Audit and Corporate Governance
Lord Sikka Excerpts(3 years, 1 month ago)
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Lord Callanan (Con)
I know that my noble friend is passionate about not imposing new burdens on companies. I share her desire, but we think that the current regime could be improved. There will be a 16-week consultation period, so we will take the time to get these proposals right, but I think that some worthwhile improvements could be made without damaging competitiveness.
Lord Sikka (Lab) [V]
My Lords, I have two points. First, in the absence of a central enforcer of company law, improvement in corporate governance is unlikely. Secondly, in the absence of tougher auditor liability and accountability, there are not sufficient pressure points to secure improvements in audit quality. When will the Government realise that their appeasement of big corporations and accounting firms is actually a recipe for more scandals?
Lord Callanan (Con)
We are not appeasing the big accountancy firms; many of them do not like some of our proposals. These are worthwhile reforms that will improve the market and help to bring about the state of affairs that the noble Lord refers to.
Financial Reporting Council (Miscellaneous Provisions) Order 2021
Lord Sikka Excerpts(3 years, 1 month ago)
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Lord Sikka (Lab) [V]
My Lords, I will make my comments in two parts. I will comment first on the legislative order and, secondly, taking my suit from the Minister, say a few words about the White Paper as well. On the legislative order, the Financial Reporting Council has really led a shadowy existence for far too long. Since 2004, the FRC has had the status of a public body and should therefore have been subjected to the full application of the freedom of information legislation, but it was not.
On 29 June 2018, the Department for Business, Energy and Industrial Strategy told the House of Commons, in a Written Answer:
“All our regulatory bodies are subject to the Freedom of Information Act 2000 with the exception of the Financial Reporting Council which is subject to the Act for some but not all of its functions.”
Over the years, I have put in many freedom of information requests to the FRC, some relating to the secondment of staff from the big four accounting firms, its complaints procedures and the quality of investigations. Every one of them was rejected so it is good, to some extent, to see a modicum of openness. I assure the Minister that I shall soon test this new-found openness and see how far it goes. Nevertheless, I have a number of concerns about the legislative order and, more importantly, its omissions.
First, despite the government claim, which I just cited, that all our regulatory bodies are subject to the Freedom of Information Act 2000, why are the four accountancy trade associations acting as recognised supervisory bodies not within the scope of freedom of information legislation? The four trade associations are the Association of Chartered Certified Accountants, the Chartered Accountants Ireland, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland. They carry out public functions and are named as regulators in the Companies Act 2006. They licence, monitor and discipline auditors. Their role is similar that of the FRC. So why are they totally exempt from freedom of information requirements?
Secondly, Article 4(1)(c) of the order refers to “accounting standards” but no mention is made of “auditing standards”, which are also issued by the FRC. I hope the Minister can shed some light on that omission.
Thirdly, Article 4(1)(m) of the order refers to:
“providing independent oversight of the regulation of the accountancy profession”.
No further details are anywhere to be seen. Is it reasonable to assume that in the Government’s view the FRC is now responsible for ensuring good governance of all accountancy trade associations?
Fourthly, despite claims of openness, or advances in openness, the FRC, which, as was mentioned, will soon morph into ARGA, has in fact regressed in some areas. Let me provide two examples. The first is its press release dated 2 April 2020 with the headline
“Sanctions against KPMG and a partner”
and the second is dated 6 November 2020 and headed
“Sanctions against Deloitte and a partner”.
In both cases, the firm delivering the failed audit has been named, but unlike the past practice, the identity of the company receiving the poor audit has been concealed. Why is that? Do the stakeholders of those companies not deserve to know that dud audits have been delivered? Armed with that information they can question auditors and directors, and make informed decisions about auditor appointment, fees, investment, credit, reliance on the audited information and much more. The FRC’s regression is not compatible with the Government’s claim of new openness at the FRC.
Fifthly, the so-called openness at the FRC is not accompanied by open board meetings. I am sure the Minister would acknowledge that the FRC does not discuss troop movements or the position of spy satellites, so this obsession with secrecy and keeping the people out is hard to understand. In the US, the Financial Accounting Standards Board holds all its meetings in the open and makes full minutes and background papers available to any interested party. The same is also true of the Swedish Accounting Standards Board. As we know, openness always promotes public confidence and accountability, so why are the Government afraid of writing in open board meetings in the current legislative draft or in some other ways? Why is the UK to be a laggard in such matters?
