I beg to move amendment No. 439, in page 251, line 28, leave out 'knowingly or recklessly' and insert 'dishonestly or fraudulently'.

With this it will be convenient to discuss the following: amendment No. 440, in page 251, line 32, leave out 'knowingly or recklessly' and insert 'dishonestly or fraudulently'.

Government amendments Nos. 447 and 448.

Amendment No. 684, in clause 503, in page 243, line 22, at end insert—

'(4A) With the exception of the audit fee, an auditor or auditors of a public company must not be a party to any transaction in the financial statements.'.

Amendment No. 686, in clause 505, in page 244, line 7, at end insert ', and

(c) they serve a maximum of five consecutive years'.

Amendment No. 759, in clause 509, in page 246, line 17, at end insert—

'(2A) The auditor's report must be accompanied by a statement stating the regulatory action, if any, taken against the firm or any member of the audit team during the preceding five years, together with the outcomes.'.

Government amendments Nos. 213, 225, 449 and 519.

In speaking to amendments Nos. 439 and 440, I return to the subject of the auditor offence proposed in the Bill. At this point, I declare an interest: I am a chartered accountant, as I pointed out yesterday, and I spent my formative years as an accountant auditing a wide variety of companies, many in Britain and some in other European countries.

Clause 521 will enable an auditor to be prosecuted if he or she has acted knowingly or recklessly to cause

"a report under section 509...to include any matter that is misleading, false or deceptive in a material particular".

In Britain, about 700,000 audits are carried out annually. To my knowledge, they are carried out professionally, and largely show no indication of behaviour by auditors that would need to be tackled by the proposed new criminal auditor offence. As my hon. Friend Mr. Djanogly noted yesterday, we have debated the proposals not only in the House, but at a breakfast briefing in the City last week. At that event, I challenged the Minister for Industry and the Regions to tell us how many auditors she believed would be prosecuted under the new offence. I hesitate to put words in her mouth but, from memory, she suggested that there would be only one or two auditors whose behaviour would have to be dealt with via the offence. That sounds like taking a sledgehammer to crack a nut, especially given the existing law on negligence and fraud.

Can the hon. Lady tell us from her experience as a chartered accountant whether any malfeasance by an auditor, whether reckless or not, ever comes to light unless the company goes belly-up and flops? Was there reckless behaviour in Andersen's audit of Enron in the United States?

Generally, shareholders and the company would have redress if they felt that an audit had not led to an accurate audit opinion. The Enron case was in the US jurisdiction rather than in the UK, so it is probably not appropriate for me to comment on it in the UK Parliament.

The Opposition are not convinced that a fresh offence is necessary.

Does not the hon. Lady accept that "knowingly or recklessly" is a fairly high level for an auditor to reach? We are not talking about mere carelessness or mistakes; an auditor would have to do something, or deliberately not disclose something, that was of material importance to people relying on the company's accounts, for investment or other purposes. The barrier is high, so does she accept that for a few cases it may be necessary?

If the hon. Gentleman makes a contribution to the debate, perhaps he could mention any cases that were not prosecuted, but would have been if the new offence were in place. The proposed auditor offence actually lowers the bar for the prosecution of auditors. They can already be prosecuted under the existing negligence and fraud laws.

In addition, we have concerns about how the offence will work in practice, especially its impact on the broader audit process and, consequently, on business and the economy. The offence necessarily lowers the threshold for the prosecution of auditors and in doing so will have negative consequences for the whole of business and the audit profession.

Can we clarify the fact that no criminal offence of negligence is involved? There is civil liability for negligence in very limited circumstances. We are talking about what criminal offence should be added to a difficult aspect of civil liability.

I take the hon. Gentleman's comments on board, but the Government clearly want to broaden the ability to prosecute auditors. My concern is that that will have negative consequences for business and audit that are disproportionate to the number of offences that will be prosecuted under the new provisions. That is important, first, because more audit opinions will be qualified. Auditors will require a significantly higher risk threshold to be passed before they can be comfortable in stating that accounts are true and fair. For some companies—in respect of going-concern issues, for example—the provision could be a self-fulfilling prophecy if auditors are forced unduly to highlight such matters by qualifying an audit report when, in reality, they might have been perfectly happy with assurances from management about the going-concern nature of the company. In fact, we are putting at risk the fine judgments made by auditors, because instead of looking at the facts in front of them, they will constantly be looking over their shoulders at the offence.

Secondly, audits will take longer because more issues will need to be followed up, and in more detail. I note that later amendments propose that filing time limits for some companies should be shorter. The offence would put considerable strain on the potential for that. At present, when auditors come across a matter that seems to be unusual or anomalous, they have to make a judgment whether, and to what extent, they should follow it up.

The hon. Lady seems to be following the line of argument that she took in Committee, but at that stage the Minister reassured us that "recklessly" meant knowingly taking an unreasonable risk, and knowing about its unreasonableness. In those circumstances, I cannot see how the concerns that the hon. Lady raises are still valid.

