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Newsroom & speeches
93/06
20 November 2006
1. Thank-you for inviting me to the opening of your conference today and let me start by saying it is a pleasure to join with so many representatives from across your industry and the accountancy profession to discuss the important challenges we face together.
2. With economic growth strengthening this year, and with stability in our economy locked-in through our inflation target, our independent and forward-looking Bank of England, and the Code for Fiscal Stability, it is right that we focus on the reforms we need to take to further enhance the long-term strength of our economy.
3. And today I want to talk about the important role that the accountancy profession must continue to play in promoting economic growth and long-term investment in our economy - and in particular in our financial services industry; the importance we attach to proper standard-setting for accounting at the global and European levels for the stability and efficiency of global markets; and with European Union finance representatives meeting tomorrow in Brussels to agree the annual EU Budget, the enhanced role that I believe strengthened audit and control can and must play in improving the EU budget.
4. The role of the accounting profession is critical to many aspects of my Ministerial role – and Government policy more generally.
5. Your professions make an important direct contribution to UK jobs and prosperity employing 200,000 highly skilled professionals and providing tangible services for which customers pay over £7.5 billion per year. These services facilitate a huge range of business activity. Not just the archetypal recording, reporting and audit of financial information, but the provision of a much wider array of specialist advisory and consulting services, whether in taxation, insolvency, restructuring or other business advisory services.
6. The competitive strength of the UK profession in delivering these services is proven by your ability to sell in the most demanding of international markets – generating a surplus of nearly £700 million of exports last year.
7. And I know how important a role the ICAEW, and indeed all the professional bodies, play in delivering these successes.
8. But the contribution of your profession goes way beyond what can be simply measured in jobs, profits and export earnings. The quality of financial reporting and the reliability of audit are fundamental to the efficiency of our economy and the prospects for savers and investors – as they are increasingly for public service delivery and reform.
9. I know that the process of passing the new Companies Act into law, on which I know many of you have worked closely, has been somewhat gruelling. We believe it will enhance further your ability to contribute to efficiency and long-term investment in our economy by simplifying private company requirements, providing for electronic communication with shareholders, and encouraging disclosure of institutional investor voting.
10. A good number of the Act’s measures bear directly on the profession’s activities, such as the enhancement of forward-looking narrative reporting - ensuring that this is flexible and focused on the needs of shareholders - and the provisions permitting fair and reasonable limitations on auditor liability.
11. One measure that illustrates well the interconnection of company law with my Ministerial financial sector responsibilities is our use of the Companies Act to clarify the liability position of auditors and directors for companies’ financial and narrative disclosures. The fine calibration of liability is essential if we are to balance incentives for meaningful disclosure with fair rights of redress to create a good environment for enterprise – and we need to get the precise scope and reach of the liability regime right. That is why I have asked Professor Paul Davies of the LSE to advise the Government on how to resolve the final aspects of this issue in the coming months.
12. Can I also thank you this morning for the important contribution you are making as a profession to our efforts to improve financial capability and financial education in Britain. I particularly welcome the work you are doing with the Personal Finance Education Group and congratulate you on the Financial Volunteer Programme being launched today. This is just the sort of collaborative approach we are keen to encourage and it provides an excellent model for how professionals in the finance sector are putting their expertise to good use in local communities across our country.
13. Our accountancy profession plays a critical role in the smooth functioning not just of the British economy but also the global economy – and your continuing contribution is essential in maintaining London’s global standing as a financial centre. For three hundred years, London’s success has been based on our commitment to the rule of law and the highest professional standards.
14. And practitioners here and round the world regularly cite London’s world-class business support services in areas such as law and accounting as one of its key attractions. The UK accountancy profession is a world leader in financial reporting, audit, taxation and business advisory services. The UK’s proportionate and risk based regulatory approach in financial regulation but also in corporate governance, is internationally respected: the comply-or-explain approach of the Combined Code, the Smith reforms to audit committee practice, and the Turnbull requirements for internal control.
15. I know there is growing demand in China, India and other emerging economies for professional training and business education of the quality provided by UK organisations. Training in business education and providing professional qualifications together represent a major export for the UK’s educational establishments and professional institutes and this is an area of rapid growth.
16. Your determination to seize these opportunities is amply demonstrated by your recent initiative with the Chinese Institute of Certified Public Accountants to train China’s most promising certified accountants - and I know you have also been developing training partnerships with Russia and with other countries in the Far East.
17. As I have said in recent speeches, it is increasingly negotiations and regulatory decisions at the global and the European levels that have a major bearing on the competitiveness of the City and our financial services industry. This is particularly the case for accounting standards.
18. High quality financial reporting and reliable audit opinions constitute one of the main pillars supporting the UK’s – and Europe’s – capital markets. That is why the UK must continue to lead international efforts and advance our current strong position.
