Examination of Witnesses (Questions 466-488)
Lord Myners
18 JANUARY 2011
Q466The Chairman: Lord Myners, thank you very
much for coming. We are very grateful to you for being with us,
because as you know, we had a discussion in particular with the
Big Four auditors about the auditing of banks during the 2007
and 2008 financial years, and reference was made to meetings with
you particularly in relation to the latter. It is very helpful
indeed to have your input as to exactly what happened then. We
will, if we may, divide the session into two parts. One is, first
of all, to get your view about what happened with the banks during
the financial crisis and to have the facts clear from your point
of view. As you know, this is a much wider inquiry as well. From
your long-standing position in the City, and in business and in
government, it would be helpful to have your views on some of
the issues that we're investigating, such as the position of the
Big Four and the lack of competition in the audit industry. So
could I start with the questions on the banks? I think you've
seen the transcript. Clearly, the going concern of banks was prominent
in the minds of the Big Four when they were auditing the banks
and asking to meet Ministers towards the end of 2008. Clearly,
what must have transpiredand I think they gave an indication
of thisallayed the auditors' concerns so they were able
to testify to going concern. Could you please describe exactly
what happened, as far as you can, and the nature of the assurances
that you and your colleagues gave the Big Four, which enabled
them to take the view that they did on the 2008 year-end audits?
Lord Myners: Thank you very much, Chairman.
I was the Financial Services Secretary in Her Majesty's Treasury
from 2 October 2008 until 13 May 2010. You already have, in the
papers that have been submitted to the committee, a letter that
the accounting profession sent through Mr Griffith-Jones of KPMG
on 11 November 2008 to the Chancellor of the Exchequer. The Chancellor
of the Exchequer passed that letter to my office and I handled
the response from the Treasury. I went to the Treasury to re-examine
the papers yesterday morning. I told the Treasury that I thought
the papers it showed me were incomplete. It contacted me this
morning to say that they were incomplete and that it had failed
to show me some other papers that are relevant to this matter.
If, after giving evidence and reading the transcript, I find that
there is something that those papers cover that I would have given
a slightly different or qualified answer to had I been reminded
of it, I will of course write to the committee. I doubt whether
that will be necessary. I met the accountantsthat is, representatives
of KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Youngat
8.00 am on 16 December, and I was accompanied at that meeting
by two officials. I noted that going concern was a matter that
ultimately required judgment by the board of directors and review
by the auditors. I asked them whether the issues that they were
raising with me, which are summarised in the letter from the accountants
to the Chancellor, had been raised by them in other jurisdictions.
They said that that was the case, although discussions were not
as far advanced in other jurisdictions as they were in the UK,
which I found somewhat surprising as they didn't seem to be very
advanced in the UK as this was the first meeting that I or anybody
from the Treasury had had on this subject. They gave no examples
of other jurisdictions. I reminded the four accounting firms of
the statements that had previously been made by the Chancellor
of the Exchequer and the Prime Minister to the effect that the
Government were committed to taking whatever action they regarded
as necessary to maintain financial stability. I went on to say
that I would like to maintain a regular dialogue with them on
this issue relating to the preparation and completion of year-end
accounts, and suggested that we have a further meeting at the
end of January to review progress. I added that I would be available
to meet them between the middle of December and the end of January
should the matter become more urgent. They did not seek an additional
meeting. I closed the meeting that we held on 16 December by restating
that it was most important that the accounts that were produced
were clear, fair and honest. I then wrote to the accountants on
17 December 2008. You have a copy of that letter, so I won't repeat
it. I think the only thing that I would emphasise is that I included
in that letter a statement to the effect that the Government remain
committed to taking whatever action is necessary to maintain financial
stability and to protect depositors and the taxpayer. That was
the end of the contact and correspondence that I had with the
accounting profession on this point. I did, however, in view of
this discussion, decide that it would be sensible for me to meet
the chairs of the audit committees of the major banks. You might
wish to ask me about that in a moment, but you might prefer to
stay with the accountants for a little longer, Chairman.