In Committee, we argued about the fine legalities of the meaning of the offence in relation to existing law. I am not going back down that track; I am trying to get more information from the Government about the cost of the offence to business and the audit profession.

I was talking about the decisions that auditors may need to take about following up an anomalous matter. If they believe that the matter is immaterial, they may take no further action and will continue with the remainder of the audit. However, there is no doubt that once the new offence is in place, such immaterial issues will be chased up—just in case. Audit companies will not take the risk of being accused of not following up something that may subsequently become a material issue. That will take more time, but it will also take more resources, so my final point about the effects on the audit process is that audits will be more costly because audit work will need to be broader to prove that all anomalies discovered—not just potential material anomalies—are followed up adequately.

The hon. Lady's point about following up matters that would not previously have been pursued applies to the lower test of negligence, not to the higher test of knowingly or recklessly doing something criminal. Her point is aimed at a different civil liability.

Again, Members seem to misunderstand my argument. Even if the hon. Gentleman is right, is it therefore appropriate that we should take action that leads to incredibly increased audit costs for businesses—large, medium and small—when there is apparently nothing for auditors to worry about because, in his mind, there is only a small risk of their being prosecuted? In reality, the audit profession and business will find that they cannot accept even that small risk.

To prove that someone has behaved recklessly, it is necessary to show that the auditor was aware that an action or failure to act carried risks, that they personally knew that the risks were not reasonable ones to take, and that, despite knowing that, they went ahead. Why does the hon. Lady not want such people to be prosecuted?

People who are prosecuted are not always found guilty and the provision may well lead to spurious cases that put reputations on the line. The judgment as to whether the auditor's judgment about whether he or she knew that a risk was unreasonable will be made by the courts, rather than by the auditor as at present. Can Ministers name one case that they believe should have been brought to court, but which was not because this offence did not exist? We would all be interested to hear which cases they feel have not been dealt with as a result of not having this law in place. I did not receive an answer to that question on Second Reading or in Committee. Perhaps I will finally get an answer today. The danger is that very few—if any—prosecutions will be brought. At the breakfast briefing last week, the Minister for Industry and the Regions seemed at pains to stress that the offence would be rarely used, and yet the ramifications for business and the audit profession could be broad.

The hon. Lady asked for an example. I wonder whether the Department of Trade and Industry report on the performance of Coopers and Lybrand as auditors in the Maxwell case might provide her with a convincing one. The evidence cited was that the senior partner at Coopers and Lybrand summed up the strategy when he told his audit staff:

"The first requirement is to continue to be at the beck and call of R.M."—

Robert Maxwell—

"his sons and staff, appear when wanted and provide whatever is required".

Was he therefore recklessly conceding to the wishes of Maxwell?

The hon. Gentleman raises another potential problem with the clause as it is drafted, to which I will come later. Frankly, I do not think that it is for Members to interpret what that Coopers and Lybrand partner was saying. One of the amendments that the hon. Gentleman has tabled would mean that audit companies could only carry out the audit, and not provide any other form of service. Clearly, audit companies provide a whole host of services to their clients, ranging from due diligence to tax and IT. Who knows what the Coopers and Lybrand partner was talking about?

The hon. Lady has referred twice to remarks that I made at a breakfast meeting at which she and I were both present. I just want to put the record straight in the House. I said that, of the 700,000 or so audits that take place a year, most are carried out scrupulously by auditors, with diligence and honesty. However, that does not mean that we do not need an offence to assure ourselves that all audits are carried out scrupulously, diligently and honestly. Most people do not commit murder, but that does not mean that we do not have an offence on the statute book to prosecute people who do so. Her argument is spurious.

I would counter that the Minister's argument is far more spurious than mine. The offence of murder does not change everybody else's behaviour towards one another, but the proposed auditor offence will change the behaviour —[ Laughter. ] Hon. Members are laughing, as if knowing that there is an offence of murder is what stops law-abiding people from killing one another. I fail to see how that furthers the Minister's argument in relation to the auditor offence. I am sure that she will try to come on to that. [ Interruption. ] The Minister is saying that it is a poor argument. I presume that she is talking about her own comments.

My final point about how the offence will affect the audit process is that audits will be more costly. Audit work will need to be broader to prove that all anomalies discovered—not just potential anomalies—have been followed up. Everything will get followed up. Those costs will almost certainly be passed on to companies—large, medium and small—placing additional unnecessary costs on them. I have a large number of small and medium-sized companies in my constituency and I know that they will not welcome the prospect of increased audit costs, which might put some of them at risk of going out of business.

In the other place, Baroness Noakes, who has a vast amount of experience in this area, said of the Bill:

"I believe the biggest impact will be risk-averse auditing and higher audit costs."

She goes on to say, of auditors:

"Put simply, they will do more auditing, more documentation, more double review and more double checking. They would be fools not to do so."—[ Hansard, House of Lords, 10 May 2006; Vol. 681, c. 1028.]

