlikely to be of use to the shareholders. In such cases, it is plainly of no value to the company to have to go to the expense of informing all its shareholders that it has gone to court.
Whereas we can see that there are cases where circulating this information might have some value, on balance we believe that it would generally have no value, and that it would therefore be inappropriate to force this extra expense on companies. I reiterate: we do have sympathy with the thrust of this point, but ultimately it is just a balance of which is the best way to take it forward. We would prefer to stick with the current formulation.
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