Company Law Reform Bill [HL]

moved Amendment No. 329:"Page 236, line 31, leave out ““knowingly or recklessly”” and insert ““dishonestly or fraudulently””" The noble Baroness said: In moving the amendment, I shall speak also to the other amendments in my name in this group. Clauses 498 to 500 create a remarkable new departure in our law, because they create a criminal offence for one class of professional person—auditors to companies. Our amendments fall into two groups: Amendments Nos. 333, 334 and 335 propose the deletion of this offence in its entirety; Amendments Nos. 329, 330, 331 and 332 seek to amend the offence so that it has fewer undesirable features. I shall speak first to Amendments Nos. 333 to 335. We established in Grand Committee that the existing law, together with the Fraud Bill, currently before the other place, will provide criminal sanctions for the vast majority of auditors who would be caught by these clauses. The Government say that the new offence is needed to catch auditors who consciously turn a blind eye or choose not to carry out work that might uncover problems. The Government say that a criminal offence should apply to such auditors, whether or not fraud or dishonesty is involved. The Government have produced no evidence that there is a problem with auditors who are not fraudulent or dishonest, but who turn a blind eye to problems. I do not believe that it is appropriate to create a criminal offence on the basis of an unproven hypothesis. The real fear among the auditing profession is that the new offence will not just cover the hypothetical blind eye but will criminalise negligence. It is far from clear that the wording of the new offence, which uses the concept of ““recklessly””, will not catch cases of misjudgement or negligence. The Minister is aware that ““recklessly”” carries many meanings, and it is the ambiguity that is associated with it that is the cause of great concern in the auditing profession. All professionals are subject to lapses of judgment, or making errors in adhering to their professional standards. Doctors and nurses occasionally kill people through such errors, but there is no special criminal offence for them. That is dealt with through their professional disciplinary procedures. The Government have never explained why auditors should be treated differently. The accountancy profession has an elaborate set of disciplinary procedures that have only recently been overhauled at the behest of the Government. These procedures carry the possibility of unlimited fines and the removal of the right to practice. We understand that serious concerns are being raised among those charged with disciplinary processes about the harm that the new offence will do to the effective operation of those disciplinary procedures, especially because the interests of audit firms and their partners and staff will diverge if criminal prosecutions hang over the heads of the latter. The offence is drafted at a petty level of detail. Under Clause 498(2) the offence applies if the auditor knowingly omits a statement on the remuneration report. An auditor who issues an audit report and financial statement that shows a true and fair view when he knows that it does not is one thing. That is the main purpose of an audit—to say whether or not the accounts show a true and fair view, as Amendment No. 332, in the name of the noble Baroness, Lady Goudie, emphasises. Omitting something about the information in the remuneration report is at such a different extreme from whether or not the accounts show a true and fair view that it seems almost laughable that a criminal offence is created, except that it is not a laughing matter for the auditors who get caught up in this. Even if we think that there might be at the margins the case of the occasional auditor who neglects his duties in a way that is not caught by the existing law, and there is a prima facie case for overriding the professional disciplinary rules in favour of a criminal offence, we as legislators need to consider the costs against the benefits of such a move. It is difficult to see how there are any benefits to society, given that the auditors’ disciplinary procedures can remove an auditor’s ability to audit, thus providing all the protection that the public need. The Government seem to believe that the threat of criminal prosecution will incentivise auditors to act properly. But I believe that the biggest impact will be risk-averse auditing and higher audit costs. The threat of a criminal record for cases that fall far short of dishonesty and fraud will lead the auditing profession to try to prove their audit processes against prosecution. Even if auditors believe that their existing processes would withstand disciplinary scrutiny, they will want to avoid any possibility that a criminal prosecution will be maintained, especially with the wide and uncertain formulation in Clause 498. Put simply, they will do more auditing, more documentation, more double review and more double checking. They would be fools not to do so. Auditors have advised us that the way in which Clause 494(2) is drawn will also drive them to more extensive testing of immaterial accounting records. What will happen to all these costs? It will lead to increased audit fees, which will mean that this Bill will impose a regulatory burden on businesses of all sizes of a very uncertain amount. In the US the Sarbanes-Oxley Act has resulted in a hike in audit fees for listed companies of between one third and three quarters. Clause 498 could do exactly the same here, which is why the CBI strongly oppose this offence. There are other consequences, which I am sure are all unintended by the Government. The audit firms are already reporting that their most able partners are reluctant to specialise in audits, and a cloud is starting to hang over the recruitment of trainees to the accountancy profession. All of this will drive the brightest and best away from the audit firms. That is not in the interests of UK plc. It will be plain that my preference is for this misconceived offence to be removed from the Bill. I would be delighted if the Minister were to say today that the Government have had a Damascene conversion. At a minimum, however, I hope that the Government will support Amendments Nos. 333 to 335 on the basis that they at least remove the worst effects of the new offence. These amendments replace the words ““knowingly or recklessly”” with ““dishonestly or fraudulently””, and delete the word ““misleading””. It is impossible to find a single stakeholder group outside the Government which in favour of this new offence. However, plenty have publicly or privately voiced their concerns to the Government, as I am sure the Minister will be well aware. So far, it has all fallen on deaf ears. I hope that today will prove different. In its submission, the CBI stated that it is a matter of the utmost importance that clause, as presented in the Bill, does not proceed. It said that, at the very least, it should be amended in line with the detailed amendments that I have just described; and that, without these minimum changes, if the clause is not deleted there is a real danger that the UK economy could be seriously damaged. I beg to move.