Sixthly, the FRC publishes its board minutes, but they are sanitised and have virtually no information content—I have seen them. Paradoxically, individuals sitting on its board and various committees come from corporations and big law and accounting firms and have full access to all inside information. It must inevitably inform their worldviews and policy options discussed within their organisations. Yet the other stakeholders affected by the FRC’s decisions and policy choices do not have access to the same information and must therefore be disadvantaged in any negotiations, lobbying and framing of accounting and auditing rules. Why are the Government content with this kind of information apartheid? It is almost legalised.
Seventh, the legislative order before us is full of words such as “independent” and I struggle to know what the Government mean. The FRC is not independent of corporations and big accounting firms as their personnel have colonised the FRC board, committees, working parties and its world views. Corporate thinking informs the FRC’s operation and, inevitably, there is cognitive capture. Neither is the FRC independent of the International Accounting Standards Board, which issues international accounting standards that in many cases are simply rubber stamped by the FRC. I am sure the Minster is aware that the IASB is an offshoot of the IFRS Foundation, which is registered in the US state of Delaware for the sole reason of avoiding taxes on all the income and charitable donations it receives. Is that a good way to be setting accounting standards, with somebody holed up in Delaware and keen to avoid taxes? That is not really appropriate.
It would be helpful to know what exactly the FRC is independent of. What are the tests the Government will specify we should apply to test whether the FRC passes those marks? It would also be helpful for the Minister to tell us whether any part of the FRC’s operations are not subject to the Freedom of Information Act and why they are excluded.
I will say a few words about the White Paper. For the last 20 years, the auditing industry has led a charmed life. Most of the urgently needed reforms have been postponed. The White Paper does not really tackle any of the fundamental issues. I am sure the Minister is aware that the FRC has said that up to 80% of the audits in its samples are deficient. Can you imagine if any producer of cars, aeroplanes, medicines or food had an output that was 80% deficient? That industry would be put out of business and taken into special care, not allowed to play its selfish games.
In my view, the White Paper misses the fundamental points and it does not address those things. In the White Paper there is a memorable line about share- holders being company owners. Can the Minister refer me to any economic theory, legal theory, or anything in the Companies Act which says that shareholders are owners of companies? Shareholders may have controlling rights, but they have absolutely no ownership; that is something entirely different. For the last 100 years we have been relying on shareholders. Where exactly has that got us?
I was an adviser to the Work and Pensions Committee for the investigation of BHS. Shareholders appointed the auditors and everybody else, and we all know what the outcome was. In many ways the Government are reciting the past failures and repeating the past mistakes—
Baroness Sanderson of Welton (Con)
Can I remind the noble Lord of the 10-minute speaking limit?
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021
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Lord Sikka (Lab) [V]
My Lords, I am very grateful to the Minister for the explanation of the regulations. It is also a great pleasure to follow the noble Baroness, Lady Neville-Rolfe, and to add to some of the comments that she has made. I am sure that many businesses welcome the extension of what were supposed to be temporary measures, especially as they struggle to re-establish themselves. At the same time, some may well resent it, because they may argue that it constrains their ability to recover money from some businesses.
Overall, I am inclined to support what the Minister has announced. Nevertheless some industries, such as aviation, hospitality and event management, will need support beyond the period from 2022, and it would be helpful for the Government to consider the specific circumstances of various industries and businesses in considering what happens over the next three to four years. The Government need a transitional plan, as it would give businesses some certainty about what is coming their way in the next two to three years. Many businesses will still face a cliff edge in that, when these measures come to an end, floodgates to insolvency will open. Those unable to pay landlords or suppliers will definitely face an uncertain future so transitional help, focusing on their particular problems, would be helpful.
The Government could and should have done more; they could have increased the survival chances of businesses by reforming insolvency practices and ensuring that unsecured creditors receive a fair share of the debts owed to them, but they have refused to act on that front. The high street is already reeling from bankruptcies. Bonmarché, Cath Kidston, Comet, Flybe, Maplin, Monarch Airlines, HMV, House of Fraser, Payless shoes and Toys“R”Us are just some of the victims of asset-stripping by private equity. Their ranks are now swelled by Debenhams. Private equity invests little in equity and usually installs itself as a secured creditor, which means that it needs to be paid before unsecured creditors can recover anything from the proceeds of the sale of a bankrupt business’s assets. These insolvency arrangements have no economic or moral logic from a national perspective and are based on medieval practices that prioritise the interests of lenders over all other creditors. The Government could and should have investigated the predatory practices of private equity to create breathing space for supply-chain creditors, but they have not done so.
