Audit, Reporting and Governance Authority

Question

14:47:00

Asked by

To ask His Majesty’s Government whether the legislation establishing the Audit, Reporting and Governance Authority will account for the principle of separation of powers regarding its standards-setting and enforcement functions by having independent committees for each area.

My Lords, as announced in the King’s Speech, the Government intend to publish the draft audit reform and corporate governance Bill in due course. The Government’s aim is to modernise the Financial Reporting Council’s framework for standard-setting and to uphold the principle of the separation of powers in the establishment of the audit, reporting and governance authority. It would not be appropriate to anticipate the contents of the Bill in advance of its publication. However, the Government agree with the noble Baroness, Lady Bowles, that transparency and due process should be at the forefront of standard-setting processes.

I thank the Minister—I think that his answer was yes. The Takeover Panel had to separate itself as a result of the Human Rights Act 1998, and it is long overdue in the field of audit and accounting. Will it be clear in the legislation that the enforcement side should not rely on the same historic legal advice as the standards side on a “true and fair” view? The FRC has relied on controversial legacy legal opinions on a “true and fair” view that were obtained when the big four had significant sway over the FRC and elsewhere. We need to know that ARGA should mean the end of systemic vested interests, including benign vested interests and groupthink, and marking its own homework.

My Lords, the Financial Reporting Council has put in place transparent procedures which ensure a separation between decision-making on standards and enforcement. The draft Bill will continue the transition of the FRC into a revamped regulator—ARGA—with powers for the setting of standards, including on accounting, reporting and audit. Decisions to open an investigation under FRC enforcement schemes are taken by the Conduct Committee. Once an investigation has opened, case decisions are taken by the FRC executive council or its deputies based on the recommendation from the independent case examiner, which plays no part in standard-setting.

My Lords, it is fundamentally wrong that a body funded and populated by corporate and audit industry interests makes the rules which affect distribution of income and risks. Its cognitive capture means that Whitehall reforms are neglected. To take just one example, the audit partner of PwC spent just two hours on the audit of BHS. There are still no disclosures about the audit time budgets, composition of audit teams or lists of questions asked by auditors. Why is the Minister not willing to seek the immediate disclosure of these facts?

I thank my noble friend for the question. As we know, the UK has certain accounting standards, such as GAAP and the international financial reporting standards. These standards are non-mandatory. However, the Companies Act is very clear that a true and fair view of the accounts must be stated. That is a very high standard, but it is up to the individual or the committee of the company as to what should be reported in the accounts. This new Bill will set much higher standards for companies to abide by.

My Lords, can the Government provide assurances that the powers granted to ARGA will not create an overly burdensome regulatory environment that discourages investment in the UK?

The noble Lord makes a very good point. At the end of the day, we would like any regulator to perform the work but not to overburden SMEs or, for that matter, to stifle growth, which is the Government’s number one priority.

My Lords, the creation of a new auditing authority was first mooted in 2018 under the last Government. Despite numerous statements that this is a priority, firm after firm has collapsed, raising new concerns about the adequacy of the UK’s auditing arrangements. While it is of course important that we get this right, can my noble friend reassure your Lordships’ House that we will not have to wait another seven years before we make progress?

My Lords, my noble friend is right to point out the length of time that it has taken to reach this point. Let us not forget that the collapse of BHS and Carillion caused havoc in the country. It was a wake-up call, when 11,000 people lost their jobs in BHS and 30,000 people lost their jobs in Carillion. Improving auditing standards is an important step, not least to better inform lending and investment decisions. I hope my noble friend will take heart from the fact that this was included in our manifesto commitment and in our first King’s Speech. We look forward to the proposals receiving pre-legislative scrutiny in due course.

My Lords, I draw attention to my declaration of interests. I thank my noble friend for his answers to the questions, but my heart sinks when he talks about presenting the Bill “in due course” and when he will not even tell us what is actually going to be in it. One area that may be covered in the Bill is the regulation of the actuarial profession. At the moment, we have planning blight. Will he please expedite the process?

I thank my noble friend for that question and for all the work he has done in the actuarial sector itself. Let us not get ahead of ourselves. The Government are committed to publishing a draft Bill in this Session of Parliament. Until such time, it is important that we do not pre-empt the contents of the Bill.

My Lords, the Chancellor has written to other regulators encouraging them to look at ways to help the economy to grow and be more competitive. What are the plans in this area for encouraging growth and competitiveness?

The noble Baroness makes a very good point. It is important that, whichever regulator we have, it is effective. Currently, the regulator has some weaknesses in its powers; the new regulator will, I hope, address those weaknesses. It is important that, when anyone looks at the accounts, investors have confidence to make investment decisions. That will drive business and growth.

My Lords, late last year, the chief executive of the Financial Reporting Council said of the transition to an audit, reporting and governance authority: “It’s long overdue. It’s the right thing to do. It may sound a bit boring and bureaucratic, but it’s really important”. Given the highly technical nature of this area, publishing a draft Bill makes sense. However, can the Minister confirm that this process is being used for genuine scrutiny and not to kick proposals into the long grass?

I thank my noble friend for his question. It is true that these reforms are long overdue, which is why this Government are working on them at pace. My noble friend will understand that I cannot pre-empt any pre-legislative scrutiny process for either the content of the draft Bill or the timing of its introduction. However, we are fully committed to delivering these changes and doing so in a way that ensures that parliamentarians, businesses and wider stakeholders are part of the journey.

My Lords, the Minister set out some of the recent scandals that have occurred. Can he tell us how many people have gone to jail over those scandals and whether the proposed legislation will hold these people to account?

My noble friend makes a very important point. I do not know whether anyone has been sent to jail, but I will find out and write to him. It is important that noble Lords recognise that the current regulator has limited powers. The new regulator will have additional powers to ensure that directors are held responsible for their fiduciary duties. It is important that we get it right and that we consult widely, but, at the same time, we do not want to overburden SMEs and other businesses with the new regulator. We are taking our time to make sure that we get it right.