Considered in Grand Committee
The main purpose of this instrument is to complete the implementation of the company reporting directive, directive 2006/46, in relation to corporate governance statements that publicly traded companies publish separately from the directors’ report.
The regulations before the Committee today amend the Companies Act 2006 to make provision for the filing of separate corporate governance statements at Companies House. They also implement the directive’s requirement for an auditor’s report on any separate corporate governance statement. Rules made last year by the Financial Services Authority implemented the requirement for a corporate governance statement and set out what it should contain. As permitted under the directive, the FSA rules give companies the option to prepare a separate corporate governance statement rather than including it in a specific section of the directors’ report. The auditor is required by these regulations to check that information in a separate corporate governance statement on internal control and risk management systems in relation to the financial reporting process and share capital is consistent with the audited financial statements. That is the same check that would be required to be carried out by the auditor if the information formed part of the directors’ report.
We do not believe that these regulations should add to the costs of audit because the test for consistency should not be onerous, and in a number of companies, the audited financial statements may not contain information on internal control and risk management systems.
The regulations also contain some technical accounting amendments. If the noble Lord wishes, I can give a brief description of each of the accounting amendments that remain in Part 3 of the regulations.
As noble Lords will be aware, a version of this instrument was laid before Parliament earlier this year and then withdrawn. That earlier version contained an amendment to Section 413 of the Companies Act 2006 concerning disclosure of loans to directors of banking companies. We have decided to re-lay the draft regulations without that amendment. We want to consider further what form the amendment should take and to conduct a public consultation. I commend these regulations to the Committee. I beg to move.
I thank the Minister once again for introducing these regulations. I do not think that they are particularly controversial so I will not detain your Lordships long. As the name includes the word “audit” I suppose I should disclose once again my membership of the Institute of Chartered Accountants in England and Wales although I have not been a practitioner since at least the early 1980s.
When these regulations were being debated on Monday in another place, I notice that the Liberal Democrat spokesman asked the Minister several technical questions, which he did not fully answer. Perhaps I can leave it to the noble Lord, Lord Razzall, to pursue these matters if he wishes to do so. On these Benches, we are strong supporters of transparency. Transparency is particularly important with company accounts. Although relatively modest in their ambitions, we are supportive of the impetus behind these regulations. When they were debated in another place my honourable friend Oliver Heald asked the Minister why these provisions had taken so long to promulgate. He asked if it was because the Financial Services Authority had taken a very long time to create the rules. The Minister there undertook to make inquiries of the FSA, and it would be helpful to know if there is an answer yet.
I do not propose to repeat the questions that my colleague in another place asked, but I will say what they were. The two questions he asked were: first, whether the Minister will state the accounting impact of the fairly technical changes to realise losses; and, secondly he asked about the transfer and value of pensions. I do not expect the Minister to answer because I understand that the Minister in another place gave an undertaking to write to my colleague with an answer to that, which no doubt we will see in due course. I do not propose to delay the Committee any further; I am happy to support this regulation.
Could I delay the Minister for 10 seconds? I had a look through the corporate governance statements. My noble friend told us when he last carried out work in the audit profession; I go back at least 15 to 20 years before that.
Will the Minister clarify something for me, though not necessarily today? On page 3 under “Part 15 definition of ‘corporate governance statement’”, the noble Lord will find paragraph 6 and “Auditor’s report on separate corporate governance statement”. That is not necessarily his duties, but in Regulation 6 he will find Section 497 of the Companies Act 2006, which, I am afraid, is not part of my bedtime reading. I am fascinated by the auditor’s report on the auditable part of directors’ remuneration, but I am somewhat suspicious. I wonder what aspects of the report and the directors’ remuneration would not be auditable, to put it politely. Perhaps the noble Lord could reassure me—not today, but in writing, because I do not want to delay the Committee any further. I am very grateful for his words of reassurance throughout.
I say to the noble Lord, Lord De Mauley, that with regard to the implementation by the FSA of rules of directive 2006/46, requirements on corporate governance statement, the Government consulted on the implementation of the directive in March 2007. One of the questions asked was whether the requirement for a corporate governance statement should be implemented by rules made by the FSA or should it be prescribed as part of the Companies Act.
The consultation period closed on 1 June 2007. Consultees preferred a continuation of the existing regime for corporate governance statements. The Government therefore decided with the agreement of the FSA that the requirement for a corporate governance statement should be implemented by FSA rules. The FSA needed to consult on its rules, which encompass not only the corporate governance statement but also requirements for audit committees in the Audit Directive 2006/43/EC. The FSA’s consultation document was published in December 2007; the consultation period closed on 20 March 2008. Due to that need to consult and the length of the consultation period, the FSA was not able to make the rules by the common commencement date of 6 April 2008. They were made, however, within the deadline for implementation of the directive.
In answer to his technical questions, I assure the noble Lord, Lord Razzall, that a letter has been placed in the Libraries of both Houses. The noble Lord, Lord Lyell, asked about the non-auditable parts of directors’ remuneration—the parts that the auditors cannot reach. No doubt, we will provide a Written Answer.
I am grateful to noble Lords for their contributions to this debate and for their succinctness. The regulations make some modest changes to the law which are needed to complete our exercise of the member state option under the EU directive permitting publicly traded companies to prepare a separate corporate governance statement should they so wish. I hope that, on this basis, noble Lords will support the regulations.
Committee adjourned at 4.36 pm.