Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 460-479)

RICHARD ROGERS, JOHN GREWE, DAVID LAWTON AND DAVID LOWETH

TUESDAY 2 JULY 2002

  460. That is helpful. Have you read The Times article by Miss Lea Paterson, the respected Economics Editor in yesterday's Times?
  (Mr Loweth) Yes.

  461. You have read it. In that—very well sourced, very well respected Economics Editor—the information reported refers to sources close to the Chancellor. Before coming to this Committee you will of course have checked out the contents of this. Is that correct?
  (Mr Loweth) We have made enquiries as to the source of the comments.

  462. Good. That is helpful. I am not suggesting for a minute that you are responsible for what the copywriters say or indeed what Miss Paterson says. What I really want to understand is whether you have briefed yourself on the contents of this report.
  (Mr Loweth) I read it.

  463. You have made enquiries and you have asked whether or not this is in fact Treasury policy. You work at the Treasury, do you not?
  (Mr Loweth) Yes, I do work at the Treasury.

  464. So you have come to this Committee, which holds your Department to account through Parliament, and you have done the necessary research, because I am going to ask you some questions about it.
  (Mr Loweth) Fire away.

  465. It was a question. Please answer it.
  (Mr Loweth) We have made enquiries but I personally do not know the source of the comments.

  466. It seems to me that we have actually got a situation here where very well sourced comments are in the public domain and I want to ask you two questions. First of all, the suggestion that there will be an enforcement of a change every seven years of accountancy firms in terms of audit work; rotation after seven years. Is that what the committee is looking at? Since it is in the public domain, I think you should do this Committee the justice of a reply.
  (Mr Loweth) You ask whether the group is looking at it. The answer is yes, auditor rotation is an issue which is being looked at.

  467. After seven years?
  (Mr Loweth) Sir Howard quoted a backstop of a different period.

  468. No, I am asking about what your committee has looked at. After seven years, yes or no?
  (Mr Loweth) We have looked at the wider issue of the monetary rotation of audit firms and continue to look at that.

  469. After seven years?
  (Mr Loweth) Seven years is one period which has been mentioned.

  470. And intervening with statutory change to effect that. Is that being looked at as well?
  (Mr Loweth) That is on the agenda but no conclusion has been reached.

  471. It is looking favourite here judging by this very well sourced article which you have not bothered to check out.
  (Mr Loweth) I do not know who the source is.

  472. You do not know. You are on the committee but you do not know. This is in the public domain. You come to this Committee and you do not have an answer.
  (Mr Loweth) I am not responsible for writing articles in The Times.

  473. You are responsible for checking material out before you come to a Committee of this House.
  (Mr Loweth) The interim report of the group is in preparation at the moment. A full draft has not yet been completed and no conclusions have been made in that draft.

  474. On the issue of the separation between audit and consultancy work, are you looking at a statutory ban on that? Yes or no? Someone has briefed that the Chancellor thinks this is a strong runner. I do not know if you know or even if you are involved in this decision, but perhaps you could enlighten us. Is a statutory ban one of the favourites as part of these proposals?
  (Mr Loweth) It is one of the issues on the agenda which is being looked at.

  475. May I say that we have a headline here for which neither Treasury Ministers nor Treasury officials are responsible, I grant you that, "Treasury cracks down on auditors", but information has been put out in the public domain the day before this Committee is taking very serious evidence on this and you are not in a position to go into any detail about the two principal pieces of briefing which appear in that report, a statutory requirement that auditors be rotated after seven years, nor the statutory ban on audit and consultancy work being done under the same roof. I really do think you should take back the message to Ministers that either they do not do this kind of thing or you come better briefed. I should like you to take that back to Ministers. Will you confirm that you will do that?
  (Mr Loweth) Yes.

  Mr Cousins: Personally speaking, I should like to acknowledge the difficulties of your position this morning. Perhaps the Committee and yourselves are being reminded that as well as aggressive earnings management, it is possible to have aggressive news management and that both can be a source of difficulty.

Mr Laws

  476. You will be aware that the European Commission has looked into this issue of the independence of statutory auditors recently and issued a paper on 16 May. In that paper it reports a clear majority of Member States consider that mandatory external rotation would at this stage not be a wise decision because there is no evidence that this improves short, medium or long-term audit quality. Can we assume from what you said that the UK was then in a minority when that matter was discussed?
  (Mr Grewe) I was more directly involved in the discussions in Europe. What the recommendation from the Commission is reflecting in that comment is a discussion around the table on the basis of what happened in other Member States. The only country in Europe where there is mandatory rotation at the moment is Italy and the discussion around the table was very much on whether that had been considered to be a success. There were very few Member States who were saying it was a success. That comment you have read out, if I have the reference correctly, is to the effect that there was no great positive support around the table for the proposition that mandatory auditor rotation would improve audit quality.

  477. So the clear majority thought it would not be a wise decision. Did the UK argue that it would be a wise decision?
  (Mr Grewe) No, we did not argue that it would be a wise decision in that context.

  478. Did you take any position on the matter at all?
  (Mr Grewe) This was officials in an advisory group to the Commission technically so it is not a Council working group. We shared some of the doubts about rushing into auditor rotation. You must remember most of the discussion on that as well goes back quite a long time. That document was largely agreed in 2001.

  479. So at that meeting you discussed your doubts about the compulsory rotation which has been trailed in the article to which Mr Ruffley referred a moment ago that the Government may be going for.
  (Mr Grewe) I cannot speak for the article. The arguments around auditor rotation need to be addressed and assessed. Sir Howard Davies offered a view on some of those. There were views from a number of Member States in this advisory group over quite a long period of time. As a result of that it was concluded that it should not be in the recommendation. It is down to the Commission at the end of the day. They took the sense of the Round Table that they should not on a European basis argue for mandatory rotation of audit firms. You will see in there that there are separately provisions on the rotation of audit partners and indeed members of the senior management team.


 
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