According to the DTI, the Companies (Audit, Investigations and Community Enterprise) Act gives auditors greater powers to get the information they need to do a proper job, and increases company investigators' powers to uncover misconduct.
Trade and Industry Minister Jacqui Smith said:
"The UK has one of the best systems of corporate governance in the world. This Act contributes to a comprehensive package of measures aimed at strengthening investor confidence in corporate governance, company accounting and auditing practices here in Britain. This is another key milestone on the journey to create the very best framework for thriving, competitive and responsible businesses."
She added that there is still much to do, however.
"One of the next steps will be to introduce a new Operating and Financial Review for quoted companies which will provide investors with new and more meaningful information about companies' business opportunities, risks and future prospects."
This will be followed by a consultation on draft clauses that implement the wide-ranging Company Law Review, the biggest overhaul of company law in a century.
The Act aims to improve the reliability of financial reporting and the independence of auditors and auditor regulation by:
• requiring directors to make a statement in the directors' report about the disclosure of relevant information to their auditors;
• giving the Government the power to require large and quoted companies to publish details of non-audit services provided by their auditors;
• requiring the professional accountancy bodies that supervise auditors to sign up to independent auditing standards, monitoring and disciplinary procedures;
• strengthening the role of the Financial Reporting Review Panel (FRRP) in enforcing good accounting and reporting, by giving it new powers to require documents and broadening its scope; and
• allowing the Inland Revenue to pass information about suspect accounts to the FRRP.
The Act also strengthens company investigations by:
• improving investigators' access to relevant information;
• reducing the possibility of delay or obstruction by companies under investigation;
• removing a possible deterrent to individuals volunteering information when complaints are vetted for possible investigation; and
• introducing more effective sanctions.
The Act also relaxes the current prohibition on companies indemnifying directors against liability and permits companies to pay directors' defence costs as they are incurred.
The Act requires disclosure in the directors' report by companies that indemnify directors. Shareholders will also have the right to inspect any indemnification agreement. Companies that do not indemnify directors will not have to make any disclosure.
Community interest companies
The new Act also creates community interest companies (CICs), a new type of company for social enterprises, or businesses that use their profits for the benefit of the local community or the wider public.
The Minister said:
"Community interest companies are an exciting innovation - a new type of company designed to meet the needs of people seeking to build dynamic and sustainable businesses 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 additional social benefits such as employment and training."
CICs will offer the certainty and flexibility of the standard company form, but with a new feature – a legal "lock" to ensure that assets and profits will be used for the community interest, not private gain.
CICs will face fewer legal restrictions than charities and will not get charity-style tax breaks. They will be commercial enterprises, competing with other businesses, but for a social aim.
According to the DTI, CICs will be:
easy to set up, but subject to an objective and transparent eligibility test;
able to issue shares to raise investment, but the dividends paid on those shares would be capped, to protect the "asset lock";
required to produce annual reports (which will be made publicly available) on how they have pursued their social or community objectives and how they have worked with their stakeholders; and
allowed to transfer assets to other suitable organisations, such as other CICs or charities.
The Act's provisional commencement date is January 2005. Organisations and individuals will be able to set up CICs from July 2005 onwards.