Auditing and Accounting

Part of the debate – in the House of Commons at 12:32 pm on 29 January 2003.

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Photo of Patricia Hewitt Patricia Hewitt Secretary of State, Department of Trade and Industry 12:32, 29 January 2003

I am grateful to the hon. Gentleman for his broad support and welcome for the statement and the proposals. He began by setting out the principles. As I said, there cannot be complete protection against determined wrongdoers. The best defence against wrongdoing is the integrity and incorruptibility of the individuals concerned. That is why we want to strengthen not only professional standards but oversight, monitoring and enforcement of them. The reforms must be designed, and have been designed, to strengthen the competitiveness of our companies. At the outset of the work and report, Derek Higgs said that the reforms are about promoting the greater success of our companies, not least by strengthening the confidence of the people who invest in them. We believe in self-regulation where possible, legislation where necessary. That is what we have practised, and I think that the balance in the package is right.

Let me stress and develop what the hon. Gentleman said about the need to avoid one size fits all. Derek Higgs clearly acknowledges that. Perhaps I can clarify matters by confirming that the Higgs proposals apply to listed companies, pension funds and major charities. They do not apply to alternative investment market listed companies. However, he recognises, as we do, that the circumstances of companies, especially smaller companies, that fall within the scope of the combined code will be different. It is important for the FRC to reflect that in the wording of the revised code and it explains why we rely on comply or explain. There will be circumstances in which it is not sensible or appropriate for a company, especially a smaller firm, to meet every Higgs recommendation or combined code standard. They will be able to explain that to their shareholders. That is the great merit of comply or explain.

The hon. Gentleman asked about the implementation of Sir Robert Smith's recommendations, in particular the role of the FSA. The suggestion is that the FSA will extend its proactive enforcement role by conducting a risk assessment to guide the work of the financial reporting panel. Instead of the FRC simply waiting for problems to be drawn to its attention or worries to be raised, the FSA, having conducted a risk assessment, will draw the panel's attention to those audits on which it thinks the panel should focus.

Let me elaborate on the implications of toughening standards for the purchase and delivery of non-audit services. Sir Robert Smith's recommendations involve stronger policy and standard setting by the audit committees of the companies that purchase the services. Each committee will have to review that and set out company policy on it. On the other side of the fence, where the audit companies themselves are concerned, I am asking the Financial Reporting Council to consider the recommendations by my colleagues in the combined group who have suggested much tighter controls on what audit firms can sell. For instance, a prohibition on the supply of internal audit services by the external auditor might involve checking on management controls. Similarly, a ban on the provision of non-audit services might create a mutuality of financial interest and perverse incentives to distort either the audit or the non-audit services, or both.

The hon. Gentleman asked how all the different groups fit together. I draw his attention to the helpful diagram in the DTI review. By bringing the Accountancy Foundation and the FRC together, we are creating a single unified regulator under which will sit the Auditing Practices Board with its enhanced role, the investigation and discipline board with its strengthened powers, and the professional oversight board, which will include the audit inspection unit. That is a much simpler and more rational system than we have had until now, and because it all fits within the FRC, I think that the hon. Gentleman will find the complementarity of roles that we both want. Finally, he urged on me speedy implementation of the recommendations—that is precisely what we are now doing.