We ignore the views of people such as Baroness Noakes at our own risk. I agree with her comments. Is that really what we want to achieve—an across-the-board raising of audit costs and risk-averse auditing for an offence that may capture only one or two, or perhaps several, rogue auditors?

I have great respect for Baroness Noakes, but after she made those comments we explored in greater depth the extent of criminality, as David Howarth has made clear. It appears that I satisfied the hon. Lady's colleagues, as none of them is here to support her today. She should look at what Baroness Noakes said in the context of the issue having been more fully explored by us in Committee. I doubt that Baroness Noakes would say what she said then if she had heard our argument in Committee.

I have, of course, spoken with Baroness Noakes and she is pretty comfortable with her initial comments. The Minister did take some time to run through the Government's rationale for this offence, stating that, in her opinion,

"Good auditors who behave honestly have nothing to fear.

But even having said that, when I asked about the issue of auditors occasionally making mistakes—given that they are human—and following up anomalies, she said:

"If he"

—the auditor—

"was in any doubt, the safest thing would be to check things through".—[ Official Report, Standing Committee D, 13 July 2006; c. 724-5.]

Surely that is the heart of the problem. That is why audit costs will rise if this offence is passed today. The Minister said so in Committee. Will she agree to assess the impact of this aspect of the Bill once we are, perhaps, two years into its operation, and will she agree to revisit the offence if it proves to lead to unnecessary and disproportionate rises in audits costs for businesses?

Moreover, to return to the intervention that was made by Mr. Mitchell, given that audits are carried out by teams of people, ranging from the audit junior to the assistant manager, the manager, the director, and the partner, in practice it could prove difficult to establish which team member committed the offence. I presume that we could have a situation in which several auditors on a team would be prosecuted simultaneously because it was not clear where exactly in the team the "knowingly and recklessly" behaviour associated with the offence took place. In Committee, I expressed my doubts and said that that might be a fatal flaw. Before that is brushed off by the Minister, I refer again to the corporate manslaughter legislation, which had a fatal flaw and ultimately proved entirely ineffective in the courts because of that flaw, to the extent that the House—I think today—has had to set up another Committee to look at a fresh version of that legislation. Perhaps the Minister can comment on how she expects that it would be assessed which audit team member should be prosecuted. Does she expect that multiple prosecutions of team members might arise?

Before the hon. Lady finishes, I invite her to explore the meaning of "dishonestly or fraudulently" in her amendment. Does she mean by dishonest or fraudulent what fraud means in the Fraud Bill, which is that there has to be an intention to cause a gain or a loss—a gain, for example, for the defendant or a loss to the victim?

The hon. Gentleman brings me neatly on to what I was about to say. Amendments Nos. 439 and 440 would substitute the words "knowingly or recklessly" with "dishonestly or fraudulently". They would thus prevent the litigation risk from being excessively increased for auditors, in line with his comments about alignment with our understanding of the concept of fraud in current law.

Although our amendments would leave an auditor offence in place, they would take away the negative by-products to which the clause as drafted will lead, such as companies having to put up with auditors over-auditing under the new law compared with what they would have otherwise done under the current law in order to be comfortable with declaring accounts to be true and fair.

Let me turn briefly to the other amendments that hon. Members have tabled. Amendment No. 684 would be unworkable. As I have said, audit companies provide a whole host of services for their clients, such as tax advice, IT systems consultancy, internal audit, due diligence work and regulatory filing work. The restriction suggested under amendment No. 684 would harm not only the businesses that clearly value the additional services that they engage audit companies to provide, but audit businesses themselves.

Amendment No. 686 proposes to limit auditors to serving a maximum of five years. Again, I would be concerned that the amendment would lead to added costs for companies and auditors because they would spend too much time on costly tender processes. New auditors have to take time to get to know client operations and doing that regularly would perpetually add unnecessary costs, prevent auditors from carrying out efficient audits on behalf of their clients and, dare I say, lead to the risk that auditors would be less able to spot that one anomaly that represented a major problem because they had not been involved with the company for as long as they ordinarily would have been. For small, medium-sized and large companies alike, that would add not only cost, but risk.

Amendment No. 759 would be unworkable and unfair. It would devalue the accounts of companies not involved in any dispute unnecessarily. It would also have an impact on large accounting firms with offices throughout the world. The corporate structure of such a body might be that a large accounting firm in Europe was merged with another firm in Asia. In such circumstances, it might well be impossible to say whether a regulatory action taken in one continent should be included in the report for an office not merged in the other continent. It would be difficult to make the amendment stick.

We are broadly happy with the Government amendments. Although we have already heard several interventions, I look forward to hearing hon. Members' contributions to the debate and, of course, the Minister's response to the issues that I have raised.

