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Baroness Noakes: My Lords, I thank the Minister for his reply. I accept that it is a question of balance between imposing unnecessary costs on companies on the one hand and on the other hand giving information to shareholders and perhaps even strengthening the hand of the auditors who might be being removed for reasons that are not entirely good. That has happened in the few cases which have gone to court to date where—certainly in the most recent one—the court punished the company by awarding costs against it. That did not go quite far enough because in that case the issue was kept from shareholders for a very long time.
I accept that there is a point of balance and I will consult again with the UK Shareholders Association, but for today, I beg leave to withdraw the amendment.
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Amendment, by leave, withdrawn.
Lord McKenzie of Luton moved Amendment No. 351:
Page 244, line 3, leave out from "is" to end of line 4 and insert "using the provisions of section 510 to secure needless publicity for defamatory matter"
On Question, amendment agreed to.
[Amendment No. 352 not moved.]
Clause 513 [Copy of statement to be sent to appropriate audit authority]:
Baroness Noakes moved Amendment No. 353:
The noble Baroness said: My Lords, in moving Amendment No. 353, I shall speak also to the other amendments in my name in this group. This is a slightly complicated group of amendments because, as the House will see, the Government have tabled Amendments Nos. 361 and 362, which introduce two new clauses in place of Clause 513. These new clauses highlight the points made by my amendments in this group, but I fear that, far from answering them, they accentuate the points that I was making.
We have been concerned about the duplication of information flows. Clause 513 and, indeed, the replacement clauses require both the auditor and the company to send identical information to the appropriate audit authorities. We do not believe in waste, and we can see no practical purpose for double information flows unless it is simply to provide evidence that either the company or the auditor has not done what Clause 513 requires for the purposes of a prosecution.
I am aware that the information flows from a company are reduced in the Government's amendments but, unless the Minister makes a convincing case that these duplicate flows should remain, we shall have reservations about accepting the Government's amendments in this group.
I have one question to put to the Minister about his Amendment No. 370, which is in the next group of amendments but has a bearing on these amendments. Amendment No. 370 defines the appropriate audit authority in subsection (1)(a) of the new clause after Clause 514. In the case of a major audit, this is either the Secretary of State or another body, which I believe will be the Public Oversight Board for Accountants. Can the Minister clarify whether it is for the company and the auditors under his new clauses to choose to whom the notifications and statements are sent? If so, what happens if the company sends material to the Secretary of State and the auditors send material to POBA? Do they have to check with each other and do they have to send information to one or both? Are we not creating the possibility of some dreadful paper chases between Whitehall and the City?
We do not oppose the thrust behind Clause 513 and we agree that information about auditor resignations should be passed to the appropriate audit authorities. But we believe that the associated processes should
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be as efficient as possible and should be based on the principle of avoiding rather than creating bureaucracy. I beg to move.
Lord McKenzie of Luton: My Lords, I start by dealing with the specific question on Amendment No. 370 concerning which body is the appropriate audit authority in relation to a major audit. We believe that, where that delegation has taken place, it is the body to which the Secretary of State has delegated that function, which I think would now be the POB—the "A" has recently disappeared from its title. So we believe that there should be no confusion or duplication with the various flows going in two different routes, as the noble Baroness suggested might arise.
I shall speak to Amendments Nos. 360, 361, 362, 498 and 500 and respond to the other amendments in this group that have already been spoken to. I shall move Amendment No. 360 and so on in due course. We have brought our amendments forward having reflected on the debate on Clause 513 in Grand Committee in relation to amendments similar to those to which the noble Baroness has spoken.
Clause 513 introduces new requirements about the statements that auditors and companies must send to the appropriate audit authority when an auditor's appointment comes to an end. That is in line with the EU audit directive, which was agreed last year and formally adopted on 25 April.
Debate in Grand Committee revealed that the clause is confusing in conflating the duties on the auditor and the company, and the purpose of the new clauses introduced by Amendments Nos. 361 and 362 is to set out these duties separately and clearly. The first new clause deals with the auditor's duty to inform the audit authority when he ceases to be auditor of a company and divides it into two categories, based on the type of company being audited.
If it is a listed company, or another company of major public interest according to criteria issued by the Financial Reporting Council, all statements should be sent to the Secretary of State or to the body to which he has delegated auditor supervisory functions. As that delegation has taken place, it would be to the Professional Oversight Board.
Baroness Noakes: My Lords, can the Minister clarify this point? It is important and I would like to pursue it.
Amendment No. 370 states that,
"in the case of a major audit, the Secretary of State or the body to whom the Secretary of State has delegated functions".
It does not indicate that it has to be the body to which the functions have been delegated. It implies that those persons lodging the appropriate statements can choose to which of those two they give them. The Minister repeated that point twice and I would like to be clear about it.
Lord McKenzie of Luton: My Lords, the drafting is not as clear as it might be on that point, but the
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provisions before us do not only deal with the current delegations that have taken place. Who knows what might happen in the future? That is why it is important to provide the alternative. I would like to repeat that and put in on record. If anything else is needed, I am happy to write on that matter. As that delegation has taken place, the POB is the body to which those submissions should be made.
If the company that the auditor has left is an unlisted company and not otherwise of major public interest, a statement need only be submitted in the case of an auditor's resignation or dismissal by the company and the statement is sent to the auditor's own supervisory body—for example, one of the institutes of chartered accountants—rather than to the POB.
The second new clause sets out the company's duties when its auditor resigns or when it dismisses its auditor. The company has to inform the appropriate audit authority and send it a statement. This can either be a copy of the auditor's statement or a separate statement by the company explaining the reasons for the auditor's departure.
The reason why the company and auditor are both required to send their statements is that when an auditor resigns or is dismissed, it is quite possible that the auditor and the company will have different accounts of the circumstances. This is a requirement of the newly adopted audit directive.
Amendments Nos. 354 and 355 would remove reference to the supervisory bodies so in practice all the statements would go to the POB. Burdening the POB—a relatively small organisation—with details of the circumstance of every auditor who resigns or is dismissed would not be of value.
The relevant part of the audit directive refers to authorities responsible for public oversight and I am advised that the supervisory bodies can be included as they are part of the public oversight system for auditors. The supervisory bodies may have a closer interest in any case as some of the circumstances around dismissal may suggest a problem with an auditor, particularly if there is a pattern. Our intention is that the company should have the choice of whether to send any statement made by an auditor or to send its own. That is what the two paragraphs of subsection (2) of the new clause to be inserted by Amendment No. 362—linked by the word "or"—are meant to achieve.
If the Secretary of State has delegated the functions of supervisory statutory auditors to a body, it is that body to which the auditor or the company should send their statement. That will be clear from the wording of Amendment No. 370, but we will reflect to see if anything further needs to be said. That is the clear intention and I am happy to put it on the record. I am grateful to the noble Baroness for probing this issue so we can be clear on it.
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