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Lord Hodgson of Astley Abbotts moved Amendment No. 484:
"( ) is a statutory auditor of a company,"
The noble Lord said: My Lords, we now come to Clause 703, which concerns the allocation of unique identifiers. Amendment No. 484 would insert the statutory auditor into the list of people for whom the Secretary of State may make provision for the use of these identifiers.
In Grand Committee, when I first raised this point, I said that it was something that the Institute of Chartered Accountants in England and Wales was anxious about, but I am afraid that the reply given by the noble Lord, Lord McKenzie, has done little to ease its nerves. He said:
"We do not think there is the same interest in finding a list of all the companies whose accounts have been audited by a particular firm. Even if there were, there is probably less scope for confusion between firms than for confusion between individuals with similar names".—[Official Report, 28/3/06; col. GC 354.]
I am afraid that I think that that response in large measure misses the point that we were trying to make. Therefore, we have again tabled the amendment, which seeks to include in the Bill an enabling power to introduce unique identifiers for auditors in addition to directors. We acknowledge that unique identifiers for
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directors are to be introduced primarily to enable the registrar to distinguish between directors of a similar name, given that they can now opt to provide service addresses. However, we believe that these unique identifiers will also enable directors to track information filed about them on the record. If that is the case, in our assumption unique identifiers would also enable auditors to monitor the public record to pick up instances where they are falsely claimed to be the auditor of a company.
The accountancy trade press claimed in September 2005 that it had been notified of more than 100 incidences of auditor identity where auditors' names were erroneously used to legitimise bogus company accounts. Auditors will often become aware of such fraudulent filings only when approached by credit agencies to explain discrepancies in the accounts that they have allegedly audited; for example, where the accounts do not balance or subsidiaries do not exist. This could lead to damaged reputations for auditors and also to fraudulent filings going unnoticed, as it is currently not possible for auditors to check the register for filings in their name.
We understand that in response to this problem Companies House has committed to improving its online filing security with electronic passwords and the introduction of PROOF—a protected online filing service that aims to reduce the possibility of fraud—in order to crack down on auditor identity theft, among other things. However, even if such systems were introduced for online filings by auditors, electronic security is not always able to stay one step ahead of the fraudsters. For example, we are told by the institute that it is aware of at least one case of a fraudulent record falsely claiming an individual as a director of a company that was filed using what is supposed to be secure electronic filing.
According to the accountancy trade press, the Metropolitan Police have advised businesses not to rely on Companies House records when determining whether to issue goods on credit. We think that that is unacceptable, and so anything that we can do to improve the security of the register would be beneficial. Therefore, we argue that a system enabling auditors to see whether they have been fraudulently cited—akin to "Monitor", the monitoring system in place for companies, which results in an e-mail alert when filings are made—would be beneficial. At this stage, we seek only an enabling power by this amendment, and we propose that a regulatory impact assessment should be conducted before implementation to ensure that the potential benefits outweigh the costs.
That was rejected by the Government in Committee on the basis that they,
"do not think that allocating a number to every registered audit firm would be particularly helpful. It is unlikely to make it any easier to root out false claims that a particular firm has audited a company's accounts. The idea is that unique identifiers will be available to the public; they will not be like some authentication code or password used in electronic communications".—[Official Report, 28/3/06; col. GC 355-56.]
However, as I have already mentioned, improvements in the security of online filing will always be vulnerable to fraud and so such security systems alone will not solve this issue. We think that monitoring should therefore be available, in addition to improvements to such security systems, and so it would not matter that such unique identifiers were available to the public.
If the Government decide that unique identifiers should not be allocated to auditors, as our amendment proposes, we would, as a fallback position, suggest that the registrar be obliged to maintain the legal name of the audit firm as a searchable field on the record. Any audit firm could then, if it so wished, search Companies House records to gain a complete list of audits credited to it on the record and could cross-check for any areas of concern. I emphasise that at this stage we seek only to provide the ability for the Secretary of State to set up a unique system of identifiers for auditors, perhaps at some date in the future. I beg to move.
Lord McKenzie of Luton: My Lords, Clause 703 provides that the Secretary of State may make regulations so that a unique identifier can be allocated to anyone who is a director of a company, or a secretary of a public company, or the UK representative of an overseas company. It will help the system for protecting directors' home addresses and it will prevent third parties confusing different individuals with the same name or being confused by different names being used by a single director.
We do not intend that unique identifiers should be allocated to statutory auditors for filing purposes; nor do we believe that it is justified. I listened carefully to the noble Lord's presentation on this matter. We are aware of the concern that the name of a registered audit firm might be fraudulently added to a company's accounts. Companies should not claim to have been audited by a particular firm if that is not the case. Such a false statement would be an offence, and we believe that this is a sufficient protection.
Unlike in the case of directors' names, the problem is not one of confusing people with the same name. While there are many John Smiths, different audit firms do not share the same name. So if a company claims that it has been audited by, say, KPMG, it should be fairly easy to demonstrate that it has not without needing a unique identification number.
I understand that firms may also be concerned to detect when a company takes their name in vain. This would not require allocation of a unique identification number but, rather, a facility to search on the basis of the audit firm's name on the register at Companies House. Indeed, if it had a unique identification number and that search facility were available, I suspect that the firm would almost certainly search the number as well as the name, so I do not see that the number adds anything. This could involve considerable expense and we would need to explore whether there was a problem on a scale to justify that expense. In any case, it would certainly not require primary legislation.
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I appreciate that there is concern about companies falsely claiming to have been audited by certain audit firms but, for the reasons that I have set out, I do not think that allocating unique identifiers to audit firms would do anything to resolve the problem.
Lord Hodgson of Astley Abbotts: My Lords, I am grateful to the Minister for his reply, and he has clearly thought about this issue. I have two things to say. First, this was only a proposal for enabling legislation; we were not suggesting that it should happen. It would just give the Secretary of State another arrow in his quiver, so to speak. I think that the Minister was moving towards the fallback position of encouraging Companies House to have the legal name of the audit firm as a searchable record. We felt that that was a good fallback position and probably less complicated, and possibly less expensive, than a unique identifier.
It would be helpful if the Minister could do all that he can to assuage the concerns of the audit profession by encouraging Companies House to introduce that searchable field facility, which presumably can be done at relatively little cost, and that would probably solve the problem. I think that we have probably gone about as far as we can on this matter and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
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