Companies (Audit, Investigations and Community Enterprise) Bill Second Reading

Speech by Brian Cotter MP, Shadow Small Business Minister delivered to House of Commons on Tue 7th Sep 2004

Thomas Edison, the famous inventor, once said that "opportunity is missed by most people because it is dressed in overalls and looks like work."

When it comes to the question of reforming company law, I would certainly not accuse the Government or being work shy -an enormous amount of consultation has already been completed in this area and yet various proposals are still waiting to be enacted.

Thus, for whatever reason, this Bill represents a major missed opportunity to carry out the extensive reform and simplification of the law that is so desperately needed - a point that was made eloquently by my friend Lord Sharman in the other place, when he criticised the Government for nibbling away at the edges of company law reform.

As he mentioned then - we have had the Enterprise Bill, dealing with questions of bankruptcy and insolvency. Now we have this latest Bill which amounts to 17 clauses on the reform of regulation, five clauses on improving company investigations and 37 clauses establishing community interest companies.

But what of other areas that have yet to be addressed? - We are still awaiting draft regulations to require companies to produce an annual operating and financial review (OFR).

This continued piecemeal approach to company law is causing immense frustration. Earlier last month, the Chief Executive of the Institute of Chartered Accountants, Eric Anstee told the Financial Times that without action on both auditor and director liability, the DTI's initiative on the OFR is "doomed to failure."

Let me deal with the statement this morning which announced the Government view on director and auditor liability. I will come to auditors later. But let me give one cheer to the announcement that companies will be allowed to indemnify directors in terms of legal costs.

That is a step forward. But can the Secretary of State explain why the Government rejected the Institute of Directors proposal to cap director liability?

The prospect for company directors is therefore a bleak one and for the near future it is evident that they will have no choice but to continue wading through successive layers of company law that have often become unfathomable as a result of continual change and amendment.

A written ministerial statement made by the Secretary of State on 26th May 2004 did announce new proposals to try and deal with this problem, promising the introduction of "new types of legislative power enabling company law in future to be amended by a special form of secondary legislation" - thus making it easier to keep company law updated over time.

The Secretary of State assures us that these new powers will be "introduced as part of the major new Companies Bill…… as soon as Parliamentary time allows" - yet here we are scrutinising another Companies Bill in the meantime!!!!

Thus, on behalf of all the company directors that are currently frustrated by the plethora of company law regulations, the first thing I would ask the Minister is, how much longer will they have to wait for the major reform and simplification that is promised?

Turning to the specific parts of the Bill and Liberal Democrat reactions

Although the Bill is a missed opportunity, there are still merits within it which the Liberal Democrats wish to support.

First part of the Bill - Auditing and investigation standards

The first part of the Bill aims to improve public confidence in companies and financial markets by strengthening the system of regulating auditors, tightening up the enforcement of accounting and reporting requirements and strengthening the company investigations regime.

This is very much welcome in light of the recent Enron and Parmalat cases and I know that my friend, Lord Sharman was able to offer his expertise to strengthen the Bill further in regard to the provisions relating to auditing and investigations.

Indeed, he has applied his expertise so rigorously that we are relatively content with this part of the Bill.

We are all aware through the pages of the Financial Times of the arguments that have been raging between the Treasury and the DTI in regard to the issue of whether a cap should be introduced to limit auditor liability. Today we found out who won that particular argument!

Our concern, as a party, is that the free market should be allowed to operate in this area, where we currently have a unique situation in which statutory intervention will not allow an auditor and a company to freely negotiate the liability to be borne by either party.

We know that the auditors, lawyers and the business community have questioned the Office of Fair Trading's conclusion that a cap on liability would be competitively neutral, claiming that the OFT's report is a flawed one.

At face value, these claims carry some weight given that in Germany, where a cap is in existence, 67 of the top 300 quoted companies are audited outside the Big Four and the story is similar in countries such as Greece and Austria. In contrast, all of the FTSE 100 companies and 248 of the FTSE 250 in the UK are audited by the Big Four auditing firms.

Is the Secretary of State satisfied that these competition points were adequately addressed by the OFT?

Does she further accept that confidence is dented in an OFT which gets so wrong the availability of PI insurance for auditors?

In her statement issued earlier the Secretary of State said that the government will look closely at the option of proportionate liability by contract. From these benches we welcome that.

Proportionate liability by contract would ensure that the auditors pay for their mistakes in an equitable way - which would I think carry the support of business, investors and the audit profession.

Can I ask the Secretary of State to clarify two points.

First - what is the timetable for looking at proportionate liability by contract?

