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Companies Bill [Lords]

I think that the hon. Lady is confusing the liability rule and the test in the Bill—they are quite different. It is crucial to bear it in mind that the circumstances under which auditors can be sued in tort by third-party victims of negligent auditing are extraordinarily limited. The fundamental problem is the form of loss. Pure economic loss, as it is known in law, can be sued for only when the auditor has assumed responsibility to the victim of the particular negligent act. That usually means that no liability is found because the court thinks that the primary responsibility of the auditor is to the company, not to any third-party victims. The number of cases in which auditors have been found liable of negligence to third parties is very small. There will be little pressure—or less than there is now—on auditors from civil liabilities across tort and contract after the Bill has been passed. That is the context of the introduction of the new crime to try to rebalance the situation. As we have heard, problems can be caused by audits that go wrong—the Enron and Maxwell cases have been raised. We must thus ask what form the new crime should take. The choice is between a knowing and reckless crime, and a dishonest and fraudulent crime. The difference between the two is not that which the hon. Lady described because she fundamentally misunderstands the notion of recklessness. In one crime, the most important thing is the consequences for other people and the defendant’s state of knowledge about those consequences, while causing gain or loss is crucial for the other crime. Given the circumstances in which problems arise in audit cases, it is not especially relevant to worry about whether auditors are dishonest in the sense of wanting to gain for themselves from a situation. The important point is the consequences for other people and whether an auditor unreasonably—subjectively unreasonably— took an unreasonable risk. Given the balance of the measures in the Bill and the fact that pressure on auditors is being reduced in some respects—the civil liability pressure on them is quite low anyway—the form of the crime that has been chosen is acceptable, especially given what the Minister has said on many occasions about the Government’s view of the meaning of the word ““recklessly””. I will resist the Conservative amendments.