Q467 The Chairman: Yes, I think we
would quite like to come on to that. Thank you for that description.
Could I just ask you whether you think it's good practice or,
indeed, reasonable for auditors to sign off on commercial enterprises
as going concerns only on the basis, pretty well, that a commitment
from government that government support will be forthcoming? There
is a wider question, I think, about dialogue between auditors,
regulators and government which I'll just couple with that. We
are obviously very interested in that, and I think there's a lot
of support for that idea, but do you see any difficulties from
the point of view of non-disclosure to institutional investors
or others in having those private dialogues?
Lord Myners: A particular issue with the auditing
and accounting for banks is that there has to be an underlying
assumption of continued confidence, because you have maturity
transformation, which is evidence in illiquid longer-maturity
assets being funded by quite liquid, short-term liabilities, although
an assumption is required to support a bank's audit that confidence
will continue to exist in the depositor and interbank market.
I think that's inherent in the accounting for banks. Whether the
directors or auditors should have included some comment in the
2008 accounts to the effect that they had had regard to the crisis
in financial markets and had drawn comfort from the existence
of committed lines of credit and other sources of fundingincluding
the Special Liquidity Scheme that the Bank of England had set
in place and the Credit Guarantee Scheme that the Treasury was
operating as part of the package of measures that we announced
on 8 October 2008must be a matter for the judgment of directors
and the auditors.
Q468 The Chairman: Do you have a
view on the wider question of discussions between auditorsparticularly
in the financial sector in years like 2008regulators, and
now the Bank of England, on issues of liquidity and all the issues
that are involved, because both have an interest in that dialogue?
Lord Myners: My knowledge of what happens is
based on hearsay. I have not been present at any discussions between
the auditors, the regulator or the Bank of England. It would seem,
however, that such discussions should take place and should be
part of a two-way dialogue. To put it simply, it would seem sensible
for the regulators, the banks, insurance companies and other financial
sector companies to talk to the auditors about the conditions
that they see as prevalent in the market place and the concerns
that they have. For instance, talking about the valuation of mark-to-model
assets, the reliability of market valuations that are struck on
the basis of illiquid and infrequently traded instruments that
are then applied to a larger pool of assets, and assumptions about
the fragility of funding are the sort of things that the regulators
should alert the auditors about. The auditors in turn should have
a private dialogue with the regulators about any issues of concern
that they have, either about the sector as a whole or about specific
companies, although if they had concerns about a specific company
it would probably be preferable that they expressed those views
in the presence of the chairman of the audit committee of the
company about which they were expressing concerns. I think that
this is a case where more dialogue, more discussion and more exchange
of views could only be helpful.
Q469 Lord Forsyth of Drumlean: It
is a pretty rough position, two months into your job, to be faced
with this dilemma. Clearly, the last thing you want is for the
auditors not to be able to sign off the accounts for reasons of
confidence, but were you not concerned about the position of the
shareholders who were in the dark about these discussions?
Lord Myners: It's quite interesting. I read
some of the evidence that the committee has already taken, in
which there's been a lot of focus upon the utility of the accounts
to shareholders. I think there are others who rely upon the accounts
as well: creditors, customers, depositors, funders, so one is
concerned at all times about the strength of confidence that one
can draw from the accounts. I think, Lord Forsyth, it was a matter
for the judgment of the board of directors, who have ultimate
responsibility for preparing the accounts, and the auditors for
reviewing the core assumptions, as to whether something was a
matter that should be disclosed. I personally was not of the view
that some generic statement to the effect that all banks were
at the moment exposed to a degree of systemic risk and contagion
would either be particularly damaging or particularly alarming
to people who could evidently see this with their own eyes. So
for me, this was a matter for the judgment of the auditors. I
think if they had wanted to put a statement to that effect in
their audit report, providing it had been done across the sectorand
it seemed to me this was not an idiosyncratic risk but a systemic
riskthen I didn't think that that would necessarily give
rise to a further decline in confidence, but it wasn't for me
to put that view to them. That would be seeking to direct them
in their professional work.
