My Lords, following that speech, I think that the Minister will be delighted to know that we welcome these regulations, and particularly what they seek to achieve. I am a little surprised that, today being 13 June, they come into operation on 17 June—so we are cutting it fine. Nevertheless, the content is important to improving audit, and is another welcome initiative by the EU, further proof of how our membership of the EU enables us to develop rules across the whole of the EU, which will ensure that the public can be assured that company accounts really mean what they say. We particularly
welcome the increased oversight of the auditing of quoted companies, credit and insurance firms, all of which are vital to the health of UK plc. I think even the noble Lord, Lord Hodgson, would agree with that. We especially welcome strengthening the independence of auditors from their clients, including independent members having to form a majority of an audit committee. We strongly welcome the audit firm rotation, with at least 10-yearly public tendering, and an upper limit of 20 years for appointments, and we welcome the restrictions on the supply of non-audit services, including at certain points tax, legal, and internal audit functions.
The questions that I shall pose to the Minister are about the governance of the competent authority—the FRC; the delegation to, and recall back from, an RSB; and the potential exclusion from membership of an accountant from a professional body. First, I recognise the detailed work that the FRC has undertaken in preparing for these regulations, and in preparing itself for 17 June. However, could the Minister confirm that involved in that planning were not only the regulated community but representatives of the wider community, which particularly depends on high-quality auditing—consumers, investors and employees?
That brings me to the second question about the FRC—its future accountability and governance. I note that in its response to our Secondary Legislation Scrutiny Committee, BIS said that the Government and the FRC are likely to review the current accountability framework. Will the Minister confirm that in any such discussions and review the Secretary of State will take seriously the need to include these wider interests of consumer, investor and employee representatives in the governance of the FRC? I should perhaps say that, although it is quite out of date, I used to chair the FRC’s actuarial stakeholder group. This wider input to professional, ethical and enforcement standards remains important, and I would like to build it into any such review of governance.
When we look at BHS or many other examples, we are often left wondering what on earth the auditors did not see or did not choose to report. A proper audit might have led to different outcomes. It is essential that in fulfilling its bigger and, indeed, powerful role, the FRC will work not simply with its regulated community—that is, the audit firms and the RSBs—but with these wider interests who are dependent on high-class auditing for the future of their jobs or their investment or, indeed, for the purchase of goods and services in their role as consumers. Will the Secretary of State consider their interests in looking at future governance?
Secondly, in relation to the delegation from the competent authority to an RSB and the recall of those delegated powers, the regulations define what cannot be delegated from the competent authority—the FRC—but allow the retention of some tasks. They also allow for some tasks to be reclaimed. Will the Minister confirm that, so that the FRC can concentrate on the systemic risks in the audit market, it will leave the other bits of the regulation of audit to the existing regulatory supervisory bodies? I assume that he agrees that the FRC should really concentrate on the bits that only it can do and leave the RSBs to use their experiences and skills where that is appropriate.
That brings me to the part in the draft regulations that state that something can be reclaimed if the FRC considers that the RSB is unable to carry out the task. However, we know nothing about how that would be defined and what the barrier is. Will the Minister outline the governance mechanism and the criteria behind a judgment that an RSB was not able to carry out a task? Will there be transparent criteria for that decision on its competence? Will there be any appeal mechanism against such a judgment?
Thirdly, if I and others have read this correctly, an important area is the potential expulsion by the competent authority—the FRC—of an accountant from his or her professional body. I think the Minister knows that RSBs are concerned about the FRC taking power to exclude members from their professional body. The ICAEW asked whether it really was the intention to allow the FRC to exclude an ICAEW member from membership of the ICAEW or whether it was really simply for the FRC to be able to exclude a member from holding an audit licence issued by their professional body. That is quite a big difference. Our legal friends who are in the House tonight will know the difference between being and not being a member of their professional body. It would be unusual for an outside body to take away their membership of the Law Society or the Bar Council.
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The BIS response on that question to the Secondary Legislation Scrutiny Committee seemed to be that the former was the intention—that the FRC would indeed be able to exclude an auditor from membership of an RSB—because the definition seems to encompass that. It refers to the definition of an auditor in Regulation 2 as being the same as in the Companies Act 2006. If so, that in effect would enable the FRC to strike someone out of their professional body, which is not in the original EU directive’s list of five sanctions that have to be imposed by a competent body; it will be the Government who have added that. I do not like to use the word “gold-plating”, but it comes to mind with regard to the Government adding that when it was not in the original list of five sanctions that a competent authority could impose. It also seems slightly illogical because the five prescribed sanctions under the directive are very much targeted at stopping poor-quality audit work. That is where the FRC’s sanctions should be targeted.
If the FRC is not to be given the power to exclude someone from their own professional body, it is hard to imagine what the regulations mean. A professional body cannot partially expel a member; it cannot expel them just for audit, if you like. Either you are a member of a professional body or you are not. So it sounds as if the FRC is being given that power. It is hard to know why because under the regulations the FRC can already prohibit someone from signing an audit, which really ought to be sufficient. Any question of expulsion would then fall to the professional body. If the FRC found someone who had not been competent as an auditor, I imagine that the professional body would then hold a hearing and decide whether or not they should be expelled. However, the regulations as written seem to preclude that second stage, and seem to allow the FRC to expel someone from a professional body.
I have one more question. First, are the Government confident that the regulations will indeed improve the role of auditors through the increased supervision by retendering that, and that auditors will be more independent of their clients? I hope they are going to say yes, they are confident, but that leads on to how they are going to monitor that to ensure that when we look back in three, four or five years, we can see some improvement. Any comments that the Minister can make on monitoring will be welcome. However, contrary to the earlier speaker, we welcome the thrust and aims of the regulations and we wish them well.