The survival of suppliers is also affected by the collapse of the Arcadia empire, and darker shadows loom on Liberty Steel and others. Most supply-chain creditors will be lucky to get a few pennies in the pound of the debts owed to them, and this will hit their survival chances, just when they need all the resources that they can muster. There is no logic in such insolvency arrangements, whereby the risks of insolvency are not fairly shared. The current arrangements throw a few crumbs to unsecured creditors and strangle many SMEs, which often rely on relatively few customers and stand to recover next to nothing.
The Government should have used the last year to reconstruct insolvency practices, but they did not. Last year, as the Minister knows, Labour put forward proposals for equitable sharing of insolvency risks, which would have ensured that unsecured creditors recovered substantial sums from their bankrupt customers and thus improved their chances of survival. I hope that the Government can still revisit those proposals, because they are worthy of consideration. The suppliers’ chances of survival are further hampered by the Government’s failure to effectively regulate the insolvency industry. Higher insolvency fees and longer time taken by insolvency practitioners to finalise the bankruptcy inevitably harms unsecured creditors.
By January 2021, PricewaterhouseCoopers, acting as special managers assisting the official receiver in the Carillion liquidation, had already collected nearly £60 million in fees. The London Capital & Finance administrators have collected nearly £8 million in fees. I have personally seen invoices from big accounting firms where their partners act as insolvency practitioners; they are charging themselves out at a rate of some £1,500 an hour. There is absolutely no justification whatever for this. Such huge fees directly deplete the amount available to unsecured creditors, but the Government have done nothing to curb such predatory practices. I am not aware of a single insolvency regulator who has even asked any questions about such high fees.
I am sure that the Minister will put up a spirited defence of the Government’s action on the insolvency front. However, they are not even curious about the welfare of unsecured creditors. On 14 January 2021, I asked the Government:
“how much unsecured creditors have been unable to recover from the bankruptcy of their corporate customers”.
On 28 January, the reply was:
“This information is not collated and held centrally.”
The Government have no idea of the size of losses faced by supply chain creditors, far less have they been helping them.
There is no control on insolvency processes, and practitioners can continue to milk distressed businesses for years. On 27 October 2020, the Minister informed me that 7,962 corporate liquidations were still open within five to nine years of commencement; that 3,642 incomplete liquidations dated between 10 and 14 years; and that 14,328 were incomplete even after 15 years. Do the Government know that these prolonged insolvencies destroy supply chains, since the cost of these huge fees is directly borne by unsecured creditors? Secured creditors do not bear a single penny of the cost of the insolvency practitioner. I urge the Government to help unsecured creditors by reforming insolvency practices and clamping down on rapacious practices, thus giving hard-pressed businesses, especially small businesses, a good chance of survival.
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
The noble Baroness, Lady McIntosh of Pickering has withdrawn, so I now call the noble Lord, Lord Lennie.
Retail Sector: Unemployment
Lord Sikka Excerpts(3 years, 3 months ago)
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Lord Callanan (Con)
The noble Baroness is correct, sadly. We recognise that many of those losing their jobs in this sector are likely to be younger, low-skilled female workers, hence the importance of higher universal credit payments, the Kickstart programme and JETS, and, from January 2021, the Job Finding Support service. We have temporarily increased universal credit by around £1,000 a year and are doubling the number of work coaches to 27,000 in 2021.
Lord Sikka (Lab) [V]
The loss of 200,000 retail jobs is terrible news for many, especially young people. Does the Minister agree that the Government need to take immediate, practical steps to help, such as reducing the rate of VAT on sales from bricks-and-mortar shops and lowering the state pension age to enable many to retire and vacate jobs for younger people?
Lord Callanan (Con)
The noble Lord will understand that I cannot give commitments on VAT and tax changes. They are rightly a matter for the Chancellor. We need to do all we can to assist the sector in these difficult times. I have outlined some of the measures we are taking to support retail. We will continue to do that and will keep all future policies under review to see what we can do to help.
