Draft Statutory Auditors and Third Country Auditors Regulations 2016

Adam Afriyie Excerpts

Monday 13th June 2016 General Committees

[Kevin Brennan]

It is a great pleasure to serve under your chairmanship for the first time, Mr Turner.

As the Minister said, the regulations are quite complex in many ways, although they have a simple purpose, which is to try to ensure that the standard and quality of auditing improve right across the EU, not just in the UK, for the benefit of all concerned—investors, consumers and, ultimately, people working for businesses and organisations. Having a high quality, independent standard of business auditing is important.

As the Government’s impact assessment indicates, there is clear evidence of market failure in the area due to the misalignment of incentives that can happen in business. There can be conflicts of interest between the purpose of audit, which is to give a clear and honest account of the financial situation of a business, and the need for auditing companies to obtain and maintain their clients. The regulations are a good example.

The Minister said that the measures will have a deregulatory effect, which is interesting because normally each time the Government introduce a new regulation, they say that they have a rule that they must get rid of two other regulations. They never tell us what those two other regulations are but, at this very moment, two regulations are expiring somewhere; they are on their last legs, out of breath and about to die. We do not know what they are because the Government never tell us, but the Minister says that these regulations are actually deregulatory. Whether they are or not is irrelevant. If the measures constitute good regulation, we should have them and if they are bad, we should not. That is the sensible position.

Our position is that, broadly speaking, the measures are an example of good regulation. We broadly welcome what the Government are doing. The Minister is a passionate advocate for our membership of the EU but I suspect that at least half of those Conservative Back Benchers behind her are in favour of leaving the EU. They should think again, because this is a good example of an EU-initiated reform that is of benefit to the United Kingdom and, ultimately, to businesses, consumers and workers in the United Kingdom. The regulations will bring greater consistency and better practice to the auditing of businesses, which is a very positive initiative for the European Union to take.

[Adam Afriyie (Windsor) (Con)]

Will the hon. Gentleman give way?

[Kevin Brennan]

I will in a moment. The regulations will be counted, no doubt, by some Government Members as yet another law made in Brussels. However, I assume that those Members—including, I suspect, the hon. Member for Windsor—are going to vote for yet another law made in Brussels in a few months.

[Adam Afriyie]

I am enjoying the hon. Gentleman’s Eurosceptic baiting. Does he know whether the audit regulations also apply to the auditing of the European Union budget?

[Kevin Brennan]

That is not their intention, as the hon. Gentleman knows. They are a positive contribution from the European Union that I am sure he will welcome if he makes remarks later in our deliberations.

Having got that off my chest, I will move on to ask a few questions of the Minister. Even though we broadly welcome the regulations, the job of Opposition Members here today is to probe the Government a little and to understand whether they are getting this right and whether the implementation is correct. My hon. Friend the Member for Bootle and I have raised concerns about the regulations not allowing for a joint auditing approach that could help smaller auditors. Some of these companies are quite large, even though they are small in the auditing world. Nevertheless, the Government should seriously consider anything that could enhance genuine competition in this area. I hope the Minister will review that, because there is real concern that that is a missed opportunity, as was expounded by Mazars when it got in touch with Committee members.

I want to ask the Minister a few questions about the FRC’s future accountability and governance. I understand that the Government told the Lords Secondary Legislation Scrutiny Committee that the FRC is likely to review the current accountability framework. Will the Minister include wider interests—those of consumers, investors and employee representatives—in the review of the current accountability framework and the FRC’s governance structure? I would be grateful if she clarified whether the Government intend to make it a broader consultation.

As we survey the wreckage of the BHS scandal and other corporate failings, we are left wondering what auditors were actually doing in some of those cases. It is essential, in fulfilling its larger role, that the FRC works with not only audit firms—important as that is—but those with wider interests who depend on there being a high standard and class of auditing for the future of their jobs, their investments or, as consumers, for any products they purchase. Will the Government consider that as governance issues are further discussed, in addition to systems of reporting to the Department and to Parliament?

In the consultation, a number of organisations raised different issues. I want to check the Government’s response to those concerns and find out whether Ministers feel they have adequately responded to them. For example, the Association of Investment Companies said that it understands the Government consider that the disclosure of non-audit services may need to be amended, so that services required by the European Union or national legislation are disclosed under a separate heading from other non-audit services. That is not urgent, as it is not due until accounting periods begin on or after 17 June 2019, but the AIC’s submission recommended that the Government release a further consultation paper in due course to discuss any proposed amendment to the disclosures. Clarity about whether the Government agree with that recommendation would be helpful to the Committee.

In its response, the Chartered Institute of Management Accountants said:

“We would continue to urge that maintaining the approach whereby the audit exemption threshold tracks the small company accounting regime is taken. We believe that consistency with IFRS standards wherever possible supports international business by decreasing the regulatory burden”,

which the Minister says is the intention in the regulations. Again, will consistency with the IFRS standards be adversely affected by the proposed changes?

The Quoted Companies Alliance raised a general concern in the consultation that the impact assessment, which has been published and which I have read,

“does not provide enough detail on what the costs would be for smaller companies in connection to the new rules or what the costs would be for the non-PIEs”—

that is, non-public interest entities—

“to familiarise themselves with the audit committee. We believe that further analysis should be conducted by BIS in this regard.”

Does the Minister feel that enough research has been commissioned on the costs for small companies of familiarising themselves with the proposed changes? If necessary, will she commission further analysis, as proposed by the QCA?

Returning to a point I made earlier, PricewaterhouseCoopers recommends that a separate consultation be considered to build consensus on the appropriate future governance and oversight model for the Financial Reporting Council. As part of that, it wants BIS to consider arrangements for how Parliament and the Department itself might exercise more active oversight of the FRC. Are the Government considering that proposal for a separate consultation?

PricewaterhouseCoopers also warns about a lack of clarity and too much ambiguity in the regulations, saying that the appropriate application of the provisions would not necessarily be clear in all cases. PwC suggests that to achieve the FRC’s objective of enhancing confidence in audit quality, non-binding guidance should be developed by BIS, the FRC and the wider profession to assist audit firms and audit committees in interpreting the provisions. I believe the Minister mentioned guidance. The kind of guidance that PwC referred to would assist shareholders and the FRC, which will have responsibility for monitoring compliance. In the absence of any guidance, there is a risk that inconsistent practices could emerge. The provision of guidance would not undermine the FRC’s clear focus on principles, but might prevent inconsistencies from developing. Does the Minister believe that such guidance should be issued, and are there plans to help or encourage its development between BIS, the FRC and the wider profession?

I have a couple of other questions for the Minister. The ICAEW has concerns relating primarily to the implementation of the new audit regulatory framework and a desire to ensure that the FRC can focus on the systemic risks on which a single competent authority should concentrate, while the recognised supervisory bodies should have sufficient certainty to fulfil their role effectively and efficiently. It is also concerned about the procedures for recognition of statutory auditors from other member states of the European Union. Will the Minister comment on the concerns about those procedures and on the implementation of the new audit regulatory framework?

To conclude, I confirm that it is not our intention to divide the Committee. However, if any of the leavers on the Government Benches are so offended by the fact that this is a European Union initiative that they decide not to support the Minister, we will ride to the rescue.