TUESDAY 4 DECEMBER 2007

MR RICHARD SEXTON AND MR JOHN HITCHINS

  Q1340  Jim Cousins: Can you tell the Committee whether they did happen about Northern Rock?

  Mr Sexton: Yes.[7]

  Q1341  Jim Cousins: In your relationship with the FSA where do your duties lie? Do they lie to Northern Rock who are paying you £300,000 or to the FSA and the wider markets?

  Mr Hitchins: The £300,000 referred to was to report on regulatory returns to the FSA where we have a duty of care to both the company and FSA.

  Q1342  Jim Cousins: Could you spell out what your duty of care is to the FSA?

  Mr Hitchins: In terms of regulatory reporting, our duty of care is to make sure the information in the regulatory returns is consistent with the information we have audited.

  Q1343  Jim Cousins: Did you ever draw to the FSA's attention that in terms of assets and liabilities over three months Northern Rock's liabilities were four times its assets?

  Mr Hitchins: I do not know whether we specifically did so.

  Mr Sexton: That information is included in the regulatory returns and therefore is brought to the attention of the FSA.

  Q1344  Jim Cousins: It is up to the FSA to spot it?

  Mr Sexton: The FSA has a very well developed procedure.

  Q1345  Jim Cousins: You are not under any duty to point it out?

  Mr Sexton: Not explicitly, no.

  Q1346  Jim Cousins: What is your duty as auditor to the depositors?

  Mr Sexton: Our duty as statutory auditors to any UK plc is primarily to the shareholders; it is they with whom we contract through their board.

  Q1347  Jim Cousins: So, you do not have any duty of care to depositors?

  Mr Sexton: We have no duty of care to depositors.

  Q1348  Jim Cousins: What are your fees so far for preparing the documents for the sale of Northern Rock?

  Mr Sexton: I do not know that number. It is an ongoing process and as the bid process proceeds as auditors we will almost certainly be involved in providing opinions on historical financial information predominantly in relation to periods already reported.

  Q1349  Jim Cousins: Perhaps you could let the Committee know in due course what those fees are.

  Mr Sexton: Those fees will be thoroughly disclosed in the annual report and the prospectus.

  Q1350  Jim Cousins: Can you let the Committee know what the fees are so far?

  Mr Sexton: Those fees will be thoroughly disclosed under regulatory requirements.

  Q1351  Jim Cousins: In preparing those documents obviously your duty is to the board of Northern Rock.

  Mr Sexton: The duty in preparing a prospectus-related document will be to the shareholders of the company—we contract with the company—and to the purchaser to the extent we contract with the purchaser. It will depend entirely on with whom we contract.

  Q1352  Jim Cousins: One of your former colleagues, Rosemary Radcliffe, was a director of Northern Rock and served on the audit committee.

  Mr Sexton: That is correct.

  Q1353  Jim Cousins: Did you raise any issues about that?

  Mr Sexton: We did. That was why she stood down from the audit committee in December 2006 and only after we had obtained explicit clearance with the regulators that her independence was not impaired, she having left our partnership in 2001, did she go back onto the audit committee.[8]

  Q1354  Jim Cousins: Therefore, you sought the assurance of the regulators that it was perfectly proper for her to be on the audit committee and she went back onto that committee?

  Mr Sexton: She did. The specific arrangement is that she steps out of any discussion involving PricewaterhouseCoopers and its appointment to Northern Rock.

  Q1355  Jim Cousins: What about her involvement with the regulatory returns that you prepared?

  Mr Sexton: I am afraid that is a matter for the company. I do not know the answer to that.

  Mr Hitchins: We do not prepare the regulatory returns and effectively we provide an assurance opinion on them.

  Q1356  Jim Cousins: In your reporting to Northern Rock shareholders in the annual report you say that you are not required to consider whether the board's statements on internal control cover all risks or form an opinion on risk and control procedures. Do you think you should be required?

  Mr Sexton: The requirements of the combined code which drive the work we do and do not do have been subject to repeated review involving all market participants—regulators, companies and standard-setters—and the conclusion they have reached is that the best use of auditors is to focus upon financial reporting controls, which is what we do, not provide an overall opinion on internal control in the way the American environment has moved.

  Q1357  Jim Cousins: I was asking you, not them. Do you think it would be right for you as auditor to report on the risk and control procedures of the bank? Do you think you should be required to check out the board's statements on its internal controls on risks?

  Mr Sexton: What I am saying to you is that the regulators dictate the work we do as statutory auditors, so if your question is directed to us as statutory auditor I can answer only as to the nature of what the regulators might require us to do.

  Q1358  Jim Cousins: This is dissembling. I am asking for your view about this. Do you think it would be sensible if you were required to report on these risks? Either you do or do not.

  Mr Sexton: I think that firms like my own can add value when they look at all kinds of control. It is one of our areas of expertise, so we could certainly add value to companies if they requested us to do that work.

  Q1359  Jim Cousins: To be very clear about what you are saying, that would be additional to your work as auditor and it would be a specific new task for which you would charge an additional fee, presumably.

  Mr Sexton: If it were requested by the company outside statutory regulation that would be the case.

8   Note by witness: For completeness, the regulator I was referring to in my reply was the Securities and Exchange Commission. Back