Q470 Lord Forsyth of Drumlean: Even
if that was in the interests of all the stakeholders whom you've
identified, including the shareholders?
Lord Myners: I do not think, Lord Forsyth, it
would be for me to alone draw that conclusion. I was meeting knowledgeable
and informed people and, as I said, I subsequently met the chairmen
of the audit committees because I wanted to make sure that they
were focused on the importance of the year-end accounts, because
these were critical documents towards restoring confidence in
the financial sector.
Q471 Lord Hollick: At the meeting
with the auditors, did they say or did they imply that the assurance
that you were giving about taking "whatever action"I
think those were the words you usedto ensure financial
stability, to protect depositors and to protect taxpayers was
sufficient to enable them to sign off on a going concern basis?
As Lord Forsyth has pointed out, you carefully did not talk about
shareholders or bond holders, two groups that would look to the
accounts to see whether their interests were, indeed, safe. Did
you have the sense that they had gone away from that meeting comforted
and in a position then to give that unqualified going concern,
which they subsequently did?
Lord Myners: I hope they left the meeting better
informed. It was not my task to give them comfort, and I very
carefully in my letter to them did not seek to give them comfort
that went beyond what we had already said. That is why I particularly
reread that sentence, because, as Lord Hollick has quite correctly
picked up, I was quite clear as to the people whom government
felt were the focus of the protection of government action: depositors,
taxpayers and enhancing general financial stability. This was
one of the reasons why I left this meeting very open-ended, with
a clear message that I would not have been surprised if they had
sought further meetings, either as a group or individually. I
did not want them to go away thinking, "That's it. The weight
of responsibility has been removed. We can rely upon the statements
given by the Minister".
Q472 Lord Levene of Portsoken: Lord
Myners, just to continue a little bit on that theme, did the Big
Four indicate to you that they considered that a letter was essential
prior to their signing off the audit reports for the 2008 year-end.
Lord Myners: Not to the best of my recollection.
I was clearly positioning my discussion with them on the basis
that I did not want to give them anything that they judged essential,
because I was very clear where the responsibility lay.
Q473 Lord Best: You did not have
a subsequent meeting in January, but had there been a meeting
prior to this one to look at the year-end accounts for 2007, and
was there one afterwards to look at the year-end results from
2009, or was this event an absolute one-off?
Lord Myners: I obviously was not in office in
2007. One of the notes that I have not seen is the briefing note
prepared by officials before my meeting with the accountants,
but to the very best of my recollectionand I have a fairly
high degree of confidence in this recollectionthere had
been no meeting in respect of 2007. And to the very best of my
knowledge, there was no meeting in respect of 2009certainly
no meeting in which I was involvedand I'm sure that if
this matter had been raised again with the Chancellor, he would
have again very nimbly passed the file to me.
The Chairman: Are there any other questions
on these events? Lord Forsyth.
Q474 Lord Forsyth of Drumlean: Had
the Big Four left your meeting and you thought that they were
not going to sign off the accounts, that would have been a disaster,
wouldn't it? So you must have had a degree of confidence as a
result of that meeting that they were going to sign off the accounts.
Lord Myners: I think we would have waited to
see, Lord Forsyth, and I think they would have come back. There
was a very clear message, "If you're having further difficulties
and if there are further issues, if you feel you'd like to have
a further discussion you know where to find me". So I was
acknowledging that there might be a continued difficulty, but
they didn't leave me with a sense that I had kept them in a position
of an impossible dilemma.
Q475 The Chairman: Yet I think they
made it clear to us that it was the words you had said to them
at that meeting that gave them the comfort, one of the comforts,
for signing off the accounts as a going concern.
Lord Myners: I would just remind the Committee
that I repeated public statements. I drew their attention very
clearly to the comments made by the Chancellor of the Exchequer
and the Prime Minister. I think it may well have been the fact
that I didn't say we're at the end of our tether, the end of our
resource. They had a concern, for instance, that we had indicated
that we had earmarked up to £50 billion of government funds
for the recapitalisation of banks through primary equity, and
they had some concern that that pool of money might be exhausted
on a first come first served basis, but I don't have a recollection
that they pushed me particularly hard on that point. I think they
saw in my eyes and heard repeated the comments by my more senior
colleagues in government, that the Government were committed to
taking action to ensure financial stability, on which basis I
think they could draw some conclusions about continued funding
to protect the interests of depositors and the taxpayer.
