Examination of Witnesses (Questions 440-459)|
TUESDAY 2 JULY 2002
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
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.
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.
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 parkedI am not
using that word in any derogatory sensewithin 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
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"
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
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
(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
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
(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 issueCan 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.
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.