Draft Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) regulations 2018

Bill Esterson Excerpts

Thursday 10th January 2019 General Committees

[Bill Esterson (Sefton Central) (Lab)]

It is always a pleasure to serve under your chairmanship, Mr Davies. I take the opportunity to wish you and all hon. Members a happy new year.

I noted from the Minister’s opening remarks that we are still very much in the pantomime season. She only had to look behind her to see the truth of that statement as in her opening comments, when she confidently articulated the likelihood of Tuesday’s vote succeeding in the House. I do not want to disabuse her, but I sincerely doubt that that will happen. Nevertheless, here we are. We will play the game and address the regulations before us in the spirit intended, with the assumption that the deal will go through on Tuesday, even though we all know that is not going to happen.

The Minister rightly said how important it is that we have a successful, sustainable and workable audit regulatory framework in the UK after leaving the European Union. I wholeheartedly agree with that sentiment, but her speech and the information before us raises a number of questions, which we can usefully address, regardless of how we leave the European Union and whether the vote goes through on Tuesday.

The Minister mentioned the fact that a transition period in the withdrawal agreement lasts until the end of 2020, and that this avoids a cliff edge in the changes that she described. Can I ask her about the FRC’s confidence in its ability to negotiate new mutual recognition agreements to avoid simply delaying a cliff edge until the end of 2020? What have other countries said on the same subject? My understanding, from talking to the FRC, is that negotiating mutual recognition agreements on those subjects is by no means straightforward—they are extremely complex. I must ask where her confidence comes from, because I could not find in the paperwork before us any kind of clarification or assurance that would lead her to be so confident.

The Minister mentioned the commentary of the Government of the Republic of Ireland. She also mentioned that the number of businesses affected cross-border on the island of Ireland is small. Can she tell us how small, how many businesses are affected and what their turnover is? Similarly, can she say exactly how many businesses overall will be affected by the anticipated changes, and what their turnover is? I note that again—as for similar statutory instruments that we have discussed in the last few months—we have no impact assessment. The last impact assessment we had, which was on accounting standards, suggested that 20,000 businesses were affected. That is a sizeable number, and I would be interested to know whether it is a similar sort of number in this case. Perhaps she can get that figure for us.

As with the accounting standards regulations, the responsibility for oversight moves from the European Commission to the Secretary of State, and is delivered by the Financial Reporting Council. I ask the Minister, as I did last time, what the arrangements are. There are arrangements for scrutiny of the European Commission’s activities, but what arrangements will we have to scrutinise the Secretary of State’s activities and, more importantly, how will resourcing of the FRC be changed to address the additional workload resulting from what she set out in her remarks?

We are discussing regulations for significant additional third-country operation of auditors in the UK, and the regulation of that activity. Those are very important areas. Public confidence in our auditing profession is low, with some very high-profile cases— Carillion springs readily to mind—so anything that undermines or further devalues public confidence in how audits are carried out would be extremely damaging. What assurances can she give that the FRC will be in a position to ensure that no further damage done to the reputation and quality of audit? That is extremely important. Twenty-one months is not a long time. The changes are significant and additional reassurance would be extremely welcome.

I mentioned the Irish Republic. The chartered accountants body in Ireland is calling for negotiation on the mutual recognition of professional qualifications. My understanding is that a significant number of EU citizens are working in our large audit firms, which audit the FTSE 350, for example. What arrangements are being put in place to ensure that their qualifications are recognised and that they will be able to continue auditing businesses of all sizes in this country? The Irish Government want to deliver a bilateral mutual recognition agreement. As some of these issues will not just apply in the Irish Republic, is something similar being suggested by other EU countries, and have those discussions taken place with the Minister’s Department?

The regulations are in the event of the withdrawal agreement going through. However, if the agreement does not go through, what planning has been done on these subjects in the event of no deal? I was heartened to hear the Secretary of State’s comments that he is doing everything in his power to avoid no deal, which he reiterated this morning in response to the very bad news about the job losses at Jaguar Land Rover. Knowing him, I am sure that is true, but in the event of no deal, what would be the impact on the regulations before us? More importantly, what would be the impact on the auditing that is relevant to these regulations? As with so many other parts of our economy and country, no deal would have serious consequences for the audit sector. Arrangements need to be put in place—a point that has also been made in the information that is in front of us, and in the Minister’s opening remarks. To be fair, she set that out very well.

With the exception of a small number of people in this House, we can perhaps all agree that avoiding no deal is extremely important. With these regulations, we have yet another example of why it is so important that we avoid no deal, and that the proper arrangements are put in place to make sure—whether for the audit sector or for many other areas of the economy—we have an agreement that we can all get behind. As I said before, that is not going to be the agreement that the Prime Minister puts forward on Tuesday, but we are certainly going to need to agree something in the coming weeks and months. The prospect of no deal, whether for these regulations or for other areas, is utterly disastrous for us all.