Q476 Lord Smith of Clifton: Lord
Myners, as usual this is all very delphic, is it not? It's all
about nods, winks, intimations and eyebrows raised, or even not,
and we all come away with what we want. I, on the part of the
Government, have gone some way to intimate that if the worst came
to the worst we would be in there. They come away saying, "Well,
we've got the assurances", but actually you would need an
English literature or linguistic person to deconstruct this conversation.
We have gone beyond accountants, economists and business anthropologists.
It has become a very elaborateif I can mix my metaphorsminuet,
where we all know what we're doing, but nothing is so substantive
that future historians can do much more than try and feel their
way through this and what's happening. You are a past master of
this, I'm sure, and so are those at the meeting in general, but
it is terribly difficult to get a handle on what actually happened.
Lord Myners: I am sorry if that's the case,
Lord Smith. As Lord Forsyth said, this is quite a tricky situation
for me, still fairly early into my ministerial mini-career. The
one thing I was absolutely clear that I was not going to dothey
didn't press me to do it, but if they had donewas to have
given some all-embracing guarantee that, come what may, the banks'
shareholders and accounts would be protected. We, as a Government,
had been very disappointed when the Irish Government had introduced
blanket guarantees to depositors, and the German Government had
done something similar. We were very concerned to ensure that
the medicine we administered was appropriate to the patient in
the form of equity, access to liquidity and assurance to support
the taking of deposits. It was focused upon each individual bank
according to that bank's particular needs, I was not giving some
across-the-sector guarantee or assurance. I met the senior partners,
or close to senior partners, of our major four accounting firms.
I think that if they had found me too Sir Humphrey-like, or too
delphic, it was incumbent on them to press me. And if they thought
that my letter was in some way more conditional than the one they
had expected, it was very clear that they could come back to me,
and they didn't do so.
Lord Smith of Clifton: Thank you very
much.
Q477 Lord Forsyth of Drumlean: Just
to summarise, you were doing what you had to do to get those accounts
signed off?
Lord Myners: I was ensuring, at all times, that
we protected the interests of the taxpayer.
Q478 The Chairman: And you didn't
have individual talks with individual banks? I thought you
Lord Myners: I did.
The Chairman: You did.
Lord Myners: They talked about how difficult
it was to produce the accounts. This was aside from the issue
about whether the Government would do whatever they thought might
be necessary in hypothetical circumstances of further deterioration,
but they talked about the general difficulty of valuing assets
and the trouble their clients were having in this respect. They
were always very clear that the primary responsibility lay with
the client, so I thought it would be quite helpful and interesting
to meet the chairs of the audit committees of our major banks.
I invited them all inI can't remember if they all cameand
I invited them to come on their own with a note-taker. They were
all, without exception, quite alarmed about that and wanted to
bring with them their CFO, their external auditors, their internal
auditors and probably their legal advisers. I said, "No,
this is just a chat over coffee". I was, I have to say, Chairman,
pretty disappointed with what I heard when I met these fellowsbecause
they were all male, with one exception. When I started asking
them about their understanding of the valuation models, the sensitivities
of model assumptions, the CDOs; what a CDO2 was; and about the
limitations of VAR as a concept of risk, on the whole I got some
pretty cloudy expressions. When I said, "How do you form
a view on whether the assumptions that are being used in your
valuation models are appropriate?", I can best summarise
the reaction as, "We're pretty wise and experienced fellows.
We look the executives in the eye and can tell whether they're
trying to pull the wool over us". I wasn't terribly impressed.
There was one exception, but I am not going to name names.
Q479 The Chairman: Were these one
to one discussions?
