Audit and Corporate Governance - Question

– in the House of Lords at 12:42 pm on 23rd March 2021.

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Photo of Lord Leigh of Hurley Lord Leigh of Hurley Conservative 12:42 pm, 23rd March 2021

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.

Photo of Lord Leigh of Hurley Lord Leigh of Hurley Conservative

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.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

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.

Photo of Lord Leigh of Hurley Lord Leigh of Hurley Conservative

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?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

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.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Labour

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?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

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.

Photo of Baroness Bowles of Berkhamsted Baroness Bowles of Berkhamsted Liberal Democrat

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.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

These proposals are to provide information to expert users and many of the ordinary readers as well. Therefore, both markets are to be fulfilled.

Photo of Baroness Noakes Baroness Noakes Conservative

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?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

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.

Photo of Lord Bilimoria Lord Bilimoria Crossbench

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?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

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.

Photo of Lord Lennie Lord Lennie Opposition Whip (Lords)

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?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

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.

Photo of Baroness Bennett of Manor Castle Baroness Bennett of Manor Castle Green

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.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

We are discussing audit reforms and reforms to the audit market. I think that the noble Baroness may want to have a separate debate about reforms to company structures.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe Conservative

My Lords, I refer to my interests in the register. I hope my noble friend realises that this audit and governance package is onerous. It will place significant costs on businesses of all shapes and most sizes and is, I fear, unlikely to achieve a lot in practice. Does he not agree that the best and more immediate way forward would be for the existing, comprehensive rules to be enforced properly by everyone—including firms, auditors and, if appropriate, prosecutors—while minimising the burden of any new regulations?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

I know that my noble friend is passionate about not imposing new burdens on companies. I share her desire, but we think that the current regime could be improved. There will be a 16-week consultation period, so we will take the time to get these proposals right, but I think that some worthwhile improvements could be made without damaging competitiveness.

Photo of Lord Sikka Lord Sikka Labour

My Lords, I have two points. First, in the absence of a central enforcer of company law, improvement in corporate governance is unlikely. Secondly, in the absence of tougher auditor liability and accountability, there are not sufficient pressure points to secure improvements in audit quality. When will the Government realise that their appeasement of big corporations and accounting firms is actually a recipe for more scandals?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

We are not appeasing the big accountancy firms; many of them do not like some of our proposals. These are worthwhile reforms that will improve the market and help to bring about the state of affairs that the noble Lord refers to.

Photo of Lord Reay Lord Reay Conservative

My Lords, the White Paper proposals place onerous obligations on directors of larger businesses. Does my noble friend the Minister share my concerns that the reforms will discourage candidates, due to the increased and unnecessary liability? Further, does he agree that companies will face greater regulation, higher directors’ fees and indemnity costs at a time when the noble Lord, Lord Hill, is, sensibly, attempting to improve access to capital markets?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

I do not agree with my noble friend. As I said earlier, accountability for directors applies only to those in the largest businesses—that is, those with revenues in the hundreds of millions of pounds and potentially thousands of employees. The new sanctions will apply only in cases where directors have clearly failed in their duties as set out in law, so I do not believe that there is a conflict with the proposals made by the noble Lord, Lord Hill.

Photo of Lord Sarfraz Lord Sarfraz Conservative

My Lords, I declare an interest as set out in the register. Companies are staying private for longer and entrepreneurs are not always in a rush to go public. Will Her Majesty’s Government consider simplifying trading in private company shares, possibly even introducing electronic trading, so that founders and employees can access the liquidity they need?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

My noble friend makes an interesting point. Although this White Paper does not include proposals on trading in companies’ shares, the listings review of the noble Lord, Lord Hill, does include some recommendations, including making it easier for private growth companies to make the jump to a public listing.

Photo of Lord Fowler Lord Fowler Chair, House of Lords Commission, Lord Speaker, Chair, House of Lords Commission

My Lords, all supplementary questions have been asked. That brings Question Time to an end.