Public Limited Companies (Financial Regulation)

Part of the debate – in Westminster Hall at 2:30 pm on 13th March 2003.

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Photo of John McFall John McFall Chair, Treasury Committee 2:30 pm, 13th March 2003

It is a pleasure to open the debate on a report by the Select Committee on the Treasury into the financial regulation of public limited companies, which was published in February last year. I speak on behalf of the Committee, and it is gratifying to know that we were the first to look into such matters and that everything has flowed from that, although my hon. Friend the Financial Secretary to the Treasury may not see it exactly in those terms. We undertook the inquiry because of a remark made by the chairman of the Financial Services Authority in New York at the World Economic Development Forum, when he said that the only honest answer to whether an Enron could happen here was yes.

If an Enron could happen here, it is important that proper procedures are in place for corporate governance, accountancy, auditors and everything related to business. The Committee took oral evidence from the Accounting Standards Board, the Institute of Chartered Accountants in England and Wales, the Department of Trade and Industry, the Treasury and the Financial Services Authority. We are aware that since then the Government have set up various other relevant reviews, which include the co-ordinating group on auditing and accounting issues, which is chaired by my hon. Friend the Financial Secretary and her counterpart at the Department of Trade and Industry, as well as the review of company law that had been under way since 1998, which reported in 2001.

We now have the Government's White Paper, "Modernising Company Law"—published in July 2002—which is concerned with the implementation of the review's proposals, and which, as a result of my Committee looking into the issue, could be best served by pre-legislative scrutiny. If my Committee could play a role in such matters, we would be happy. We need to put such company law on the statute book.

I was encouraged by the Government's response to my Committee's report, and by the Secretary of State for Trade and Industry when she responded in January to the four main reports: the Higgs review, the Robert Smith report, the report of the co-ordinating group and the review of the regulated regime of the accountancy profession. We welcome the fact that the Government's response was mainly positive. One glaring element is that there are 23 regulatory bodies for the accounting profession. If that is not a recipe for chaos, what is? Will the Financial Secretary simplify the procedure as much as possible, because it creates a fog which few people can see their way through?

The Treasury Committee considered the rotation of auditors. At the time, the knee-jerk reaction was that it should be mandatory that auditors should be rotated. My Committee did not advance that argument. We listened carefully to the views expressed and were aware of the good relationship that existed between several auditors and companies. In addition, the complexity of companies prevents an auditor from coming in for a year or two and then departing, because the baton would then have to be picked up by another auditor. We are suggesting auditor rotation and a role for the audit committee. It should look into the issue and make a statement in the annual report, thereby explaining itself to the public. That would be a way forward.

One thing that struck the Treasury Committee about the Enron debacle was that the audit committee was chaired by the professor of accounting at Texas university and one of its members was a British ex-Cabinet Minister who also happened to be an accountant. There is still an awful lot of work to do with regard to audit committees, and the Select Committee considered transparency and publicity a good way forward.