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Company Law Reform Bill [Lords]

When a Government Bill is praised with faint damns by the Conservatives representing the vested interests in business and then even more lavishly by the Liberals in some kind of deteriorated Sharmanese language, we must believe that there is something wrong with it. What is wrong with the Bill is that it is a disappointment because of what it does not do rather than what it does. Indeed, the number of dogs that do not bark in this Bill is a deafening cacophony of examples where action should have been taken but has not been. The Bill is a particular disappointment to those who felt in 1997 that an incoming Labour Government would be able to change the climate in business and ensure that companies were run with the participation of the workers and the stakeholders, and above all, that there was for accountancy and audit a framework of independent regulation along the lines of the Securities and Exchange Commission. Indeed, we promised such a framework in our business manifesto. Somehow, it never materialised. We were told that there would not be time, and that a foundation that was to be set up would fill the bill. We have now said RIP to the foundation; it accomplished nothing and was abolished fairly quickly. We proceeded not to restrict or regulate the activity of auditors but to give them more power and independence. We proceeded to limited liability partnerships. Now in the Bill we proceed further in that direction by giving what amounts to a capping power based on an agreement between the auditor and the company. This is at a time when effective proportionate liability is already being established, as in the Barings case. Deloitte’s liability was cut down from a claim of £1.3 billion to £1.5 million on the grounds that others were more largely responsible for the losses than they were. In effect, we are seeing a dilution of the responsibility, role, power and effectiveness of audit. Audit is now used—particularly by the big four, but this is common over the whole profession—as a kind of foot in the door or market stall from which to sell other services. Companies can get a foot in the door by underbidding on the audit and then they can sell other services, where the profit is made. Most of the profits of the big four now come from the sale of other services—to audit clients; it is a fairly closed market. That means that the audit itself is debased. In order to bring the audit in at a low and competitive price, untrained staff are overworked and standards are not maintained. That way lies disaster, because the audit is not effective. I know of no other field where the limitation of responsibility improves performance. We have high standards for manufacturers and we demand that they live up to them. For audit, we have low standards, which we do not enforce in any case. In the United States, Mr. Stiglitz, a Clinton appointee, argued that when an expensive campaign by the audit firms forced him to reduce auditors’ liability, that led directly to the Enron, WorldCom, Xerox and Global Crossing scandals and all the rest of it. That is what happens. If the standards are lowered and effective enforcement is not provided for, the audit is debased. In that way, we have no idea of the real health of the company. I am worried because the big four have been so much the spoilt darlings of my party in power and have benefited so substantially from us that I am surprised that we have not issued them with a request to affiliate to the party, as the trade unions do. The machinery and regulation—the Financial Reporting Council—that we have been forced to set up in the wake of Enron, after denying that it was necessary for so long, essentially consists of one man and a dog to regulate extremely powerful bodies with a global income of £70 billion and an income in this country of £5 billion. The budget of the FRC is £12 million. That is pathetic compared with the role of the SEC. The FRC cannot regulate the big four effectively. In effect, the big four dominate it, just as they dominate the professional bodies and the DTI—the department of timidity and inaction, as it has sometimes been described—which, in my experience, after long sessions with various Ministers on these issues, always tells us what the big four want it to say. We have the regulation of the big four, by the big four, for the big four, and that is not healthy for the public or for industry. We should not allow the mafia to regulate the mafia, as we have. The Government have been cosseting the big four. Ministers tell us, ““We don’t want competition to be restricted by one of the big four””—the big five, as they were—““collapsing in the same way as Andersen collapsed.”” Andersen collapsed because it was cheating; it was crooked. It provided Enron with all kinds of methods of financial manipulation that should never have been provided in the first place. We are protecting the big four. It rings somewhat hollow in the mouth of a Labour Government to protect those four enormously powerful and wealthy institutions. Last December, KPMG partners got a bonus of £550,000 each. A senior partner at Deloitte is paid £3 million. The money is rolling into the big four accountancy houses. They have benefited richly from a Labour Government, but are they trustworthy? Are they the paragons of virtue that we treat them as? They are part of multinational organisations, which are all based in tax havens and very secretive. We do not know who runs them, who owns them, or what is going on. We find that branches of all four organisations in the United States have been involved in various undesirable practices. KPMG has been fined $456 million in the States for tax evasion that was described as the biggest tax fraud in American history. The head partner confessed to the fraud and thus pulled the rug out from under all the other partners who were contesting the accusations. Ernst and Young was banned for six months from taking on new business for breaking the rules on independence. PricewaterhouseCoopers was asked to use a self-reporting system to give some account of violations of the rules. In one month, there were 8,000 violations. The big four are the bodies that we are trusting, but they have all been sued by federal and state authorities. Here, however, we concede more and more power to them. We make no effort to limit their power or to stop them selling other services to audit clients, which must be a form of collusion between the auditor and chief executive, or certainly the top executives.