Public Limited Companies (Financial Regulation)

Part of the debate – in Westminster Hall at 4:48 pm on 13th March 2003.

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Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 4:48 pm, 13th March 2003

Yes. We will consider those issues further as these proposals are developed. The issue of mandatory rotation is raised time and again. It was considered in great depth by the co-ordinating group, which concluded that the balance of advantage was against such a mandatory requirement. That is partly because we accepted the view that there were sensible and workable alternatives and that mandatory rotation itself had not been proven as an effective way of ensuring auditor independence.

Indeed, the key elements of the package of measures that we announced as an alternative to mandatory rotation include an enhanced role for the audit committee in the appointment and oversight of the relationship between the company and its auditor, the audit partner rotation requirements, greater transparency by audit firms, and a greater emphasis on independence when monitoring auditors with long-standing relationships with client companies.

The co-ordinating group also considered the Treasury Committee's proposal to set a precise periodic requirement for audit committees to consider the relationship, and decided that that would cut across the enhanced role for the audit committee envisaged by the report. The proposal was influenced by the fact that the enhanced role and the role for judgment should be made as coherent as possible throughout the report. That would provide the effective check that the hon. Gentleman is seeking.

The Chairman of the Treasury Committee, my hon. Friend the Member for Dumbarton, also asked why we were not referring auditors to the Competition Commission. The co-ordinating group also examined that matter. Indeed, the Office of Fair Trading considered the question in detail and announced in November that it did not consider there to be a case for referral. Although the market was dominated by four large companies, it did not show evidence of being uncompetitive. The Office of Fair Trading concluded that it should keep the market under review, particularly in light of Andersen's demise.

My hon. Friend also raised the importance of streamlining the regulation of the accountancy profession. Following a DTI review of regulation, the whole package of measures will be underpinned by a much more streamlined process and a better structure for regulating the accountancy profession. The FRC will assume the functions of the Accountancy Foundation, creating a unified independent UK regulator with three clear roles: setting accounting and auditing standards; proactively enforcing and monitoring them; and overseeing the self-regulatory professional bodies. All those steps will be taken forward alongside the Government's long-standing programme of company law reform.

I could not fail to note the interest in the publication of a Bill for pre-legislative scrutiny. The Government fully accept that such a Bill would benefit from pre-legislative scrutiny. The Government have shown evidence of their commitment to consultation with the publication of 225 draft clauses, but ultimately—I shall inject a caveat here—the decision depends on the parliamentary timetable, the views of the Select Committee on Trade and Industry, and the evidence given to it during the company law review by the Department of Trade and Industry. However, we accept that a Bill on this issue would benefit from a pre-legislative process.

In conclusion, the debate has been valuable and well informed. Members are right to take a close interest in accounting, auditing and corporate governance. I congratulate the Treasury Select Committee on being the first off the mark in considering in depth the issues contained in its report. It is absolutely right that we should give those issues our full attention. The approach that the Government have taken will ensure that our corporate governance structures remain among the best in the world, and that must be in the interests of the millions of pensioners, savers and businesses that depend on them.

Question put and agreed to.

Adjourned accordingly at seven minutes past Five o'clock.