Lord Myners: Yes, they were. Each chairman of
audit came with a note-taker, and I was accompanied at the meeting
by one of my officials. In the case of one of the banks, both
the incumbent chair of the audit committee and the person who
was just about to take the chair came, but in all other cases
it was simply one executive and a note-taker, a nice cup of coffee
and Treasury biscuit in my small office. I'm sure they enjoyed
the meeting, Chairman.
Q480 The Chairman: This is slightly
going off on a different point, but do you think that this reflected
the factand we have discussed this in the committee before
with various witnessesthat non-executive directors, and
very often, I suspect, senior executives, didn't understand the
complexity of some of the instruments with which the bank was
dealing?
Lord Myners: I think that's a conclusion that
many people hold. Indeed I think it was one of the directions
of thought in Sir David Walker's rather good report on the governance
of banks and financial institutions. It leads me to believe that
this is not a task that can easily be done by a lay-person. I,
for instance, am a strong believer that bank audit committees
should consider appointing a professional adviser to guide the
committee through the language and concepts to help the chairman
of the committee to understand the issues on which they should
be focused. I say this with the experience of having sat on the
audit committee of a major American bank and a number of other
financial institutions. My impression is that more can be done
and that too much reliance is still placed on the fact that we
look them in the eye and try to tell whether they are telling
us everything that we should know, and then we look to the external
auditors to see whether their eyebrows have gone up. I grossly
oversimplify, but I think that that was at the heart of many of
the processes that were being followed.
Q481 The Chairman: And the external
adviser could either be someone from another audit firm or not
from the audit side of the firms all together?
Lord Myners: It could be a retired CFO from
another financial services organisation or it could be someone
with an accounting qualification or regulatory experience. It
seems to me that it would be helpful for lay members of an audit
committee, who may well be men and women of considerable experience
in the commercial and other sectors. Nevertheless, when you come
to value a CDO2 with multiple algorithms in support, this is going
beyond the reach of a lay person and I think a professional guide
could be quite helpful in that situation.
The Chairman: Well, that perhaps leads
us to the second part of what we'd like to talk to you about,
which is the inquiry more generally. I ask Lord Forsyth to kick
off.
Q482 Lord Forsyth of Drumlean: What
are your views on the scope, value and quality of the annual audit?
Lord Myners: I think there's a dangerand
here I'm picking up on listening to the end of the evidence given
by your previous witnessesof believing that accounts can
convey a spurious accuracy. At best they are an indication of
health, but they are critically dependant on a number of assumptions,
many of which are qualitative in nature and allow scope for considerable
movement within a fair and reasonable band of outcomes. I read
the evidence given by the institutional investors, who I have
to say were rather an unusual group of institutional investors.
You selected the cre"me de la cre"me when it came to
institutional investors who were interested in these subjects.
It would have been very difficult to have assembled a group of
similar size of other fund managers with a similar degree of knowledge
and commitment to some of the issues that you were discussing.
They obviously said that the accounts were important, and they
clearly are. I would say that one should always read accounts
in the knowledge that there is a high degree of judgment involved,
particularly for banks and financial institutions, including insurance
companies and insurance syndicates. The pursuit of accuracy to
the last penny may well give people a greater sense of comfort
in accounts than accounts can possibly ever give.
Q483 Lord Moonie: Lord Myners, do
you consider that the financial crisis reveals a failure of audit?
Lord Myners: I think the financial crisis revealed
the failure of just about everybody. At the heart of the financial
crisis were failures of credit judgment, which were compounded
by the fact that credit judgment was increasingly concealed within
opaque instruments that were being bought and traded by people
with a poor understanding. Central banks failed to see the build
up of the asset bubble; Governments failed to give central banks
and regulators the appropriate instruments to deal with asset
bubbles and asset inflation; and regulatorsand I'm not
talking here specifically about the UK, although I am not excluding
the UKreally weren't up to speed with what was going on.
