Directors face fines in move to prevent corporate scandals

Company directors will face unlimited fines and court action under tough new rules designed to stop Enron-style scandals and improve standards of corporate behaviour in the UK, the Government announced yesterday.

The post-Enron legislation comes more than a year after the US government introduced its Sarbanes-Oxley Act designed to curb corporate malfeasance. However, the UK government believes its version is more measured and supported by business and the accountancy and audit professions.

Jacqui Smith, the trade minister, said Labour's new Companies Bill would tighten the regulation of auditors and hand company investigators greater powers to uncover misconduct. It also offers greater protection to corporate whistle blowers while giving the Inland Revenue an enhanced role in weeding out corruption.

She also revealed that the Government would soon begin consultation on separate measures aimed at limiting the liabilities of auditors in cases where company accounts proved false.

The new Bill, expected to become law next year, will enhance the powers of the Financial Reporting Council (FRC), which will regulate auditors. Its budget is expected to be about £12m a year, up from £5m.

A central requirement of the new regime will be for directors to declare in their annual report that they have not withheld any relevant information from their auditors. If investigators subsequently find directors held back relevant information, they face unlimited fines. Deliberately lying to auditors could result in a two-year prison sentence. Any company employee refusing to provide information will be treated as being in contempt of court, seen as a more flexible and effective approach than using criminal proceedings.

To stop potential conflicts of interests between auditors and their clients, the Government will now demand that companies publish details of the non-audit services provided by their auditors. The amount of non-audit work done by Andersens for Enron was highly criticised when the accounting scandal erupted.

Auditors will come under a much tougher regulatory regime under the FRC. A key part of this will be a beefed-up Financial Reporting Review Panel (FRRP), which will be given new statutory powers to carry out investigations. These can now include interim results as well as annual results. It will also work more closely with the Financial Services Authority and the Inland Revenue.