To ask Her Majesty’s Government what assessment they have made of whether their proposals in Restoring trust in audit and corporate governance, published on 18 March, conflict with those in the UK Listing Review by Lord Hill of Oareford, published on 3 March.
My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In so doing, I draw your Lordships’ attention to my interests in the register.
My Lords, the Government’s proposals on audit and corporate governance reform will enhance the UK’s reputation as a world-class destination for business and investment. They complement the aim of the review of the noble Lord, Lord Hill, to increase the UK’s attractiveness as an international financial centre while maintaining the UK’s high standards of corporate governance and shareholder rights. The audit reform White Paper includes a specific option to exempt newly listed companies temporarily from the new requirements.
My Lords, in the 210-page impact assessment, somewhat extraordinarily, no monetary benefits were identified, only costs. The average FTSE 100 company’s annual accounts have some 200-plus pages that are barely read and the proposals will simply increase the number of those pages. Are we now in danger of moving away from legislation on corporate governance to legislation on corporate management by the state? Is this area not best left to shareholders to decide on? With directors to be made personally liable for management errors, is my noble friend the Minister concerned that business will simply move to be listed in a more business-friendly environment?
The impact assessment, in fact, includes examples of quantifiable benefits that will be refined and developed in further iterations of the impact assessment. I agree that shareholders have a vital role in holding companies to account and the White Paper gives them important new tools to scrutinise audit and corporate reporting.
My Lords, from what we have read in the Sunday papers, this is a timely topic for debate and reporting on a long line of corporate failures, going back to Polly Peck, BCCI, Barings, Northern Rock, RBS, Carillion, BHS and, doubtless, many more. Throughout that time the audit market for major companies has been dominated by a few private sector accounting firms—now reduced to four. There is an urgent need to address the quality and effectiveness of audit. I presume that the Government support the proposals for a new profession of corporate auditors. What discussions have taken place with the profession itself on those proposals?
Indeed, I have had extensive engagement with the profession, including the big four and a number of smaller companies, as we seek to progress the legislation.
My Lords, in the RBS rights issue trial, Mr Justice Hildyard said that the purpose of Section 87A(2) of the Financial Services and Markets Act, concerning information to enable investors to make an informed assessment, had to be appropriate for the ordinary investor whose protection is the statutory objective. Does the Minister agree that the same logic must apply and be preserved in any changes to audit and capital maintenance statements? They are for the ordinary investor, not just expert users.
My Lords, no self-respecting non-executive director would take on a directorship unless the company arranged adequate directors’ and officers’ insurance but the cost of cover has been increasing dramatically, alongside market capacity reductions. What assessment has BEIS made of the impact of its new proposals on the D&O market, with consequential impact on the willingness of good candidates to take on board appointments?
My noble friend makes a good point but the proposals will not provide a disincentive to people taking on new appointments. It is important to remember that the proposals for directors’ accountability apply only to the largest companies with revenues into the hundreds of millions of pounds and with hundreds, sometimes thousands, of employees. It is right that directors should take more responsibility.
Professor Karthik Ramanna of the Blavatnik School of Government at Oxford said in the FT last week that corporate auditing is in crisis and that the UK Government have announced a bold set of proposals aimed at restoring public trust in audits and markets. The UK’s reputation as a world leader in corporate governance is highly prized and a vital part of what makes the UK an attractive place to invest and do business. What assessment have the Government made of the impact of these reforms on UK businesses, and how will the Government ensure that they will not affect the country’s ability to attract foreign investment nor stifle entrepreneurial spirit?
I do not agree that the audit market is in crisis. Some worthwhile improvements can be made, which is what we are proposing. The noble Lord will see that a full impact assessment is attached to the proposals.
My Lords, further to the question of my noble friend Lord McKenzie, can the Minister confirm that any annual report on the state of the City, as proposed in the report of the noble Lord, Lord Hill, will clearly outline how the dominance of the big four accountancy firms has been reduced?
The big four accountancy firms are important to the regime but we want to introduce more possible competition into it, which is why we are introducing the proposals for shared managed audit to try to bring up the capacity of medium-sized companies.
My Lords, given the clear struggle in the report, Restoring Trust in Audit and Corporate Governance, to find a workable model for auditing large UK companies, and given Deloitte UK managing partner Stephen Griggs’s comment to Accountancy Age, stating that,
“It is important that changes in audit are complemented by reforms to the governance of the UK’s largest and most complex businesses”,
does the Minister agree that the terms given to the UK listing review were fundamentally flawed? We do not need a more complex so-called competitive sector, but rather simpler, more secure, stable and auditable company structures.