Company Law Reform Bill [HL]

My Lords, Clause 498 creates a new offence for auditors who knowingly or recklessly cause an audit report to include misleading, false or deceptive matters or who knowingly and recklessly omit a statement of one of the shortcomings listed in subsection (2). I will explain in a moment why we believe that the existing wording is better than the proposed changes, but as a number of noble Lords have made clear their opposition to there being any offence at all, let me say a few words on the offence in general. The Government believe that the work of company auditors is of central importance to the working of the economy. Markets rely on good financial information in which they can place confidence, and reliable audit reports are an essential assurance. It is because society has such a strong interest in the work of auditors that we believe it is right that there should be criminal penalties available for auditors who give assurance about a company’s accounts when they know it is not justified, or when they are reckless as to whether it is justified. This is part of the proper working of our financial markets. Auditors who do wrong are already subject to a range of sanctions. They include the general criminal law of theft and fraud, and, for auditors reporting on companies whose shares are traded, Section 397 of the Financial Services and Markets Act 2000 if they knowingly or recklessly make a statement covered by that Act that is misleading, false or deceptive. In addition to criminal penalties, there are the disciplinary procedures of their profession and the threat of civil liability to the company. These new offences apply to cases that are plainly more than negligence, but need not involve fraud or dishonesty. I hope that this addition to the range of sanctions available for errant auditors will cause a few who are tempted, for example, to sign off a report that they know to be wrong to think again and do the right thing. But I do not accept that this addition will of itself transform the behaviour of the vast majority of diligent auditors, so that they will do their jobs less well. If an auditor believes that he may be about to sign off a misleading audit report, it is good auditing that will save him from the commission of an offence, not box-ticking, as has been suggested. The overwhelming majority of auditors are diligent and trustworthy and need not concern themselves about these new offences. But this provision should increase the incentive for each auditor to check for any potential problems in a company’s accounts, and, if there are problems, to reflect them fully in the audit report. It is worth noting here that we are looking at another aspect of this question, which is restriction on liability. I have not yet heard any noble Lord say that if one takes that pressure off it would lead to less box-ticking and a corresponding fall in the fees of auditors. There is symmetry here and trying to have it both ways is not clever. Let me now turn to the specific amendments.