Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 440-459)



  440. Yes, that is what I am saying. So why have you not got that out of the way? If you get that out of the way, if you refer that to the Competition Commission, you can take another five years waiting for them and you would not be criticised for it, would you? It would be the sensible way of going about it. We have the Chairman of the FSA saying that it is a problem, it is probably for Government. You have it on your agenda. Have you taken a decision on it? If not, when will you take it? Will it be part of this interim review?
  (Mr Loweth) We can certainly refer to it in the interim review.

  441. That is a strange tense again. "We can certainly refer to it". I am not asking that with reference to my questions. I am saying that you have been going for five years, you have discussed this, what was your decision?
  (Mr Loweth) We have not been going for five years; the announcement was made at the end of February.

  442. What was your decision on this?
  (Mr Loweth) The decision of the group was that it is a matter for the competition authorities.

  443. Are you going to refer it to them or are you going to suggest referring it to them?
  (Mr Loweth) I think the answer is yes.

  Mr Mudie: Well done. That is more radical than the stuff which is spun in The Times, if you are suggesting you are going to refer the Big Four to the Competition Commission, is it not? We will stick with that. I think we have a conclusion that the joint group is going to refer it to the Competition Commission.

Mr Fallon

  444. It does say in the same report in The Times, "Officials are also determined to shake up the `cosy' relationship". Which officials are these if not you?
  (Mr Loweth) You would have to talk to the Economics Editor of The Times.

  445. It is not you lot?
  (Mr Loweth) I do not know whom he has talked to.

Mr Cousins

  446. Moving on from an article in The Times, there are some very important negotiations going on. We have heard this morning about the Prospectus Directive in Europe, the very important negotiations both within the European Union and more widely about co-ordinating a new range of accountancy standards across the world by 2005. I just wonder who is leading on this within Government and is there a central point which is steering all those negotiations and the British input into them?
  (Mr Rogers) The regulation on international accounting standards is one on which the DTI led for the Government. The Prospectus Directive is one on which the Treasury is leading. I should say that both our departments have a lively interest in this area so we talk a great deal to each other. That is the answer in terms of leadership in relation to those two instruments.

  447. There is no central co-ordinating group which focuses on this whole package of issues and co-ordinates a consistent UK response. They are clearly absolutely vital are they not in negotiations.
  (Mr Lawton) Most of the measures which are going to fall in this area are part of the financial services action plan which is being led from the Treasury, but of course some of the elements are led by other Departments with the DTI being the principal one. In practice we have not found that that allocation of responsibilities has proved a problem in terms of developing a coherent UK line.

  448. Would it be possible for the Committee just to see where these various issues are parked—I am not using that word in any derogatory sense—within the organisations and what the various reporting lines to Ministers are for them? Would that be possible?
  (Mr Lawton) I am sure we could provide a note which sets that out.

  449. The Government is a big commissioner of services from the accountancy firms. Is there any coherent advice when Departments, whoever they may be, are commissioning this work as to issues they ought to consider, issues of competition, issues of probity? Is there any central, cross-government, corporate advice on which people can draw?
  (Mr Loweth) Yes, there is the Office of Government Commerce, which is part of the Treasury group under Peter Gershon. They deal with Government procurement in its widest sense. They have various procurement rules which should be followed with specific reference to audit, accountancy and similar assignments, a number of years ago the Treasury produced a letter in the "Dear Accounting Officer" letter series for Government Departments which set out a number of the issues within those rules for Departments to consider when thinking about taking on accountancy firms for audit accountancy or other assignments.

  450. Let me give you an example of the kind of thing I am thinking of, but I do not necessarily want to dwell on the particular example. The Government commissioned a very well known accounting firm to provide advice for it on tax havens using the example of Belize, when exactly the same accountancy firm was also engaging in business quite overtly in Belize designed to promote the use of Belize as a tax haven. Are there any checks? In this case it so happens that it was the Treasury. Are there any checks you carry out before you commission that kind of work? Due diligence tests to cover these issues of potential conflicts of interest and probity, the integrity of the work you are commissioning. By the way, I am not by any means suggesting that was a problem in this particular case, but you see the general issue.
  (Mr Loweth) I am not familiar with the particular case.