The problem that we face is due simply to a slip that a Minister in the House of Lords made when attempting to be helpful by describing the meaning of "recklessly". That Minister was not a lawyer and his words caused the auditing and legal professions some anxiety about the Government's intention in their use of the word. Whatever the Minister meant to say, the entire problem was cleared up in Committee by the Under-Secretary of State for Constitutional Affairs, Vera Baird, when she said—as she repeated today—that "recklessly" was used for a thoroughly subjective offence because a risk taken must be unreasonable in the mind of the person taking it. If so, I do not think that the bad consequences identified by Justine Greening will follow.

If we are to understand the situation as it now stands, we must go back to the legal context of actions against auditors. There are two liability pressures on auditors in civil law: the auditor's contract with the company; and the threat of a negligence action by other possible victims. An important aspect of the introduction of the new crime with which we are faced is that the Bill will reduce the contractual pressure that might be put on auditors. The Bill will, for the first time, allow auditors to contract to limit their liability to the company itself. Indeed, we will later debate amendments that challenge that very possibility.

The Bill will not allow auditors to limit their liability unreasonably.

That is correct, but the fact that it will allow auditors to limit their liability at all is a new departure. There will thus be a reduction in the contractual pressure on auditors.

Is the hon. Gentleman saying that he thinks that it is a good idea that auditors should be exposed to unreasonable liability?

I think that the hon. Lady is confusing the liability rule and the test in the Bill—they are quite different.

It is crucial to bear it in mind that the circumstances under which auditors can be sued in tort by third-party victims of negligent auditing are extraordinarily limited. The fundamental problem is the form of loss. Pure economic loss, as it is known in law, can be sued for only when the auditor has assumed responsibility to the victim of the particular negligent act. That usually means that no liability is found because the court thinks that the primary responsibility of the auditor is to the company, not to any third-party victims. The number of cases in which auditors have been found liable of negligence to third parties is very small. There will be little pressure—or less than there is now—on auditors from civil liabilities across tort and contract after the Bill has been passed. That is the context of the introduction of the new crime to try to rebalance the situation.

As we have heard, problems can be caused by audits that go wrong—the Enron and Maxwell cases have been raised. We must thus ask what form the new crime should take. The choice is between a knowing and reckless crime, and a dishonest and fraudulent crime. The difference between the two is not that which the hon. Lady described, because she fundamentally misunderstands the notion of recklessness. In one crime, the most important thing is the consequences for other people and the defendant's state of knowledge about those consequences, while causing gain or loss is crucial for the other crime.

Given the circumstances in which problems arise in audit cases, it is not especially relevant to worry about whether auditors are dishonest in the sense of wanting to gain for themselves from a situation. The important point is the consequences for other people and whether an auditor unreasonably—subjectively unreasonably— took an unreasonable risk. Given the balance of the measures in the Bill and the fact that pressure on auditors is being reduced in some respects—the civil liability pressure on them is quite low anyway—the form of the crime that has been chosen is acceptable, especially given what the Minister has said on many occasions about the Government's view of the meaning of the word "recklessly". I will resist the Conservative amendments.

It is interesting to get a clear-cut opinion from David Howarth, who is leading for the Liberal Democrats, at least on this issue, and an opinion in favour of the Government. I welcome that.

I was amazed at the case advanced by the official Opposition for their amendment. My view is that this part of the Bill is far too sympathetic to auditors, particularly the big four. I intended to call it "The prevention of cruelty to the big four and other endangered species", until I saw the provision, which puts teeth into the Bill and which I warmly welcome.

Justine Greening presented a picture of the big four as paragons of virtue, always doing proper, efficient and effective audits—creatures without sin. In fact, they are powerful multinationals and they have a responsibility to review their operations and, where possible, to restrain them. They are not in danger of extinction. The Government have given them special protections in the Bill, including the effective capping of liability. They are huge multinationals rolling in money. Their combined global income is $70 billion a year. They audit 99 per cent. of the FTSE 100 companies—

I note that the hon. Gentleman's comments relate to large audit firms. Does he have a view on how the Bill will affect small audit firms, which may have to pass on higher costs to small businesses?

It is certainly true that the main problems are caused by the big four. Their failures and their practices act as a slur on the entire accountancy profession and audit. However, the Government's aim, and ours, is to achieve proper, effective audit. Audit is valuable, important and required by law, and it might require some increase in the costs of audit to make it as effective as it should be. That is a price that we should be prepared to pay for good audits, but my worry is that the big four do not provide a good audit because they are involved in a collusive relationship with companies. They are selling services to them and using audit as a foot in the door for the sale of other services. That is the import of our amendments Nos. 684, 686 and 759, to which I shall speak briefly.

The sale of other services creates a collusive arrangement. The audit firms derive 75 per cent. of their profits from the sale of other services. I cite the case of the RAC audits. PriceWaterhouseCoopers undercut the incumbent auditor, Stoy Hayward, by 50 per cent. to get the RAC audit. Stoy Hayward's senior partner accused PriceWaterhouseCoopers of undercutting it to secure an appointment that might enable it to introduce higher price consultancy services to the RAC. That is exactly what happens.