Second - will she commit that if agreement is reached between auditors, investors and business that the Government will quickly legislate to allow proportionate liability by contract?

Second part of the Bill - Community Interest Companies

The second part of the Bill introduces the Community Interest Company, which as we have heard, is a new type of company whose profits and assets will be used for the public good.

This is something that the Liberal Democrats very much welcome, as we have a historic commitment to co-operative and mutual structures and believe that such social enterprises should be encouraged by clarifying their legal status.

Indeed we did argue that the Government's long-promised Companies Bill should be used to create a "Public Benefit Organisation" structure, which is very much in sympathy with the aim of the Community Interest Companies that are now being proposed in this Bill.

However, we do still have some concerns regarding the nature of the new Community Interest Companies.

Again my friend Lord Phillips was able to use his expertise in the legal and charitable sectors, to argue that the Bill should not prevent charities from choosing to become Community Interest Companies, as is currently proposed.

As Lord Phillips pointed out in the other place, "the law of charity has been distinguished by being a function of purpose and not a form or format."

This principal has given charities maximum choice in allowing them to choose whichever form best allows them to carry out their work.

This Bill represents the first step away from this flexibility and although opinion is somewhat divided on this issue, we feel that this is an important point that should be returned to in committee.

The final issue that I would like to raise relates to corporate governance. This is an area where the general public increasingly look to companies to demonstrate high standards.

My friends in the other place, Lord Sharman and Lord Razzall attempted to mitigate the slow progress towards reporting details of social and environmental performance by tabling an amendment requiring the Secretary of State to publish standards in order to guide companies further in this respect. This may be an issue that we will wish to return to later.

In the meantime, there is a further issue of corporate governance that I wish to turn to, that of a larger company's dealings with its smaller suppliers.

In particular, I want to raise the issue of the late payment of debt - an ongoing bugbear for British small firms who, according to some estimates, are owed an estimated £20 billion by larger companies in payment for services/goods that they have provided.

The Federation of Small Businesses also estimates that 1 in 4 business failures are as a result of cash flow problems caused by the late payment of commercial debt.

Clearly then, this is a major problem and despite the introduction of legislation allowing businesses to claim statutory interest on any overdue invoices, (which the Liberal Democrats very much welcomed at the time) it is clear that the situation has not improved and that further action needs to be taken to tackle the culture of late payment.

There have been at least 5 different pieces of independent research published since January confirming this. We had a Bank of Scotland survey published that month, which found that almost half of small businesses have been forced to take legal action against late or non-payers.

We have had the Federation of Small Businesses' Payment Performance Tables in April, showing no improvement in the amount of time it takes PLCs to settle their commercial bills.

And the latest survey published in July by Experian even suggested that the amount of time it takes companies to settle their bills has risen to its highest level since 1998.

Unless the Government encourages and actively helps the largest companies to lead by example, then we will never achieve the culture change that is needed to eliminate the culture of late payment which continues to plague Britain's small businesses.

Sadly the Government are failing to lead by example, as illustrated by my Rt Hon friend for Twickenham (Vince Cable) who revealed this week, that the Treasury are one of the worse culprits when it comes to late payment of bills

And I know that the Forum of Private Business have been particularly assiduous in pressing DEFRA to release the money that it still owes many foot and mouth contractors for work carried out during the crisis, some three and a half years ago.

Hardly surprising then that many large businesses are still failing to pay small suppliers on time.

And trying to identify in advance whether a large company is likely to pay on time is near impossible for small businesses

Under the Companies Act 1985 UK PLCs are required to publish details of their payment performance in their annual accounts.

Yet, when the Federation of Small Businesses were conducting research for their payment performance league tables, they were unable to find this information for 57 of the FTSE 100 companies.

Following an investigation at my request, Companies House confirmed that all of these companies had actually published the details, but the problem is that because there are no standard requirements for reporting payment performance, the job of finding the information is rather like hunting for a needle in a haystack.

Companies House themselves admitted in their letter to me that it had taken them "a considerable amount of time to examine each set of accounts" to check whether the companies had made the required disclosure.

Now if Companies House cannot easily identify this information, how on earth is a small business person, lacking the necessary resources, going to be able to identify it.

And if they cannot access a company's payment performance record, how can they make an informed decision about whether to enter into a contract to supply that company.

Given that the law was introduced to help small firms in the first place, we must ensure that it does so effectively.

This means ensuring that small businesses can easily access transparent information, relating to a company's payment performance and this is an issue which we intend to table amendments on during committee stage, to raise this issue, which is of major importance to the well-being of our small business sector.