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Baroness Noakes: My Lords, I support the amendments, to which our names are attached. The noble Lord, Lord Sharman, has explained the specific reasons why it would be right for the Freedom of Information Act to apply to the public oversight board and, by extension, to the independent supervisor. There is also a wider reason, which is that when bodies are set up to carry out public functions, it is right and proper that the equivalent freedom of information requirements apply to them and are not avoided by public functions being transferred to bodies in the way set out in the Bill.
Lord McKenzie of Luton: My Lords, the Professional Oversight Board is an operating body of the Financial Reporting Council and is currently responsible for exercising the Secretary of State's functions in relation to auditors delegated to it under the 1989 Act. The Government expect that the role of independent supervisor of the Comptroller and Auditor-General will also be carried out by the Professional Oversight Board. The oversight board is accountable—and will report annually—to the Secretary of State and, through him, to Parliament for the exercise of all functions that may be delegated to it under powers in this part and corresponding powers in existing legislation.
As I said in Committee, the Government recognise that this is an important issue, to which I am willing to give careful consideration. However, the Bill should not determine the Professional Oversight Board's status under the Freedom of Information Act.
The inclusion of the oversight board in the provisions of the Freedom of Information Act is an issue that requires careful consideration and public consultation, for a number of important reasons. As noble Lords have pointed out, the activities of the oversight board go beyond the scope of this part of the Bill and any delegation order under it. Specifically, the oversight board oversees the activity and publishes the annual report of the Audit Inspection Unit—a new independent inspection unit that reports to the oversight board and which was set up following the Government's review of the regulatory regime of the accountancy profession in 2003.
In Committee, the noble Baroness argued that those reports should be made public in the interests of transparency and decision-usefulness for audit committees. That is a subject worthy of debate and
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I have listened carefully to the noble Baroness and to the noble Lord, Lord Sharman. However, there are also very good reasons why the steering group that oversaw the implementation of recommendations from the review of the regulatory regime of the accountancy profession felt that publication of the AIU's reports on individual audits or auditors would be detrimental to the inspection programme—which is, after all, designed to improve firms' practices and internal processes through constructive dialogue, rather than an adversarial approach—and therefore not in the public interest. There are potentially significant drawbacks to extending the level of public reporting by the AIU to include reporting on individual firms and audits, and those drawbacks must be balanced against the calls for more transparency.
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We run the risk of reports becoming more legalistic, as the burden of proof required before matters can be made public would arguably increase. The inspection process would become more adversarial: focused on arguments about the finer points of what amounts to compliance, rather than a constructive dialogue focused on best practice. Ultimately there is a real risk that such an approach would drive the inspection regime towards a tick-box approach to compliance. That would be undesirable and could have a detrimental effect on both transparency and audit quality.
Furthermore, as a result, there is a risk that public reports might become anodyne and thus of little or no real value to audit committees. I guess that that is a bit like engagement letters, which we discussed the other night.
Lord Sharman: My Lords, I remind the Minister that I offered to give him an engagement letter. I can tell him that I have it with me.
Lord McKenzie of Luton: My Lords, I look forward to receiving that and I thank the noble Lord in advance. I shall repair to the bar immediately to peruse it.
There is also the risk that audit firms will focus more on challenging points rather than focusing their efforts where we want them to, addressing underlying quality issues.
As I said, there is an important debate to be had on this, and the oversight board is currently reviewing its approach to publication, having regard to practices in other countries with a view to consulting more widely later this year. In any case, the amendments before us would not necessarily result in publication of individual reports. There are a number of exceptions under the Freedom of Information Act that would probably apply with respect to much of the information contained in AIU reports.
As I said in Committee, the Government are currently building up evidence on how freedom of information has impacted on the bodies that meet the existing criteria, with a view to extending designation
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to further bodies. We believe that that is the appropriate context in which to consider the position of the Professional Oversight Board with respect to inclusion within the provisions of the Freedom of Information Act. That should, however, remain completely separate to the passage of the Bill. As I said, the oversight board is reviewing its approach to publication of AIU reports with a view to consulting more widely later this year.
I hope that, on the basis of what I have said, the noble Lord will feel able not to press the amendment. This is an important issue; there is a way to address it; but it is not the manner suggested by the amendments.
Lord Sharman: My Lords, I am quite willing to accept that the solution may not be as the amendments are framed. I was more than a little astonished by the Minister arguing that transparency, when it affects the detail of how an auditor is performing, is a bad thing. I believe that transparency is the only way in which any semblance of confidence can be restored, where it has been lost. We must face up to the fact that there have been significant questions about the quality of auditing in this country. The way to put it right is to be transparent about how good or bad it is. I will, in a moment, withdraw the amendment, but I ask that we look in some detail and with some urgency at how the purpose behind the amendments can be achieved.
Lord McKenzie of Luton: My Lords, before the noble Lord withdraws the amendment, yes, we should look with some urgency at this. A process is under way already, but I am happy to engage in discussions outside the Chamber to see what more might be done. On the issue of transparency, I entirely agree with transparency for the profession as a whole and about thematic issues that face the profession. That is absolutely right. The question is the balance of transparency versus reports on individual firms and what that may entail. That issue needs particular consideration.
Lord Sharman: My Lords, I thank the Minister for that and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes moved Amendment No. 511C:
"( ) An order under this section must include requirements relating to—
(a) the preparation and publication of financial statements of the appointed body, and
(b) the audit of those statements (save that an order may not require or permit a person mentioned in section 820(1) to be appointed auditor for that purpose)."
The noble Baroness said: My Lords, with a little luck, this will be my last appearance at this Report stage, but I shall be back. This small amendment builds on a slightly different amendment discussed in Grand Committee. It concerns the accounts of the independent supervisor and the audit of those accounts. Amendment No. 511C states merely that the order appointing the independent supervisor must
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include requirements on accounts and audit. In Grand Committee, the Minister said that the order under Clause 822 was the right place for the accounts requirements rather than a special clause. We are inclined to agree with that, but we find it a little strange that, on this fundamental area of financial accountability, the Bill is completely silent. It is unusual to find a body being created without any explicit financial accountability arrangements. Paragraph (a) of my amendment states that an order under Clause 822 must include a requirement relating to the preparation and publication of financial statements.
Paragraph (b) of my amendment states that the financial statements have to be audited—I do not think that there will be any policy disagreement on this—but, importantly, it rules out audit by any of the auditors general. I hope that there will be no policy disagreement on that either. This was included in the amendment that I tabled for Grand Committee, but we somehow failed, probably due to fatigue, to debate the point, so I have included it again in this amendment. I beg to move.
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