Such firms cut the price of audit, which means cutting its effectiveness and must mean increased pressure on the auditors, in order to get their foot in the door and use that as a market stall from which to sell other services. That brings them into a collusive relationship with the managing director, chief executive and senior figures in the company, because they are more lenient about the audit, about possible failures and about arrangements made in the audit that may raise eyebrows and be slightly dodgy, in order to maintain the good relationship and sell other services.

Following the failure of the Versailles Group in 2004, Nunn Hayward was fined for failures as auditors. It was making too much money from the sale of other services and the group was too important a client to be as stringent on the audit as it should have been. The big audit houses are prepared to restrict themselves in the sale of other services when they sell audit to local authorities. They agreed not to sell other consultancy services to get that market. If they can do it in the public sector market, why can they not do it in the private sector market? It will eventually bring down the price of other services because firms will get auditors bidding to provide other services, rather than entering into a collusive relationship with one auditor, which is a serious danger.

The US Government have been active in restricting the practice. The Sarbanes-Oxley Act placed restrictions on the sale of other services, which I am grateful to see we have followed in this country. Other restrictions are on their way and we should follow them as well. A collusive relationship is dangerous to the effectiveness, independence and accuracy of the audit. If the price of the audit is cut, that must cause pressure. The firm must be using untrained staff, cutting corners and not reporting things that should be reported, just to get the audit through at a certain price. We should ban the practice of selling other services.

Amendment No. 686 provides for rotation—a maximum of five years' tenure as an auditor. The Government and the audit profession say that partners are already rotated, but that is not good enough. We must provide for auditors to be changed. It is necessary for a new pair of eyes to look at the arrangement, scan the papers of the previous auditor and take a view. Longevity of auditors means collusion. Longevity of auditors means a comfy relationship and the kind of situation that developed in the Maxwell pensions case.

I quote from the Department of Trade and Industry report on Coopers and Lybrand's performance. The DTI report stated that the auditing firm

"consistently agreed accounting treatments of transactions that served the interest of RM"

—Robert Maxwell—

" and not those of the trustees or the beneficiaries of the pension scheme".

Collusion—that is what it is about. We end that with rotation of auditors.

Rotation of partners is not the same and is not good. Enhancing the independence of auditors requires a new auditor. How likely is it that partner B, on taking over from partner A, will say, "Scandalous practices! We can't to this. We can't do that. We must change that"? It is not going to happen, is it? If the auditors are partners in the same firm they are unlikely to abuse each other or check each other's performance closely. Most of the audit is, in fact, done by teams lower down whose turnover is rather rapid, so even a new partner does not produce the continuity of contact and skill that is claimed. We want rotation of auditors on the grounds that longevity leads to collusion, carelessness and the kind of situation that developed in the Maxwell case. The research indicates that that is a failure.

Amendment No. 759, tabled by my hon. Friend Jim Cousins and me, seemed to scandalise the hon. Member for Putney by calling for the auditor's report to

"be accompanied by a statement stating the regulatory action, if any, taken against the firm or any member of the audit team during the preceding five years, together with the outcomes."

Why not? Why should we not know the reputation of such firms and what action has been taken against them? Why should we not be able to judge the quality of their work from what they have done in previous cases where regulators have taken action against them? This should be public information and it should be available so that we can understand the judgment of the auditor in the light of the performance of that firm and the regulatory action taken against the firm.

I understand why the hon. Gentleman is setting out this argument, but does he really think that it is an appropriate one in respect of, for example, only one audit in one office in one part of the world? Does he really think that it is a proportionate response, in respect of every single company in every other part of the world that might be audited by teams and offices that have never come into contact with the team that audited that office and that might or might not have had successful regulatory action against it, for every single audit report to include that point? If that means that some businesses might have to have a fresh audit, or even go out of business because investors simply say that they are unwilling to use their accounts any longer, does he really think that that is proportionate response?

That is a fairly far-fetched picture. It is ridiculous to suggest that, because auditors report that action was taken against them in one jurisdiction, clients will flee from the firm that is being audited.

However, on the hon. Lady's basic point, I simply answer that the international composition that she talks about applies primarily to the big four, which are multinationals. They market themselves as multinationals and as having a common reputation: "We are PriceWatersCooperhouse"—or whatever it is called. I forget whether it is PWC, which sounds fairly obscene to my ears, or PCW. I think it must be PWC. It markets itself as a multinational team, maintaining common standards and providing services on an international basis. If it does that, it is answerable in respect of its offices in other jurisdictions, and we should know what has happened to it in other jurisdictions.

