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Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008

My Lords, I thank the Minister for introducing the regulations. He was lucky to escape having to deal with the monster that is now the Companies Act 2006 when it went through your Lordships' House, but I imagine that in his current role he is becoming all too familiar with its aftermath. I am tempted to say that the regulations are strictly for accountant anoraks. I think that the noble Lord will be aware that I am a chartered accountant by profession, but I assure him that I do not qualify for anorak status. So I will not be undertaking a line-by-line critique of the regulations, for which I am sure the Minister will be grateful. Let me start with some support for some aspects of the regulations. When dealing with the Companies Act 2006, the Government undertook to think small. We fully supported that and I applaud the separation of the reporting requirements for small companies in the regulations on small companies. We think that that is the right approach. I support the raised thresholds in the Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008. I can remember when the small company thresholds were first raised eight or nine years ago. There were predictions that great harm would ensue in various ways but, as far as I am aware, no harm has ever ensued. So it is entirely right that we should continue to increase the thresholds. The Government estimate that this will produce an annual benefit of around £37 million, largely through reduced audit fees, as more companies fall below the threshold for obligatory audit. I was never convinced that the earlier changes produced much in the way of cost savings to companies, and I am not much convinced by these figures. The Government assume that fees called ““audit”” will not be incurred as accountancy or other fees. However, I shall not object to the regulations on the basis that the department has over-egged the savings figure because I do not see audit as a value-adding activity for the majority of small companies below the threshold. I am aware that BERR has carried out consultation on these regulations, as it should; the Explanatory Notes indicate the range of responses that were received. The Institute of Chartered Accountants in England and Wales, which provided me with briefing for today and which responded to the consultation, while broadly content, reported that it has, "““emphasised to BERR that in view of the pace and volume of Companies Act 2006 material published we have not endeavoured to scrutinise each and every aspect””." I do not seek to criticise the department or the Government on this, because I know that it is a difficult job to implement that huge Act in a reasonable timescale. But it is clear that the volume of new material has overwhelmed bodies which are usually expected to contribute at a high level on such drafts and consultations. If the anoraks cannot cope, there is certainly no hope for mere parliamentarians. More seriously, the overwhelming volume raises the issue of unintended consequences. I am sure that the Minister is aware of some of the gremlins that are starting to emerge from the Companies Act where the sheer scale of the Act meant that his officials and outside commentators were stretched and missed things. I believe that the Minister said that one set of regulations contains some corrections to the Companies Act 2006. Issues have arisen outside the accounts parts of the Companies Act 1996. They are not large in number so far, as I understand it. Where they have arisen, however, some have caused genuine problems, so it is quite possible that these orders will have missed something or got something wrong. My purpose in raising this is not to berate the Minister or his officials, but to ask him to confirm that, if issues arise when they are actually translated into practice, the Government stand ready to make further orders if necessary. The Institute of Chartered Accountants has also raised with me the issue of gold-plating. This is not a new point for these regulations, but perpetuates the fact that the existing accounting regulations go beyond those required by EU law. It is often far from clear that, if there ever was a justification for the gold-plating, there continues to be one. The institute would like to see a commitment from BERR to review the accounting requirements of the Act and the regulations, to identify and hopefully eliminate any excessive requirements. I assure the Minister that these Benches would give any order reducing gold-plating the warmest of welcomes. The Government’s response to the consultation on the corporate governance directive was published in July last year. In that document, the Government noted that they would be having discussions with the standard setters to agree what action needs to be taken in respect of UK accounting standards or the changes implemented in these orders for related party disclosures and off-balance-sheet transactions. Will the Minister now say whether any actions are required on UK standards? Will they require additional disclosures? Does that have implications for the relationship between UK accounting standards and international ones? I am sure that the Minister will agree that it would be undesirable for this order to open up new gaps between UK accounting standards and international reporting standards. Lastly, I shall come to the one aspect of these orders that is unnecessary. As the Minister said in his introductory remarks, in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations, the Government have introduced an additional requirement for the remuneration report of listed companies to say how they have taken pay and employment conditions elsewhere in the group into account when setting directors’ pay. This issue was raised during in Committee during the passage of the Companies Bill in 2006. The noble Lord, Lord Lea of Crondall, led the attack on directors’ pay in characteristic style and demanded a number of things, including worker representatives on remuneration committees. The Government wisely resisted that and the other suggestion that they get further involved in remuneration disclosures—for example, on the ratios between directors’ pay and that of the rest of the workforce. We supported them on that in Committee. The new requirement in this order will add nothing to UK plc. It will add nothing of value to shareholders. It might satisfy the anti-corporate pay lobby which exists on the Government's Back Benches. I am afraid that it bears all the hallmarks of a concession made to the Labour Party's paymasters, the trade unions. In fact, the particular issue is not of huge importance. Remuneration committees will devise some boilerplate wording to satisfy the new requirement. My concern is with the principle that the Government are legislating for some half-baked political reason rather than something which will help to create shareholder value. Whatever the new reporting requirement, the task of remuneration committees will still be to set pay for directors in a way that reflects market conditions for them and, more importantly, incentivises them to deliver profits and shareholder value. Of course remuneration committees keep an eye on the prevailing rates of increase for the workforce overall, but directors’ pay is driven primarily by the items that are not basic pay—bonuses, LTIPs, STIFs and so on—which are, in turn, dependent on business success. Anything that interferes in the hugely difficult process of creating an executive pay system which is based on rewarding success is at best a distraction. I end my remarks on this order on the unhappy note that the Government have, in this one respect, let themselves down.