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Auditors: EAC Report

My Lords, I enter this debate with great trepidation, not being a financial expert by any means. I do not envy the Minister her task in trying to sum up. I am only going to touch on a few points. I did not read all of the report and did not have a single malt, but I certainly had a good look at it and at the government response. I think we should congratulate the committee on doing a good job. I am indebted to the noble Lord, Lord MacGregor, for the history. I was fascinated by Deloitte's involvement as the first auditor of the Great Western Railway. Knowing Brunel's propensity for raising cash from investors and very rarely giving them any return, I can see that it is a historic problem. Some key points have arisen during this debate, which focused on the banking crisis. Time and time again, although not everybody seems to agree, the question of whether there should be a dialogue between auditors and regulators was raised. The noble Lord, Lord Stewartby, drew to our attention the subtle distinction between regulators and supervisors. I am sure the Minister will deal with that. It seems to me that that is part of solving this difficult problem. Then we got to the nature of the audit and the IFRS and GAAP approaches. We had a debate between box ticking and prudence, and it seemed that most noble Lords erred on the side of prudence. I think it was the noble Lord, Lord MacGregor, who talked about professional scepticism and the feeling that it is important that auditors exercise their judgment. I was also interested in what the noble Lord, Lord Lawson, said when he asserted that there has been a decline in moral standards in the City of London. In fact, he talked about moral bankruptcy. What we saw in 2007 and 2008 was quite clearly the product of a catastrophic failure of governance and the failure of regulators to understand the nature of the systemic risk in the financial system. It may be that we should be taking the opportunity to reassert the existence of the fiduciary duty on those who are responsible for managing the assets of savers and investors to act in their interests, exercise good judgment and be accountable for that judgment. There has been a lot of discussion about the dominance of the big four, but no one has come up with a solution to that particular problem yet. I was exercised again by the noble Lord, Lord Stewartby, reminding us first of all of this 48-year relationship in what I would describe, in a variation on the word oligopoly, as a ““quadropoly”” and secondly that there seemed to be a ““unification of outlook””—I hope I have not paraphrased him—and a ““suspension of critical faculties””. None of the people involved seemed to have recognised the risk. He talked about the Queen's comment that no one saw this train crash coming. Then he referred to the slicing and dicing of products, these financial derivatives that were so complicated yet nevertheless managed to achieve an AAA rating when we knew they were rotten at their core. Clearly there is a need, as I think both the noble Lord, Lord Northbrook, and my noble friend Lord McFall of Alcluith said, for auditors and indeed management to be trained to recognise risk. That is something else I hope the Minister will address. On the question of risk and risk committees, that seemed to be one of the important recommendations, although the report seemed to refer just to banking and finance companies. I was thinking about that and reflecting that there were other companies that took substantial risks, which resulted in the Government footing some of the bill. The one that came to mind was Southern Cross, which became so leveraged that it could not sustain itself, and I recalled the impact the foundering of those care homes had on society as a whole. When it comes to big companies and risk committees, it seems to me that it is not just the banking and finance sectors that should be required to submit to them. I am also indebted to, I think, the noble Lord, Lord Shipley, for reminding us of the human consequences of the Northern Rock crisis, which he saw every time he looked out of his window in Newcastle; and not just for shareholders, but for the employees who suffered as a result. It seems to me that a risk committee and auditors being involved in that is fundamental. I am not sure how we are to resolve the dominance of the big four. I hope that the noble Lord, Lord Northbrook, is wrong that the Competition Commission will not be able to shed any light on that. We had the noble Baroness, Lady Hogg, suggesting—and she was not the only one—that now the Audit Commission is going this should present an opportunity for other auditing companies to emerge. Somebody else suggested that the FSA reports would be a good vehicle to assist in this process. I do not feel competent to comment on that but no doubt the Minister will, although she was given a get-out clause there when the noble Lord, Lord Lawson, said that she could deal with his seven recommendations by letter. I felt the Minister should be eternally grateful for that because they got more and more complex towards the end. I think it was the noble Lord, Lord Lawson, who made the point that no auditors have been sued as a result of the banking crisis. Amazingly, nobody seemed to take any responsibility. There must be something wrong if everybody apparently was exercising their responsibilities and yet we had this financial crisis. As the noble Lord said, nobody at this point in time is willing to accept responsibility. We know that there is plenty of work to be done. When I look through the government response, I do not think that they have got it right in all cases. I gave the example of the question of risk. It is important that all companies should have that. The relationship between the auditors and the risk committee will be important. I look forward to the Minister's response and once again thank the committee for its work.