An astounding number of cases are relevant to my point. For instance, in the United States of America in 1995, Ernst and Young gave undertakings to

"comply with standards and guidelines issued by the...SEC...and the accounting profession regarding the independence of public accountants", but when a case came up about it not having done that, the judge said that

"the evidence shows that EY has an utter disdain for the Commission's rules and regulations on auditor independence...EY committed repeated violations of the auditor independence standards by behaviour that was reckless, highly unreasonable and negligent."

That is what the judge said about Ernst and Young, which markets itself as a multinational providing services all over the world.

We are obliged to publish performance and league tables for every other kind of organisation—such as schools—so why should we not have similar information on the firms that are auditing the accounts of public companies and putting their reputations on the line? Those firms do 99 per cent. of the audits of the FTSE 100 companies.

All our proposals in amendments Nos. 684, 686 and 759 are important, because we do not accept that there is any threat to those big multinationals and their behaviour. Their reckless pursuit of profit endangers the reputation of sound, efficient, effective, respectable and reputable accountants and auditors, which are smaller and are not going in for the same kind of behaviour as the big four.

I did not intend to speak on this matter, but I have been moved to do so by the comments of Justine Greening. She seemed very concerned about auditors, but I have a concern for those who rely on the audit report. It is not only the company that relies on that report: an audit report in a company's accounts will be important to those who are thinking of investing in the company and those who have an interest in it—not least pensioners in the company. Mr. Mitchell highlighted the Maxwell situation, and the disasters that followed from that.

David Howarth talked about civil negligence against auditors. I have been racking my brains, but I cannot think of any major cases where anyone successfully sued an auditor in such circumstances, although I think that there was an attempt in the Equitable Life case that failed. If an audit goes wrong, that can lead to very serious circumstances.

What is proposed will not put an undue burden on auditors. The phrase we are talking about is "knowingly or recklessly". I am not an auditor. I was a fairly lowly solicitor before I entered this House, and in law there is a clear and well-established difference between carelessness and recklessness. Even in areas such as road traffic, we talk about careless driving and reckless driving. Recklessness is a very high burden for the prosecution to prove. I accept what the Minister said: the vast majority of auditors are honest, hard-working and do a good job. They have little to fear. The very small minority that for whatever reason—being too close to the company or for their own reasons—do not do the job to anything like the standard of a reasonable auditor are the only people who would have anything to fear. To add "dishonestly or fraudulently" would make it almost impossible for anyone to prosecute successfully. As the hon. Member for Cambridge said, it would have to be proven that the auditor had in some way benefited from the fraudulent activity, which would be almost impossible to do.

This is a sensible move. It means that auditors will have to think about the impact of an audit report outwith the company and adhere to proper standards. If they do not adhere to those standards, to the extent that it is reckless, it is right that there should be the option of a prosecution against them.

The House has a brief opportunity this afternoon to consider how to deal with certain remarkable financial institutions that we have developed, which have huge market power and huge global reach, namely the big four accountancy firms. We have the opportunity to consider the domination they have over the auditing of all our great companies, for which they have an effective monopoly among themselves, and also the influence that they have over government.

Some estimates suggest that, since 1997, the Government have spent almost £2.5 billion on commissioning consultancy and advice from the big four accountancy firms. Many Members are concerned with issues such as the new localism. It would be a very bold councillor indeed who would gainsay it, if an officer produced some advice that had been endorsed by the local branch of one of the big four accountancy firms. The point made by Justine Greening emphasised the global reach of those companies. KPMG is said to have 140,000 partners worldwide.

The internal organisation of these companies is far from clear, as our colleagues in the United States found when they attempted to investigate BCCI. They chased one of the big four accountancy firms across the globe, only to end up at an office in Bermuda with which no one had information-sharing agreements and no more could be said or done. David Howarth clearly set out to the House the very limited legal remedies that apply and can be brought against such massive financial institutions, even were it not the case that some of the very biggest law firms in the City of London have already made it clear that they would not contemplate any kind of legal action against the big four accountancy firms.

To deal with that situation, the Government have proposed the very blunt instrument that is the reason for the Conservative amendments. Here, I have some words of comfort for the hon. Member for Putney. It is almost inconceivable that there are any circumstances in which the powers set out in the Bill will be used. When in government, her party introduced the crime of insider dealing, which was on our statute book for nearly 20 years. I invite the Foss and Harbottle tendency among us to tell me whether there was ever a successful criminal prosecution for insider dealing under that legislation. No, there was not.

We can effectively dismiss the possibility that the situation that the hon. Lady is inviting us to discuss would ever arise. What public prosecutor would be bold enough to bring a criminal case against a big accountancy firm, in the light of the Chancellor's very clear statement yesterday that he will resist—I doubt whether he will be successful—the importation of Sarbanes-Oxley. Following the outcome of the so-called "Plumber" case in the Financial Services Authority, the number of such cases that any agency will bring will be very limited indeed. That is why we should not seek this blunt instrument of criminality in order to create a cultural change in behaviour. Any 18th century squire would have been able to tell this House that there is no prospect of a hanging party changing its behaviour unless it actually hangs someone. No one is going to be "hanged", so the prospects of changing behaviour do not exist.

