Company Law Reform Bill [HL]

I have added my name to Amendments Nos. 318, 319 and 320, and have tabled Amendment No. 318A in this group, which is substantially the same as the combination of Amendments Nos. 318 and 319. As the Minister will be aware, the introduction of this specific criminal offence has created widespread dismay among the auditing profession. It is not supported by the CBI, which describes the policy as lacking evidence. The Government backed away at the last minute from creating an offence that carried the penalty of imprisonment, but that has not allayed the concerns that existed and still exist about the offence. I started off with the view that if directors can be subject to a number of offences throughout the Bill that are based on recklessness, why cannot the auditors, but I have been convinced that it would be wrong to create this offence. As I said, the CBI claims that there is no evidence for requiring this solution and I do not believe that there is evidence of a problem of reckless auditors that cannot be dealt with by the existing law. So we are creating a criminal offence and a hypothesis of some future problem. I refer, too, to the oversight arrangements for the auditing profession, which have only recently been introduced. There is no evidence—or, as far as I am aware, even a suggestion—that those arrangements will not prove effective in dealing with the worst kind of auditing behaviour. The Accountancy Investigation and Discipline Board has powers to deal with bad auditors by issuing unlimited fines and banning individuals or firms from carrying out audits, so achieving precisely the same result as a criminal prosecution under Clause 494. The only difference is whether a criminal record is created. I am advised that the new oversight arrangements might themselves be compromised by the new offence. If the AIDB were going to investigate something that might also be investigated for possible prosecution under Clause 494, the audit firm itself may have to advise its audit partners and staff to take independent advice, because their interests may not be the same as the firm’s. That advice would almost certainly be not to co-operate with the AIDB and, if a criminal prosecution was launched, it would almost certainly have to halt the process under the AIDB. So the recklessness offence may mean that the new disciplinary arrangements become almost worthless. The noble Baroness, Lady Goudie, referred to the legal advice on recklessness and the lack of certainty that comes with it. We should be clear that the response of the audit profession will be risk-averse auditing. The consequence of that will be more costly audits, as audit firms seek to ensure that their audit procedures and testing levels will be beyond criticism. It may also mean far more qualified accounts, especially as the new offence is not only about true and fair accounts but also about the other detailed matters set out in subsection (2). It is not even clear whether this offence requires intent. On Second Reading, the Minister said that it required,"““a conscious decision by the auditor: at least a decision to turn a blind eye””.—[Official Report, 11/1/06; col. 245.]" So an auditor who has no intention of deception or fraud but who, through misjudgment or negligence, decides not to pursue an audit matter could well be caught. That seems to fall far short of intent, and that, too, is causing concern. I mentioned earlier in connection with another amendment that some firms are reporting a potential reluctance by their senior individuals to carry responsible individual status, which could well diminish the pool of available experienced auditors. Other firms have reported to us that the recruitment and retention of talented graduates could be seriously harmed if the offence exists. There are easier and less risky ways to make money. If the profession cannot attract the best graduates, that in turn will have a knock-on effect on the quality of the profession in the long term, and that could affect the reputation of corporate Britain. I am most concerned that the proposals in Clause 494 carry the risk of serious harm and I fully support the noble Baroness, Lady Goudie.