Companies Act 1989 (Delegation) Order 2005

rose to move, That the Grand Committee do report to the House that it has considered the Companies Act 1989 (Delegation) Order 2005. The noble Lord said: I should start by declaring that I am a fellow of the Institute of Chartered Accountants in England and Wales and a former partner of Price Waterhouse—and, one hopes therefore, in due course, a pensioner of PricewaterhouseCoopers. The order delegates the Secretary of State’s statutory functions in relation to auditors under Part   2 of the Companies Act 1989 to the Professional Oversight Board for Accountancy of the Financial Reporting Council—the POBA. It is important that the UK has an effective framework for corporate activity, one that gives confidence to shareholders, business and other stakeholders and ensures that capital markets are efficient and effective. A key part of this framework is better company reporting. The provisions that we introduced in the recent Companies (Audit, Investigations and Community Enterprise) Act 2004 supported better reporting by strengthening accounting and audit regulation. The order continues these reforms by providing for more effective oversight of audit regulation. The main purpose of the audit regulation provisions in Part 2 of the 1989 Act is to ensure that only properly supervised and appropriately qualified people can carry out audits of companies; and that audits are carried out properly, with integrity and a proper degree of independence. The Act achieves this by setting out a statutory scheme for the regulation of auditors, under which the Secretary of State for Trade and Industry recognises certain accountancy bodies as capable of training and supervising auditors. It is essential for the integrity of the UK’s audit regulatory regime that there is proper oversight of the work of accountancy bodies that are recognised to supervise auditors and that audit qualifications are of sufficiently high standard. These oversight functions are currently carried out by the Secretary of State but the 1989 Act also allows the functions to be delegated. This delegation power was originally drafted to allow delegation to a body that was established by the delegation order itself. However, this was too restrictive and the power was never used. We therefore amended the power in Sections 3 to 5 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 to make it more flexible by also permitting delegation to a body that is already in existence. We did this because we believe that delegating the statutory functions will bring a number of benefits. This view was confirmed by respondents to our consultation on the regulatory regime of the accountancy and audit professions. We consider that delegation would result in more effective oversight of audit supervisory bodies and audit qualifications. This is because it would enable the functions to be carried out by a body with audit and professional oversight responsibilities and therefore with a practical understanding of audit issues. The synergies achieved would significantly improve the overall independence of the regulatory regime and the effectiveness of oversight of the supervisory bodies. This brings me to the body that we propose should carry out the delegated functions. The Professional Oversight Board for Accountancy is an operating body of the Financial Reporting Council. It is the successor of the review board of the old Accountancy Foundation, although its remit has been significantly changed. The POBA will have three main roles. As well as exercising the delegated functions, it oversees the new audit inspection unit that has been established to monitor major audit work and also oversees the self-regulatory activities of the major professional accounting bodies in relation to their members. The fact that the POBA has these other audit and professional oversight responsibilities means that it is in a good position to take advantage of the synergies I have mentioned that will improve the effectiveness of the statutory oversight and overall regulatory regime. The board of the POBA is chaired by Sir John Bourn, the Comptroller and Auditor General. It has a lay majority. Its members have experience in companies, investment and regulation. In addition, there are a number of qualified accountants on the board whose expertise includes audit. This is a change from the old review board, the members of which could not be practising accountants, and reflects the new audit-focused responsibilities of the POBA. None of the board members, however, is either currently working as an auditor or employed by an audit firm. The draft order transfers the vast majority of the Secretary of State’s functions to the POBA, the most important of which are those concerned with the recognition of bodies for the supervision of auditors and audit publications. Although the recognition of new bodies is rare, this is not all that the POBA will do. The principal focus of its work will be monitoring the performance of the supervisory bodies and audit qualifications against the criteria for recognition set out in Schedules 11 and 12 to the 1989 Act. There will also be work in respect of the approval of overseas qualifications under Section 33. The draft order also contains a number of requirements on how the POBA should carry out its work. These cover the areas of consultation, record keeping and notification of information to the Secretary of State. For example, Article 4 requires the POBA to consult for at least 12 weeks. Schedule 13 to the 1989 Act also contains a number of requirements on the POBA—in particular, paragraph 10 requires the POBA to report annually to the Secretary of State and requires the Secretary of State to lay that report before Parliament. In addition, the POBA will be bound by the FRC’s regulatory strategy, which was recently agreed with the   Government and which commits to the Better Regulation Task Force principles of proportionality, targeting, consistency, transparency and accountability. The draft order before the Committee today is an important further step in our work on improving the regulatory regime for auditors. Delegation to the POBA will mean more effective oversight of audit supervisory bodies and audit qualifications. It will further strengthen the corporate framework and give confidence that the capital markets are efficient and effective. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the Companies Act 1989 (Delegation) Order 2005 [First Report from the Joint Committee].—(Lord McKenzie of Luton.)