Public Limited Companies (Financial Regulation)

Part of the debate – in Westminster Hall at 3:37 pm on 13th March 2003.

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Photo of David Ruffley David Ruffley Conservative, Bury St Edmunds 3:37 pm, 13th March 2003

I apologise to you, Mr. Deputy Speaker. I put in to speak and have since been unavoidably detained, but I take your strictures on board.

I congratulate Mr. McFall, the Chairman of the Treasury Committee, on helping to secure this important debate. He leads a Committee that, for the most part, avoids and eschews party political debate and concentrates on scrutiny. All its members are to be congratulated on raising in a Committee for the first time in the aftermath of Enron issues relating to accounting, auditing and, more generally, corporate governance. We announced our inquiry on 5 February, and much has flowed since we began. We took a great deal of evidence, and that in the documents in front of us should give a large measure of reassurance to the British public, whom we all know are not awfully enamoured of financial services at present, especially in terms of split capital trusts, the collapse of Equitable Life, and so on.

I am more concerned about the response from the Government, particularly to the Higgs report. Our inquiries envisioned the report as an important contribution to the corporate governance debate. The Financial Secretary has made some comments about the Higgs report, and I want to turn to those in the latter part of my speech.

On the reassurance of which I spoke, I believe that we have been able to show in the report that it was the shortcomings of US accounting practice that led directly to the Enron collapse—principally the inability properly to account for special purpose vehicles. That could not really happen in this country, because we have a principles-based approach to auditing. An auditor signing off must be satisfied that the accounts represent a true and fair view. The US system is much more narrow and makes it much easier to evade a general judgment. The box ticking and rules-based approach in the US were direct contributors to the problems that Enron and WorldCom experienced. That should be a source of reassurance to those in this country who legitimately ask whether an Enron could happen here. The answer is that that is unlikely.

We considered various aspects of the auditor's role, particularly in relation to that old chestnut of audit firm rotation. Lord Sharman, who gave evidence on the matter, could find no evidence that a regime of enforced statutory audit firm rotation—five years, seven years or whatever the period was—was helpful or worked. However, we considered the proposition that audit partners should be rotated, although not on the industry standard of a seven-year basis, but rather on a five-year basis. We went further than that though, and considered the suggestion—I think that this is the central proposal of the report—that there be a requirement on a board to consider both the retendering of audit work and the audit rotation of partners rather than rotating firms on a five-year, rather than a seven-year, basis. These are sensible suggestions. Why are they needed? Quite simply, the answer is that there is always the concern that there will be too much cosiness between corporate management and an audit firm.

We also examined how audit work has been used in a low-balling way—using loss-leading audit work to secure much more lucrative consultancy. I did not share the view that that was a huge problem. We must be careful, not least because there are definitional problems with regard to what pure audit work is on the one hand, and what consultancy work done by the consultancy arm of an audit firm is on the other. It is difficult to delineate which is which. The report flags up that difficulty and asks the Government to examine more closely that definitional problem. That is a sensible proposition and is evidence based, which is the great strength of the report.

The issue of corporate governance was touched on tangentially in the report. We argued that it was important for audit committees to be much more alive to the role of audit firms and the work that they do. That was a direct lesson from Enron that we can apply to this country. Audit committees are much more important than we perhaps thought they were before. That has alerted us to a problem, and is one way in which the Higgs proposals support what the Committee flagged up. However, that is where my support for Higgs ends. So that you are absolutely sure that I am in order, Mr. Deputy Speaker, I point out that although the central proposals of Higgs are not referred to in the report because the report came out before Higgs, nevertheless we were acutely aware of the issues that Higgs would raise. Now that the Financial Secretary, who is responsible for responding to Higgs, is in front of us, it is apposite to address some of the concerns that have been set out.

Mr. Ken Rushton, who is the head of the UK listing authority in the Financial Services Authority and not a man known to rush into rash judgments, responded by remarking that the Higgs proposals on corporate governance could lead to a "one size fits all" rule book if wrongly enforced. He went on to say:

"It has the look and the feel of a more prescriptive framework. If intelligently applied by all parties this would be okay, but some companies are concerned that they might be shoe-horned into an orthodoxy that could not and should not be applied to them."

He said that there was a danger that companies who did not subscribe to all the requirements of the Higgs review, even though it is meant to be a voluntary set of proposals, might be considered "heretics".

The level of consultation on the Higgs review carried out by the Financial Reporting Council was also criticised by Mr. Rushton. The consultations, which are due to be completed by 14 April are an unconscionably short period of time for a full consultation on such critically important corporate governance changes. It is a matter of regret that the FRC will be consulting only on what it considers "fatal flaws" in the Higgs review.