The hon. Member for Putney said that it would be entirely wrong to separate audit from non-audit services. In 1982, a Conservative Government introduced just such a requirement into the auditing of local government, and it has worked very successfully for 25 years. In April, the public company accountancy oversight board introduced a requirement for the complete separation of tax advice from the auditing of companies. In due course, that will be introduced into our own rules through the Auditing Practices Board. Nothing is more certain, because for the big firms, there has to be consistency between us and the United States. How much more sensible to introduce our own arrangements, rather than passively importing into this country requirements and regulations from the United States. If, by chance, one of the big firms was required to tell a company what each one of its 140,000 partners across the world might or might not have done, what a very important discipline that might be. What clarity that might bring to the internal organisation of these big firms, and how helpful it would be to the members of the company and to the wider world.

I shall begin by discussing Opposition amendments Nos. 439 and 440. I will then turn to the three amendments tabled by my hon. Friends, and to the six Government amendments that make up the balance of this group.

This new offence has been debated extensively—hyperbole is a tool that is frequently used, but "extensively" is probably an understatement—and I do not suggest for one minute that Justine Greening is trying to defend the bad auditor. Rather, she is considering the possible impact on the good and honest auditor, and I accept that it is right that she do so. But frankly, the dismal picture that she paints is based on the misunderstanding that we are criminalising negligence by auditors. I agree with her entirely that to do so would be counter-productive, but that is not what we are doing: the Bill does not criminalise negligence. Recklessness and negligence are well-established legal concepts, and they are very different. I explained this at tedious length in Committee, and most members of it seemed satisfied with my explanation. I am grateful to David Howarth, who indicated that I satisfied him on that point. As the distinction is so central, let me explain its elements one more time.

To prove that someone has behaved recklessly, it is necessary to show that the auditor was aware that an action, or a failure to act—the latter is probably much more likely—carried risks; that they knew that the risks were not reasonable ones to take; and that despite knowing this, they went ahead anyway. I did not set the position out in Committee in quite that way; I think that I quoted pretty much the sentence structure used in the House of Lords case of Crown v. G, which dealt with the question of whether recklessness was a subjective or an objective test. The Lords made it very clear that the test is exactly as I have just set out, so I hope that the hon. Member for Putney will at last be satisfied that we have been very careful in casting this offence, and that it will not have the consequences that she fears.

The hon. Lady also said that it might not be clear in some circumstances which team member behaved "knowingly or recklessly". If there is no evidence against a particular team member, there will be no prosecution. The offence deals with cases in which there is sufficient evidence, and absolutely nothing in the clause would allow all team members to be prosecuted in the hope that one could be caught. The provision could be used only in respect of a person against whom there was evidence that they had been in the state of mind that I have described a number of times. That is a very long way from negligence.

My noble Friend Lord Sainsbury went further. He has been faintly criticised in that regard, but he was trying to be reassuring when he said that the guidance to be issued under clauses 522 and 523 would say that for a prosecution to be brought under the new offence, there should be specific evidence of recklessness, and that one should not generally rely on an inference of recklessness from hindsight, even where such hindsight showed a judgment to have been so wrong that it was not credible that the auditor did not know the risk that they were running. We intend that, as a further protection, the guidance will make it clear to prosecutors that that should be the position.

Let me reassure my hon. Friend Jim Cousins that this provision will be used, if necessary. It is one of a portfolio of offences, and it fills a gap. I have it on the authority of no less a person than the Solicitor-General that the insider dealing provisions led to many prosecutions and to at least one conviction while they were on the statute book.

May I just confirm that I am being assured that, in the 20 years in which insider dealing was a criminal offence, there was one conviction?

No, I am saying that the Solicitor-General, in a different guise, successfully defended some of the many prosecutions that were brought, but that he, from his own anecdotal experience, can talk about one that most definitely did succeed. However, I doubt whether it was the only one that succeeded. The provision will be used, and we legislate with the intention of using the legislation.

If we accepted the amendment tabled by the hon. Member for Putney, which would insert the phrase "dishonestly or fraudulently", it would make the offence redundant. If an auditor behaves dishonestly or fraudulently, they are already guilty of an extant criminal offence. This is a useful new offence that will have a positive economic impact, without imposing additional burdens on those who act in good faith in carrying out their duties. We think that it is right to have that sort of legal sanction in such cases. I hope that the hon. Member for Putney will withdraw the amendment, now that we have shown yet again that her concerns are not really justified.

I turn now to the amendments from my hon. Friends the Members for Newcastle upon Tyne, Central and for Great Grimsby (Mr. Mitchell). Amendments Nos. 684 and 686 are aimed at ensuring the independence of auditors from the companies that they are auditing. Amendment No. 684 would prevent a company from employing its auditor for any work other than the audit, while amendment No. 686 would require the rotation of auditors every five years.