19. We welcome the harmonisation of accounting rules across Europe through the adoption of IFRS. As City Minister, I see this as a vital element in the development of an integrated European capital market. But there are still important issues to resolve, both in application of IFRS and the convergence of UK GAAP and IFRS. We need the profession to continue to play a leading role, working with the FRC in developing solutions and reconciling competing approaches. We also rely on you to speak up when you think the process is veering off track or a change of pace is needed.
20. I value the depth of engagement I see by the profession with external institutions – for example, with the IASB and the European Commission during the adoption of IFRS, and more generally, on European capital markets legislation. The ability of the profession to generate and press a coherent view – and to magnify this through concerted international action – is powerful and respected.
21. These arguments also apply in the debate on global convergence, and particularly in dialogue with the US. Greater convergence of US GAAP and IFRS offers benefits to the UK’s capital markets. As you know, it presents equally substantial challenges. We want to see convergence – but convergence around a principles-based, rather than rules-based, approach. Again, I see the UK profession, and its prominence in the global accounting networks, as being uniquely positioned to influence this debate.
22. For our part, Government must continue to scrutinise potential developments in the accounting field where they impact on the capital markets. In particular, this will include issues of equivalence with EU standards, which can impact on the access of non-EU issuers to the UK’s capital markets. Most recently, we dealt with this in the context of the Transparency and Prospectus Directive, and I am pleased that we were able to persuade the Commission to ensure that there will be enough time to make proper equivalence decisions, and that there is undisturbed access to our capital markets in the interim. Similar vigilance will be needed with other Directives.
23. At the same time, working within the constraints arising from our international obligations, it is important that each nation can regulate its own financial services industry and the financial markets that operate in its territory as it thinks best.
24. Questions have been raised about our approach to exchanges following NASDAQ’s declared interest in acquiring the London Stock Exchange.
25. Let me make the Government’s position absolutely clear.
26. We are neutral with respect to the nationality of the ownership of the LSE. The UK has for some years been open to overseas investment in UK exchanges. LIFFE, ICE Futures and virt-x are all owned by overseas companies to name three.
27. Our interest in the ownership of the LSE is that it should not affect the existing risk-based regulatory regime under which the exchange and its members and issuers operate.
28. That is why I announced in September that we would be legislating to safeguard our proportionate risk-based approach – and why I have introduced a Bill into our Parliament - the Investment Exchanges and Clearing Houses Bill - which will confer a specific power on the Financial Services Authority to veto rule changes by UK recognised investment exchanges and recognised clearing houses that would have an excessive regulatory impact, disproportionate to any proper regulatory objective the rules would deliver.
29. That Bill will receive its second reading in the coming days and I hope will be widely supported.
30. I will have an opportunity to discuss EU financial issues and the importance of taking a global outlook to regulation when I meet Commissioner McCreevy in Brussels tomorrow – a subject on which we have demonstrated much common ground in recent months.
31. But we are clear that the importance of taking an open, transparent and outward-looking approach to reform in Europe is not limited to financial services; and nor is the role that your profession can play in future reform.
32. Europe must respond to the changing global environment in all its areas of activity. And nowhere is this more important than the audit and make-up of the EU budget.
33. I will be in Brussels tomorrow to meet with fellow Budget Ministers to discuss the EU’s Budget for 2007. We will consider in particular how, consistent with the principle of budget discipline, Europe continues to support its external priorities, including reconstruction in Iraq and Afghanistan, bears down on administration costs, and matches the level of structural fund support to Member States’ capacity to spend these resources effectively.
34. At the same time we will need to consider what steps we must take to raise tax-payer confidence in EU financial management - a concern this audience will be particularly alive to.
35. Because, as we meet tomorrow, we do so against the backdrop of a qualification of the European Union’s accounts by the European Court of Auditors for the twelfth successive year, with the Court unable to give a positive statement of assurance on two-thirds of EU spending. This is very disappointing. Europe – Member States and the Commission - must do better to end this annual embarrassment.
36. Last year, under the UK Presidency, we secured agreement to our proposals on how the EU’s internal financial control framework could be strengthened. The Commission is now implementing these through its Action Plan towards an Integrated Control Framework centred on four core themes:
37. And the principles of internal control and simplification at the heart of the UK’s proposals have been adopted in the new Financial Regulation, currently being negotiated in Brussels, and which from 1st January 2007 will govern how the budget should be set and implemented.
38. But if the EU Budget is to inspire tax-payer confidence, there is more to be done. We need the highest levels of scrutiny and the most rigorous lines of accountability.
39. Achieving a ‘positive statement of assurance’ on EU spending will require action by all those involved in the process of EU expenditure: the Commission, the Council of Ministers, each Member State working with its national audit institution, and the European Court of Auditors itself.