You're hearing in a moment from the credit rating agencies, and
I suspect that you'll have some questions as to whether they fell
short of the expectations of some, although I'm sure they will
tell you that those expectations were falsely assumed. As far
as auditors are concerned, I think it's quite interesting that
the accounting profession has got off quite lightly. It's quite
striking that Bear Stearns collapsed within six weeks of getting
an audit sign-off, and Lehman collapsed within five or six weeks
of an interim statement that had an auditors' light form report,
so I think the auditing profession, the accounting profession,
cannot be excluded from those who must share responsibility and,
more importantly, seek to learn lessons.
Q484 Lord Tugendhat: Lord Myers,
you have almost answered the question I was going to ask you because
you said it was a failure on the part of everyone, with which
I completely agreeand you went through it in a manner with
which I completely agreeand in relation to everybody else
conclusions are being drawn. Some of the conclusions, no doubt,
you do not entirely agree with, but conclusions have been drawn
in relation to regulators and the behaviour of the banks and boards
and everything else. The one area in which conclusions do not
seem to have been drawn is the auditors. Here we are conducting
this inquiry, but so far no very tangible conclusion has been
drawn, or change recommended, or anything else. They just sail
serenely on.
Lord Myners: I agree entirely with the noble
Lord. In America, Ernst and Young has been exposed to the consequences
of Repo 105, but we've had nothing similar here. In a moment I
think you are going to come to the issue of the concentration
of the auditing profession, and I think there's a factor at work
there. I put a Written Question to the Government two or three
weeks ago, asking about the reports that the Financial Services
Authority commissions when a regulatory firm or individual gets
into difficulty. I believe, from recollection, that they're called
section 166 reports. I asked the Government, who passed the letter
on to the FSA, for a reply as to what percentage of those reports
had been commissioned from the Big Four. And it's an extraordinarily
high number. In some years 100% of these reports had been commissioned
from the Big Four in terms of fees paid, and I think the lowest
percentage in recent years was of the order of 50% of the fees
went to the Big Four. So I wonder whether one of the reasons why
the auditing profession has not being subject to more scrutiny
is because part of the scrutiny exercise has been in the hands
of the auditing profession. As we know, the report that has been
done for the FSA on RBSwhich has not been published and
will not be publishedwas commissioned by the FSA from PwC.
I would like to see the FSA broaden the range of people that it
commissions, I would like to see it less dependent on external
input, and I certainly would like to see it much less dependent
on the Big Four than it has become in recent years.
Q485 Lord Tugendhat: Could I add
a supplementary to what I said. In the case of regulators, for
instance, it lies within the power of governmentthis Government
or any other Governmentto change the regulatory system.
If that is what it wants to do, it can do it. In the case of the
bank boards, you can set up a report by Sir David Walker and he
will come up with suggestions for altering bank boards that are
very interesting. The problem with the auditors is there they
arethe three of them, in effect, with banksand it's
very difficult for anybody to think of an alternative. That is
one reason why suggestions are not made.
Lord Myners: I think your observation may well
be correct. The entire auditing accounting and governance structure
is also out with direct government intervention, rather like the
Basel III regulatory process, which is also one that is out with
direct government involvement.
The Chairman: Well, I think that leads
to the last question that we would like to explore with you. Lord
Hollick.
Q486 Lord Hollick: You have already
touched upon the issue of dominance. Lord Tugendhat says it's
the Big Three in the case of financial institutions rather than
the Big Four. This clearly worries us and clearly worries a lot
of witnesses. What measures do you feel could be taken to reduce
the dominant position of the Big Three? How can we bring in other
firms, other expertise, to deal with what you have quite rightly
described as an extremely complex issue?
Lord Myners: The standard measure of economic
concentration in business is the Herfindahl Index, and the Herfindahl
Index for auditing is very high and for auditing of banks it is
extremely high. The choice available to a bank is very limited
by virtue of the fact that in some cases a firm is already auditing
a major competitor, and that competitor will not allow the audit
firm to take on the audit for another business with a very similar
profile. The industry has become very concentrated because it
has suited the accountants. They have combined and combined and
combined because it has made good economic sense for them to do
so to a point where, I think, there is a degree of systemic risk.
Can we cope if the Big Four goes to the Big Three, or the Big
Two plus one? I think there is a point, Lord Hollick, at which
one has gone too far. We may already have passed that point, so
what can we do? Enlightened self-interest should be the response.