We entirely agree that the independence of auditors is absolutely essential, but we also have a responsibility to avoid unnecessary regulation. Tightening the regulation on auditors often ends up imposing significant costs on companies. However, over the past few years, particularly since the collapse of Enron and WorldCom, the structures in the UK within which auditors operate have been strengthened in a number of ways. We removed responsibility for auditing standards on independence from the professional bodies and passed it over to the independent Auditing Practices Board of the Financial Reporting Council. Moreover, only a couple of years ago the APB issued ethical standards on auditor independence that impose strict duties on auditors to monitor and deal with any threats to their independence. In particular, they must avoid doing other work for an audit client if that would result in their effectively having to audit their own work.

I am very glad that my hon. and learned Friend has pointed that out, as the APB's requirements follow to the letter those introduced in the US after the Sarbanes-Oxley Act was passed and the Public Company Accountancy Oversight Board was established. She makes precisely my point—that we in this country are not setting standards for ourselves but allowing the APB to import into British jurisdiction exactly the same requirements that are introduced in the US. How feeble that is.

I follow what my hon. Friend says, and he is right, at least in part. However, I hope that he will agree that substantial steps have been taken in the past few years to guarantee the independence of auditors—an aim that he and I share. The two steps that I have described are clearly highly germane to my assertion that he and I are thinking along the same lines, even though our approach differs slightly.

There is no doubt that there is a move to restrict the sale of tax advice by auditors to their clients, just as is happening in America. My hon. Friend Jim Cousins is exactly right: we are being dragged behind the Americans, step by step. It is as if we are regulating audit in the same way that we are treating Iraq.

Order. Perhaps I can help the Minister. That is not a good line to pursue, I think.

Thank you, Mr. Deputy Speaker. I do not think that I could cope even if I did try to pursue it.

The Government believe that it is better for businesses and investors in the UK to use the ways set out in the Bill to guarantee or safeguard auditors' independence, and that the approach adopted is more compatible with the culture that we are used to than would be a pursuit of the course taken by the US, with its Sarbanes-Oxley rules.

Similarly, we do not agree with the proposal that regulatory action against an audit firm or an individual auditor should be disclosed in every audit report with which they are involved. If an auditor, whether a firm or individual, is found guilty of a disciplinary offence by the professional body or by the AIDB, that is publicly available information to which audit committees and shareholders can have ready access. If auditors are investigated and cleared of a professional shortcoming, it would be unreasonable and wrong to require them to disclose that in reports.

In summary, I sympathise powerfully with the desire on the part of my hon. Friends the Members for Newcastle upon Tyne, Central and for Great Grimsby to improve the independence and accountability of auditors, but I believe that we have made real progress in these areas in the past few years and that the extra bits of regulation that they propose would be counter-productive.

Finally, the six Government amendments in this group are minor but worthwhile technical improvements. Amendment No. 213 removes a reference to a type of fine that is inappropriate in relation to conviction on indictment. Amendment No. 261 provides a definition for a "supervisory body" for the purposes of clause 539. Amendments Nos. 447 to 449 clarify that, when rights are available to a specified percentage of shareholders, someone who holds shares on behalf of more than one investor can choose to deploy the part of his overall holding appropriate to those investors who wish him to do so. Amendment No. 519 updates the definition of "bank" in clause 1174 so that it now refers to the new banking consolidation directive published in June 2006.

We have had an interesting and wide-ranging debate. David Howarth appears to think that he belongs to the real Opposition, but will clearly vote with the Government on the Conservative amendment before the House. I listened very carefully to the hon. Members for Newcastle upon Tyne, Central (Jim Cousins) and for Great Grimsby (Mr. Mitchell), and I understand the points that they raised. However, I have considered their amendments previously, and I cannot agree that they would have a positive effect. I therefore remain unconvinced of their merit.

Similarly, I take on board the points made by Mr. Weir, but there seemed a slight prejudice in his remarks against successful multinational audit firms, some of which happen to be British. By and large, they get on with their business very well.

I appreciate the Minister's acceptance that I am not trying to protect reckless accountants. In fact, the representatives from the accountancy and audit professions who have got in touch with me are worried about the rising costs that they may now have to pass on to customers. They do not feel that that will add anything to the audit approach, and we ignore their views at our peril.

Finally, my main concern is for the impact that increasing audit costs could have on small business. I very much hope that the Minister will keep a close eye on how the legislation is working once it is enacted, as that would go a long way towards minimising the potential risks that I have flagged up today. I am fully aware of how the offence is structured legally, and I understood the arguments that the Minister made in Standing Committee. However, the impact that the measure will unwittingly have on the audit profession broadly, and the costs to business that will result, cause me concern. As I have had no assurances that those arguments have been taken on board at all, I shall push amendment No. 439 to a vote.

Question put, That the amendment be made:—

The House divided: Ayes 121, Noes 306.

Question accordingly negatived.