40. That is why I welcome last week’s Report by the House of Lords on “Financial Management and Fraud in the European Union”. The Report highlights the importance of actions in the EU at the national level to improve management of agriculture and structural fund expenditure – a responsibility shared between the Commission and Member States.
41. The Government will, of course, study and respond in full to all the Report’s detailed recommendations. But because we are determined that the UK should take the lead in demonstrating how EU funds can be managed to the highest standards, I am today announcing proposals to enhance national-level auditing of EU expenditure in the UK.
42. I have written to the Chairmen of the Lords’ EU Committee, the Treasury Select Committee and the Public Accounts Committee setting out our plans to publish a statement of assurance on the national use of EU funds in the UK, which will be audited by the National Audit Office, giving Parliament a greater role in scrutinising EU spending.
43. Following detailed discussions with the National Audit Office and Parliamentary colleagues, the Government intends to lay before Parliament an annual consolidated statement on the UK’s implementation of EU spending, prepared to international accounting standards, and audited by the National Audit Office. The statement and audit opinion would subsequently be made available to the European Court of Auditors to assist it in its own audit and control functions.
44. Already similar initiatives are being developed in the Netherlands and Denmark. And because success requires action right across Europe, I am also writing today to my European colleagues encouraging them to act in a similar way – and sending them a copy of the House of Lords report.
45. By giving national parliaments greater opportunity to scrutinise how EU funds are managed, I believe we can help give taxpayers the reassurances they rightly expect. In taking a lead on this issue the UK can make great strides in improving the quality and accuracy of the EU accounts. All Member States must accept their responsibilities to work together to achieve the clean bill of health for the EU's accounts that taxpayers deserve.
46. Of course, budgetary credibility does not only depend on probity and proper accounting and financial management. In the end, it depends on what taxpayers see their money spent on.
47. Take the 2007 Annual Budget, the focus of tomorrow’s discussions in Brussels:
48. This is hardly a Budget designed to meet the challenges of the 21st century. But nor is this something which our discussions tomorrow on the annual budget – where only relatively limited budgetary reprioritisation and saving are possible – can resolve.
49. That is why we must now look ahead to the fundamental review of the EU budget, announced by EU Heads of Government in December 2005 under the Presidency of the UK. The principle of sound financial management must and will be to the fore in our approach to the Review. But building on a base of financial probity we must also ask ourselves:
50. The following principles should guide our approach:
51. First, the EU should act only where there are clear additional benefits from collective efforts compared to action solely by individual Member States – rather than “more EU” for the sake of it. That is what a hard-headed pro-Europeanism, based squarely on advancing both our national interest and the EU public interest, demands.
52. There is a strong case for budgetary assistance to less well-off Member States, helping them make the infrastructure and institutional investments needed to support their economic growth, in turn helping to develop the wider European economy. The same case cannot be made for the current scale and composition of the current CAP budget.
53. Second, where EU-level action is appropriate, it should be proportionate and flexible. Just as we acknowledge there is a clear case for European spending on some objectives, so we must recognise the very real limits to the case for European budgetary intervention.
54. Indeed, expenditure is only one of a range of policy levers alongside: coordination through peer review and shared best-practice, such as in aspects of social policy; competition policy and liberalisation, such as in the Single Market; and legislation or regulation, such as the setting of environmental emission levels.
55. Where expenditure is appropriate, Europe must be prepared to consider a wide range of sources of financing. The European Investment Bank, for example, is pioneering the use of loan support to support the development of climate change financial instruments, such as the Climate Change Finance Facility.
56. And third, and as I have set out, we need the highest standards of financial control and independent audit – alongside continuing budget discipline.
57. These three principles can help guide us towards a modern EU budget: a clear understanding of how we advance our national interest and the European interest; proportionality; and sound financial management.
58. Applying these principles properly is essential if we are to achieve our shared objective of a modern, outward-looking EU, enabling Member States to respond to the challenges of globalisation and deliver opportunity, fairness and prosperity for all our citizens.
59. I believe that this vision is increasingly widely shared. And the Government will be working in partnership with President Barroso, his Commission and other Member States to achieve this in the coming months. Because whether on the Budget Review, or other critical issues, such as the environment; Single Market, world trade; security, immigration; enlargement; and wider foreign policy, we know that the only way to get the best deal for Britain is by working with our European partners.
60. So, to conclude, we have many challenges ahead, but it is through your continued support that we will succeed.
61. Our task is to build on our platform of stability, to foster economic growth and maintain the competitive position of the financial services sector, and to ensure that we have an EU budget fit for purpose.
62. Your profession has a very important role to play and I look forward to working with you in the months ahead.
Thank you.
