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Baroness Noakes: My Lords, I thank the Minister for his reply, for he will be aware that I know the amendment goes wide in order to deal with a particular issue. I shall consult the Institute of Chartered
 
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Accountants in England and Wales on the basis of his reply to see if it wishes to pursue a more narrowly drawn exception.

I think that the Minister said it was difficult to do an ex ante approval; I suspect that it is not, in particular instances, for the recognised qualifying body to satisfy itself that a particular level of training has been provided. However, I shall ask the Institute of Chartered Accountants whether it wishes to pursue that issue. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 815 [Approval of overseas qualifications]:

Baroness Noakes moved Amendment No. 511AA:

The noble Baroness said: My Lords, in moving Amendment No. 511AA I shall also speak to the three other amendments in this group. With these amendments we return to an area we discussed in Committee, namely the exciting area of the reciprocal authorisation of auditors. I thank the Minister for his letter of 25 April following our Committee debate.

The amendments address whether the Secretary of State's powers of recognition of overseas qualifications under Clause 815—which, we understand, would in practice be exercised by the Professional Oversight Board for Accountancy—would have to be restricted either to reciprocal treatment for the professional qualification as a whole or to the ability to audit. I understand that Article 44 of the eighth directive requires the Secretary of State to have regard to reciprocity only in respect of registered foreign auditors, not foreign qualifications. Why then does Clause 815(4)(b) indicate that the Secretary of State has to be satisfied in respect of professional qualification reciprocity?

Our amendments would ensure that the oversight board concerned itself with the reciprocal treatment of auditors, not the much bigger territory of professional qualifications. Behind this lies a desire by the Institute of Chartered Accountants—and, doubtless, other relevant bodies—to see more recognition of overseas qualifications, because that is the route to greater overseas recognition of UK auditors. The larger professional accountancy firms, not just the big four, send some of their partners to overseas territories and will receive overseas-trained partners into the UK. That is what global businesses do; audit firms are no exception. If we do not recognise overseas qualifications because we make the test too hard, our own auditors will be unable to practise overseas and we will have to deny practising rights to overseas auditors.

Alongside that is the issue of transparency and the speed with which the approval process works. Amendment No. 511D—to which the noble Lord, Lord Sharman, will speak in the next group—could provide greater transparency through the use of the Freedom of Information Act 2000. Yet speed will remain an issue, as I am advised that in the 17 years since the 1989 legislation was introduced those reciprocal recognition powers have been used only
 
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twice. Only two overseas bodies have been approved. Will the Minister say something about the need to improve the recognition process?

If Clause 815 is passed unamended, the fear is that the reciprocity formulation will delay matters even further. There is a universe of non-EU overseas auditor qualifications extending considerably beyond Canada and Australia, which have the two that have already been approved. I beg to move.

Lord Sharman: My Lords, I rise to support the noble Baroness's amendment. It may interest the House to know that 11 years of my life have been spent practising overseas. That is difficult and almost impossible where there is no reciprocity. Some of my friends wonder how I ever managed to learn Dutch; you have to take tests in Dutch and Dutch law to get a licence in the Netherlands, because there is no reciprocity. That gives serious difficulty, as that language is almost impossible to learn—yet it was unnecessary for me to have a knowledge of the Dutch language to do my work. I was dealing exclusively there with international businesses that worked the whole time in English; indeed, all their Dutch staff demanded that they did so. This issue of reciprocity is critical, yet it is not moving. There is stalemate.

Lord McKenzie of Luton: My Lords, it may be helpful if I begin by explaining how Clause 815 works in practice. In doing so, I hope to address the concerns that the noble Baroness, Lady Noakes, and the noble Lord, Lord Sharman, have raised.

The eighth company directive, on auditing, allows UK authorities to approve an auditor from a third country only if there is reciprocal approval in relation to auditors operating in that country. Clause 815 is drafted to meet that obligation and requires the Secretary of State to be satisfied as to the matters it sets out on the basis of whether there is comparable treatment.

Clause 815 does not allow the Secretary of State to approve the qualifications of individual auditors from third countries on a case-by-case basis. It allows only the collective approval of qualifications. Under subsection (1)(a) he may collectively approve the qualifications of all auditors practising in a specified country, while under subsection (1)(b) he may collectively approve only specified qualifications held in the specified country. In either case, it is important to emphasise that subsection (3) requires the Secretary of State to be satisfied that the level of professional competence assured by foreign qualifications will be equivalent to that assured by UK audit qualifications.

Subsection (1)(b) is essential to the recognition of auditors who hold a specific professional qualification from a foreign country that meets our standards, but where—this is particularly relevant for countries with a federal structure—other qualifications recognised under law there do not meet our standards. I hope this explanation clarifies that subsection (1)(a) and (b) represents two limbs of the same power. Indeed, having the two limbs should help the process of reciprocity. The exercise of the power under either
 
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limb needs to be compatible with the directive's requirements; the test of comparable treatment must thus apply to both limbs.

The amendments proposed by the noble Baroness, Lady Noakes, would impose a different test for the limb in subsection (1)(b) that would not meet the directive's requirements. Furthermore, that would produce the odd result that the Secretary of State must apply different tests when exercising the same power—one if recognising all the qualifications in a country, but another if recognising only one particular qualification. I cannot see the logic in such a distinction.

I have no data to hand on the specific issue of the speed at which reciprocity and recognition are going ahead, but in the light of the comments made it is certainly a matter that we will look into discussing urgently with officials, to try to understand what roadblocks there may be. I share the view that has been expressed from all Benches about their importance in a global marketplace, for I have spent time abroad in an accountancy firm myself—although not as an auditor—and understand the importance of having quality on a wide front.

Baroness Noakes: My Lords, I thank the Minister for that reply. He said that my amendment would mean that subsection (1)(b) would not meet the directive's requirements. Either I have not understood what the Institute of Chartered Accountants has said to me, or it has not understood the requirements. Clearly I will need to clarify that, so I will do so and return to this at Third Reading if necessary. However, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 511AB to 511AD not moved.]

Clause 822 [Appointment of the Independent Supervisor]:

Lord Sharman moved Amendment No. 511B:


"( ) The order shall have the effect of making the body appointed under subsection (1) designated under section 5 of the Freedom of Information Act 2000 (c. 36) (further powers to designate public authorities)."

The noble Lord said: My Lords, I shall speak also to Amendment No. 511D. The purpose behind these amendments is to instil a deal of transparency into how the major accounting firms do their work. The public oversight body and its subsidiary organs, which consider audit quality in firms, do not publish individual reports. A composite report is published annually, which deals with the industry overall. It is averaged, because it takes the larger firms, the smaller firms and the medium-sized firms. Although there is some segregation, it is not a particularly useful document.

In the combined code, recent amendments have introduced requirements for audit committees to take a view on the effectiveness of the external audit process. They have always taken a view on the
 
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effectiveness of the internal audit process. In so doing, it has been relatively easy for them to perform a review themselves or to go outside the body and commission a review from a third party. However, they have no means to access detailed information about the performance of their external auditors in the work of auditing. It is extremely important, from the point of view of the public interest, that such information be available. That is the purpose of Amendment No. 511D. The purpose of Amendment No. 511B is to create a level playing field for the work of the independent supervisor over the Comptroller and Auditor-General. I beg to move.


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