When the investors came to see you they spoke about their encouragement
to the tier-A firms, but my sense is that that encouragement has
been pretty insipid. The shareholders own the businesses; if they
think there's a risk here of concentration, then they should begin
to say to companies, "We want you to put your audit out to
tender, and we want you to ensure that, as part of that tender
process, you give serious consideration to taking a non-Big Four
firm. And by the way, we will draw no adverse conclusions from
the fact that it's a BDO audit rather than a PwC audit".
Government can also do something here. When I was on the audit
committee of the Bank of England and we were changing the auditors
there, I made a strong case for us to include the tier-A firms
in those who pitched for the business, although from recollection
it went to another Big Four firm. Government as a major commissioner
of auditing and accounting servicesand conceivably even
more with some of the coalition Government's programmecan
be doing much more to reach out to the next-tier firms and giving
them greater opportunity. If that doesn't work, then one has to
consider whether there should be an OFT reference and whetheras
in the words of Lord Lawson of Blaby when he was at an earlier
meeting of the committeethere should be some action to
"trust bust". I, personally, would hope that would not
be necessary, and enlightened self-interest should be the first
step. But there's a paradox that everybody believes that it will
be good to have more choice but nobody seems to be willing to
be the first mover, evidencing a willingness to make that choice
and encourage more optionality.
The Chairman: Various inquiries over
the last 10 years that have looked at this have come up with recommendations
that have made very little difference to the actual situation
in relation to the monopoly of the Big Four.
Lord Myners: Which is why I am delighted that
your Committee is looking at this matter, because I am sure your
recommendations will have an effect.
Q487 The Chairman: What would be
the ones that you would most recommend to us?
Lord Myners: I'm going to side-step that one,
Chairman, because I think the issues here are so complex that
there isn't a single solution. There are a whole range of issues
that will need to be addressed if we are to have a better understanding
of the health of companiesparticularly of financial service
companiescan place greater reliance upon the accounts,
and believe that those accounts have been prepared objectively,
fairly and through a process that focuses on the end user of the
accounts rather than the dominance of the executives, and includes
a strengthened role for investors and a strengthened and more
effective involvement for the audit committee. I should add one
final comment. I believe I asked all the chairmen of the audit
committees had they had any meetings with their shareholders because
there was a lot of discussion in the press. One bank in particular
was being regularly referred to as overvaluing assets, valuing
them at a higher level than other banks that were holding the
same assets. There was much talk in the financial sector about
this, so I asked the audit committee chairmen, "Have your
shareholders been to see you? Have they been asking the sort of
questions that I'm asking?" Not a single one of them said
that they had had a meeting with a shareholder, and I would venture
to suggest that if you were to call them all in tomorrow, you
would again find that not a single one of them had had a meeting
in connection with their year-end accounts with their shareholders.
Q488 The Chairman: But isn't that
one of the weaknesses of the present situation? You rightly said
that the investors we had before us last week were a particular
pick of those who were most interested in this issue, but even
they did not feel that there was a great deal of action that they
could take.
Lord Myners: I think the good news for the Committee
is that I'm overrunning on my time because I'm about to go on
to my favourite subject of the "Ownerless Corporation".
I believe that most of our large companies have such distributed
ownership, through diversified portfolio management, that they
don't have anyone who thinks and behaves as an economic model
would assume an owner would do. To put it in the words of Rupert
Pennant-Rea, "The average institutional investor has about
as much interest in the companies in which it has invested its
client's funds, as somebody buying a betting ticket on a 2.30
horse at Plumpton. Passionately interested in what happens for
the next three minutes, but not much interested in what happens
to the horse thereafter".
The Chairman: Any other questions? Well
on that note, Lord Myners, we thank you very much indeed, particularly
for the evidence you have given us on your meetings with the banks.
You have left us with a clear feeling that it is a very important
topic we're discussing, but I don't think we have had any clear
guidelines from you as to major recommendations to make.
Lord Myners: That was my intention. Thank you,
Chairman.
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