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020
Lord Sikka Excerpts(3 years, 3 months ago)
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Lord Sikka (Lab) [V]
My Lords, I thank the noble Lord, Lord Callanan, for his speech. I am certain that there is widespread support for extending the duration of temporary measures to protect businesses from insolvency proceedings during this Covid emergency. However, these measures cannot be extended indefinitely and businesses face the prospect of a cliff edge, leading to a flood of insolvencies, job losses and damage to the supply chain. When the temporary prohibition on issuing statutory demands and winding-up petitions ends, many businesses will face pressure to pay creditors. Failure to pay will lead inevitably to further insolvencies.
The Government need to bring forward plans for long-term financial support to help businesses to navigate the post-Covid era. Many small businesses are particularly affected; the Federation of Small Businesses estimates that 250,000 SMEs are at risk. They cannot easily get trade credit insurance and will also be hard hit by the bankruptcy of their major corporate customers.
As part of the support for businesses, the Government also need to reform insolvency laws. These enable secured creditors, usually financial institutions, to walk away with most of the proceeds from the sale of a bankrupt business’s assets and leave very little for unsecured creditors. Such arrangements ensure that the risks of insolvency are not equitably shared between secured and unsecured creditors. There is no economic or moral justification for this. Banks and financial institutions hold diversified portfolios and therefore have a greater capacity to manage risks. In contrast, SMEs rely on comparatively fewer customers and have a much lower capacity to absorb risks arising from the bankruptcy of their major customers. A risk management perspective would recommend changes in insolvency laws.
Before Covid, unsecured creditors were taking a hit of around £4 billion a year and that is now bound to increase. This can be mitigated by reforming the risk-sharing arrangements. I would suggest that 30% to 40% of the proceeds from the sale of a bankrupt business’s assets should be ring-fenced for distribution to unsecured creditors, thus ensuring that they make a substantial recovery which would enable them to survive.
We also need to look at the current regulatory arrangements for the world of insolvency. Too many insolvencies last far too long and enable insolvency practitioners to milk the liquidations. Higher fees for insolvency practitioners would reduce the amounts that are available to unsecured creditors.
On 27 October, in response to a Written Question, I was told that there are 14,328 liquidations of businesses that began 15 years ago but are still not completed. None of the insolvency regulators show any concern for such a state of affairs. Meanwhile, insolvency practitioners continue to collect mega fees. Here are some examples. For Comet’s liquidation, Deloitte was charging out its partners at a rate of £1,160 an hour, and the cheapest grade of labour was charged out at £370 an hour. PricewaterhouseCoopers is a special manager assisting the official receiver in the liquidation of Carillion. It expects to make £100 million from fees, and the partners are being charged out at a rate of £1,156 an hour. At the House of Fraser administration, Ernst & Young is charging out its partners at a rate of £1,650 an hour, and the trainees are being charged out at £250 an hour. KPMG has recently been appointed administrator to Intu Properties, and its partners are being charged out at £920 an hour. Such charges harm the interests of unsecured creditors. The Government must really take steps to end this abuse.
To sum up, can the Government provide long-term plans to support businesses in the period after the end of the current temporary measures? I hope the Minister agrees that the unsecured creditors deserve a better deal. This can be done by ring-fencing some of the proceeds from the sale of the bankrupt businesses and by ending the excessive fees charged by insolvency practitioners.
Covid-19: Small Businesses
Lord Sikka Excerpts(3 years, 3 months ago)
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Lord Callanan (Con)
I agree with my noble friend that, as soon as we possibly can, we need to lift these restrictions to get the economy moving again, but we are indeed facing a public health emergency at the moment, as he has said.
Lord Sikka (Lab) [V]
My Lords, SMEs are also destroyed by unfair insolvency laws, which enable secured creditors to walk away with most of the proceeds from the sale of a bankrupt business’s assets, leaving next to nothing for unsecured creditors, including SMEs. The Carillion bankruptcy affected nearly 30,000 SMEs. Will the Government consider legislating so that SMEs have a higher priority in corporate bankruptcies?
Lord Callanan (Con)
The noble Lord makes an important point, and, of course, we constantly review all these numbers. We last looked at the insolvency provisions in recent legislation, and it is always difficult to get the balance between different creditors right when there are insufficient funds available.