Trade and Industry Secretary Patricia Hewitt will this month announce the creation of an independent body to carry out "spot checks" on companies' accounts as part of a revamp of corporate law.
The proposals, contained in a Bill to be published later this year, are an attempt by theGovernment to stop financial scandals like Enron and World- Com occurring in the UK.
The Department of Trade and Industry refused to comment on the proposals, saying they were still confidential. However, The Independent on Sunday has learnt that the new body will have the power to force companies to open their books for inspection to ensure they are properly audited and don't contain any black holes.
The proposals, to be announced to the House of Commons in the last week of January, follow an 11-month examination of company law and the role of auditors by the Co-ordinating Group on Audit and Accounting Issues. Jointly chaired by competition minister Melanie Johnson and financial secretary to the Treasury Ruth Kelly, the group will also announce measures to give non-executive directors new powers.
It is understood audit committee members of quoted companies will be allowed a greater say in the appointment of accountants providing audit and consultancy services.
The Government will also say members of companies' audit committees must be made up entirely of independent non-executive directors.
Derek Higgs, the former investment banker appointed by the Government to look into the role of non-executive directors, is due to publish his conclusions within a fortnight. The main ones are likely to be fed into the Co-ordinating Group's recommendations. Mr Higgs, a non-executive director of British Land and Allied Irish Banks, will argue for a limit on the non-executive posts that a director can hold. He is likely to call for better pay and training for non-executive directors.
As part of a drive for greater financial transparency, the Government will make it a legal requirement for companies to spell out what audit and non-audit services they have purchased from accountancy firms.
The "big four" firms – PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche and KPMG – won't escape the clampdown either. Well-placed sources revealed that Ms Hewitt will announce a new independent body to ensure auditors meet tough new ethical standards. While the proposals will place new requirements on companies and their auditors, Ms Hewitt is expected to argue against over-reacting to the threat of corporate fraud. She will say that over-regulation could stifle competitiveness.
The US has been rocked by accounting frauds in the wake of the collapse of Enron, including WorldCom and Xerox. There has, however, yet to be a major corporate fraud in the UK since Enron.
President Bush's response to Enron was the Sarbanes-Oxley corporate reform Act. This created a new "accountancy oversight board" and increased the maximum prison sentence for corporate fraud from five to 20 years.
But some UK companies have branded the US reforms an over-reaction to the problem. Don Cruickshank, chairman of the London Stock Exchange, said last month the rules would make the US markets "far less attractive and welcoming to foreign issuers".
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