Hewitt launches audit shake-up

The Trade and Industry Secretary Patricia Hewitt will on Wednesday announce far-reaching reforms of the audit profession and company law to defend the UK against corporate fraud.

The measures, to be announced in the Commons, will be the Government's response to the Enron and WorldCom scandals that rocked America.

But the measures will stop short of the strict laws that were introduced by the Bush administration, which critics have branded too restrictive.

Ms Hewitt's proposals are the result of an 11-month investigation by the competition minister Melanie Johnson and the financial secretary to the Treasury, Ruth Kelly. Government insiders said that the proposals will fall into two main areas – covering auditors and company accounts.

On auditors, Ms Hewitt is expected to announce that:

* The Government will conduct a major review of the profession, which is dominated by a "big four": Pricewater- houseCoopers, KPMG, Ernst & Young and Deloitte & Touche. It will examine whether audit firms should also be able to offer companies taxation, valuation, litigation and IT services. If the Gov- ernment decides that there is a conflict of interest then the firms may be forced to spin-off their auditing operations.

* Auditors should be ro-tated. A lead audit partner working on a company's accounts should be changed every five years.

* Accountants who quit their jobs will face a two-year "cooling-off period" before being allowed to join the company whose books they audited.

* Audit firms, most of which are limited partnerships, will be encouraged to publish detailed annual reports. On top of this, the firms will be required to disclose any client work that generates more than 5 per cent of total fee income.

On companies, it is understood Ms Hewitt will say that:

* A company should not ask its auditor to provide any additional consultancy work.

* A company must provide details about its auditor and the services it provides in its annual reports.

* A new body will be created to perform "spot checks" on company accounts. The Financial Services Authority has been lobbying the Government for this role. However, it is understood that Ms Hewitt will snub the FSA and give it only a limited role in initial analysis. Instead, the tiny Financial Reporting Review Panel, which currently only investigates accounts when it receives a complaint, will be significantly beefed up and charged with the task.