Accountancy firms will be policed by an independent regulator with beefed up powers in a bid to prevent a repeat of the Enron and WorldCom scandals in the UK, under long-awaited guidelines set out yesterday by the Department of Trade and Industry.
The largest accounting firms have also agreed to publish annual reports which will disclose how they earn most of their fees and what their senior partners are paid.
Most of the UK's big firms already publish an annual report, but they will have to give more details about sensitive issues such as how much money is earned from auditing and how much from selling other services to clients such as tax advice.
Patricia Hewitt, Secretary of State at the DTI, said the Government had resisted calls for a "knee-jerk" reaction to the series of corporate scandals in the US. In America, the spectacular corporate collapses prompted the passage of the controversial Sarbanes-Oxley Act, a complex set of rules aimed at preventing future abuses of corporate governance.
Ms Hewitt said: "Audit and accountancy standards in Britain are different from those in the United States. Different and, as has now been widely acknowledged, better. So there was no need for the UK to rush into a Hewitt/Brown equivalent of the Sarbanes-Oxley bill."
One of the main difference from the US was that the DTI has not banned audit firms from selling other services to clients.
Under the changes, to be implemented by the summer, the job of inspecting audits carried out by major firms on a regular basis will be moved from the Institute of Chartered Accountants, the sector's trade body, to the existing accounting watchdog, the Financial Reporting Council.
The FRC is also to have its powers widened by also bringing the body that scrutinises potential wrong doing by individuals under its remit. The old system was criticised by some for being too slow to act against accountants who acted illegally.
Unlike the institute, the FRC will not be fully funded by the accountancy profession. A third of its funding will be provided by the Government and another third will come from the Financial Services Authority. The two bodies will work closely together.
Peter Wyman, president of the ICA, said: "The Government is to be congratulated for taking a sensible look at things. It is not knee-jerk but there will be a very significant change in perception about independence."
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