The Debate: Is the companies bill worthwhile?

Bill stirs investor confidence

By Jacqui Smith

The scandals at WorldCom and the collapse of Enron and Andersen sparked worldwide reviews of corporate and financial standards.

In the UK, we asked what needed to be done to prevent something similar happening here. Our aim has been to ensure that we have sound companies providing full and accurate information so that we have stable and efficient financial markets.

The companies (audit, investigations and community enterprise) bill, published on 4 December, completes the package of important and proportionate measures taken by government, the City and the accountancy profession to restore and maintain investor confidence in Britain.

The bill buttresses non-legislative reforms, such as the revision of the combined code and strengthening of the independence of auditing, for example, through the new regulatory regime and the voluntary rotation of audit partners.

It strengthens the enforcement of accounting standards. It gives auditors greater legal powers to get the information they need. It also imposes tough new standards of auditor independence and reinforces independent regulation of the audit profession. And it increases company investigators’ powers to uncover misconduct.

The second strand of the bill will boost social enterprise by creating community interest companies – a new type of company that provides a vehicle for dynamic and sustainable business with strong social objectives.

Community interest companies will harness the entrepreneurial spirit of individuals for the benefit of their communities, creating new ways to provide goods, services and social benefits such as employment and training.

This is a worthwhile and common-sense package of measures, developed in consultation with business and other stakeholders. It imposes minimal burdens, while offering significant benefits for the economy as a whole.

These are priority measures, worth undertaking in advance of the larger reform of company law, to which we remain committed and which we shall bring forward as soon as possible.

  • Jacqui Smith is the DTI minister spearheading the companies bill

Further clarity is necessary
By Patricia Peter

After a long period of gestation we now have a companies bill. However, it is not the fundamental reform we hoped would emerge from the efforts of the company law steering group.

That, and the subsequent white paper, both aimed to create a framework to enable British business to flourish in the 21st century. Even the bill’s title ‘companies (audit, investigations and community enterprise) bill’ demonstrates it to be an amalgam of somewhat unrelated provisions.

Apart from the community enterprise aspects, much of the bill represents the government’s reaction to Enron and other frauds in the US. No one can argue against the prevention of fraud or adequate powers to investigate and prosecute those who perpetrate it. No one can argue against integrity in company reporting. However, the legislative response must be proportionate and reasonable.

Alas, the determined fraudster will always strive to defeat the law.

This is no reason to deter honest companies, their directors, potential directors and employees from the enterprise culture the government espouses.

Is this bill a proportionate and reasonable response? Does it help British company law become a source of competitive advantage? Unfortunately, as the bill is drafted, and in spite of good intentions, I think the answer is no.

The introduction to modernising company law says: ‘The law has become encrusted with amendments.’ What does this bill do? It adds another layer of amendment. It becomes impossible in parts to understand even the most basic concept of what the provisions are about. Pity the directors of any small and medium-sized enterprises trying to ascertain whether specific provisions apply to them. In fact, quite a number of them do not, but this is not easy to find out.

So what should be done? Amend this bill to make it comprehensible, proportionate and reasonable, so that it will not create more need for judicial interpretation than it eliminates. Finally, move towards the aims of the company law review, not backwards to the ways in which company law has grown over the last century.

  • Patricia Peter is corporate governance executive at the Institute of Directors.

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