  451. No, let us not dwell on the particular.
  (Mr Loweth) Yes, in general Departments should look at things like potential conflicts of interest in taking this forward and this is set out in that "Dear Accounting Officer" letter.

  452. Could the Committee see this so that we could be reassured that when Government are commissioning accountancy services this kind of due diligence is carried out?
  (Mr Loweth) I could certainly send the letter to the Committee.

  453. Mr Lawton, do you see significant issues of market confidence being involved in the issues that this Committee has been wrestling with and your own internal group has been studying?
  (Mr Lawton) Absolutely. Transparent and believable financial statements are at the heart of what makes a modern market economy function. If there were a risk that savers and investors lost confidence in what companies were telling them about their activities, that would have very serious ramifications both for financial asset prices, but also more generally for financial stability and macro-economic conditions.

  454. Do you think that is a problem at the present time?
  (Mr Lawton) It is clear that there has been reputational damage in certain sectors following first the Enron collapse and now WorldCom and one or two other areas, where companies who appear to have similar characteristics to those which collapsed, see their share prices suffering because investors fear they are adopting similar practices. That is undeniable; we have undeniably seen that. It is less clear that the aggregate has been sufficient to pose a threat to financial stability. I would say not at this point, but it is clearly a risk that we must guard against, which is why of course the Government is taking these very active steps with this co-ordinating group to look at these issues. There must be no sense of complacency about where the UK arrangements currently stand.

  455. In the combined Departments' note to the Committee it says that the Government is ". . . mindful that there is a trade-off to consider between the burden of regulation and the encouragement of wealth creation and innovation". Do you think at the present moment we have that balance right?
  (Mr Lawton) That is precisely what this co-ordinating group and the other initiatives the Government is looking at is precisely designed to try to judge. Whenever there is a serious breakdown, as happened in the US in this instance, it clearly vitally causes the authorities to review their procedures and see whether they need to be changed. If you look at the history of developments in the UK over the last 20 years, much of the change which has been brought in over that period has been in response to failures evidenced by particular instances. You can presumably remember what those instances were.

  456. So the Government is running behind the issues.
  (Mr Lawton) In this case the issues have been triggered by developments in the US. You have probably posed the question to every witness which has appeared before you in your inquiries on this issue—Can Enron happen here?—and most people have given the answer, a very carefully considered answer, that one cannot rule it out. There are reasons for thinking that UK arrangements in relation to key pressure points are significantly different from those in the US, but that does not mean we can be complacent with where they stand. In relation to US developments in terms of accountancy regulation, there could well be circumstances in which other significant financial centres move ahead of where we are in the UK, which does not necessarily mean that the UK arrangements are in themselves deficient, but which ought to cause us to ponder as to why other countries have moved ahead and whether we should match them.

  457. You are not responsible for calling these meetings and I do not for one moment imply that you are. But the Government announced this review in February and a lot of water, some of it mixed with blood, has gone under the bridge since then. This Committee has had two meetings. What sort of signal do you think that gives?
  (Mr Lawton) Remember that the Committee is a co-ordinating group of six or seven bodies, departments, institutions, which when they are not in the meetings of the co-ordinating group are busy progressing their agendas. The meetings of the co-ordinating group have essentially been times where the constituent bodies have been able to debrief on what has happened since the previous meeting. The group has been tasked with delivering an interim report by the summer, which is really by the end of this month. Developments in the last couple of weeks in terms of WorldCom and so on, have made that report all the more relevant and all the more urgent. These are very complex issues covering effectively the entire arrangements for financial disclosure and much of the corporate governance framework. It is very difficult to run over the territory carefully in a very short space of time without feeling confident that you have really bottomed the issues out with the justice that they deserve.

Mr Ruffley

  458. May I just address my questions to Mr Loweth? Many members have made it quite clear, and I hope you are going to take this message back to Ministers, that we think there has been a bit of foot dragging on this in terms of auditor rotation, in terms of the split between consultancy and audit. First of all, could I get your assurance that you will be taking the messages you have heard from this Committee back to Ministers?
  (Mr Loweth) Absolutely.

  459. And the need to get a move on?
  (Mr Loweth) Yes.

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