Company Law Reform Bill [HL]

My Lords, the Professional Oversight Board is an operating body of the Financial Reporting Council and is currently responsible for exercising the Secretary of State’s functions in relation to auditors delegated to it under the 1989 Act. The Government expect that the role of independent supervisor of the Comptroller and Auditor-General will also be carried out by the Professional Oversight Board. The oversight board is accountable—and will report annually—to the Secretary of State and, through him, to Parliament for the exercise of all functions that may be delegated to it under powers in this part and corresponding powers in existing legislation. As I said in Committee, the Government recognise that this is an important issue, to which I am willing to give careful consideration. However, the Bill should not determine the Professional Oversight Board’s status under the Freedom of Information Act. The inclusion of the oversight board in the provisions of the Freedom of Information Act is an issue that requires careful consideration and public consultation, for a number of important reasons. As noble Lords have pointed out, the activities of the oversight board go beyond the scope of this part of the Bill and any delegation order under it. Specifically, the oversight board oversees the activity and publishes the annual report of the Audit Inspection Unit—a new independent inspection unit that reports to the oversight board and which was set up following the Government’s review of the regulatory regime of the accountancy profession in 2003. In Committee, the noble Baroness argued that those reports should be made public in the interests of transparency and decision-usefulness for audit committees. That is a subject worthy of debate and I have listened carefully to the noble Baroness and to the noble Lord, Lord Sharman. However, there are also very good reasons why the steering group that oversaw the implementation of recommendations from the review of the regulatory regime of the accountancy profession felt that publication of the AIU’s reports on individual audits or auditors would be detrimental to the inspection programme—which is, after all, designed to improve firms’ practices and internal processes through constructive dialogue, rather than an adversarial approach—and therefore not in the public interest. There are potentially significant drawbacks to extending the level of public reporting by the AIU to include reporting on individual firms and audits, and those drawbacks must be balanced against the calls for more transparency. We run the risk of reports becoming more legalistic, as the burden of proof required before matters can be made public would arguably increase. The inspection process would become more adversarial: focused on arguments about the finer points of what amounts to compliance, rather than a constructive dialogue focused on best practice. Ultimately there is a real risk that such an approach would drive the inspection regime towards a tick-box approach to compliance. That would be undesirable and could have a detrimental effect on both transparency and audit quality. Furthermore, as a result, there is a risk that public reports might become anodyne and thus of little or no real value to audit committees. I guess that that is a bit like engagement letters, which we discussed the other night.