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Volume 124: debated on Thursday 10 December 1987

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To ask the Chancellor of the Duchy of Lancaster what proposals he has for implementing the European Commission eighth company law directive on the regulation of auditors.

I have today placed in the Library of the House a note setting out the basis on which the Government intend to implement this directive. This follows detailed consultation. Legislation will be included in the next Companies Bill.The main points are as follows: the directive governs the supervision of auditors engaged on the audit of the annual accounts of companies where such audit is required by company law. Our intention is that the overall responsibility for this supervision should be exercised by the Secretary of State, but the detailed implementation will be entrusted to recognised professional bodies. However, the legislation will be designed to enable him to transfer these responsibilities to a general auditing council or some other supervisory body, if, in due course, he considers it appropriate to do so. Under the proposed system, the ability to practise as an auditor will depend on the fulfilment of appropriate education and training requirements to be administered by recognised professional bodies according to standards approved by the Secretary of State, or on individual approval by the Secretary of State. In addition, practising auditors, including those individually approved by the Secretary of State, should be designated "registered auditors" and subject to detailed supervision by a body approved for that purpose by the Secretary of State. Any body seeking approval as a monitoring body should have to demonstrate the adequacy of its rules and procedures against broad criteria set out in the legislation.We propose to keep statutory provisions on the edcuation and training requirements for the recognition of professional qualifications to the minimum necessary for compliance with the Directive. This will give the recognised bodies the maximum flexibility to develop new courses and make other adjustments in the light of changing circumstances.In fulfilling the directive's requirement to safeguard the independence of auditors, we believe that the emphasis should be on strengthening professional guidance rather than statutory requirements. However, the Secretary of State will need to be satisfied that the guidance is adequate before approving a monitoring body. We also intend that companies other than small companies should have to disclose fees paid to their auditors for non-audit services.We also propose to remove the existing statutory prohibition on corporate auditors. The basis on which incorporation should be allowed poses some questions and I welcome the recent announcement that representatives of the accounting profession are setting up a joint working party to consider them. We shall want to take account of their conclusions before putting forward detailed proposals. I do not believe, however, that the need to safeguard independence necessarily rules out outside ownership of shares. I hope, therefore, that the working group will be able to reach agreement on ways of safeguarding independence while allowing an appropriate degree of flexibility in the way incorporation is permitted.