British law gets tough after Enron

Company directors and employees could face up to two years in prison and unlimited fines for giving dishonest or misleading information to auditors, under a review of company law announced by ministers yesterday.

The proposed legislation, hailed by competition minister Melanie Johnson as promoting a new era in British corporate life, gives auditors a statutory right for the first time to ask for information from employees and contractors.

The proposal is the government's first response to the widespread anxiety caused by the accounting scandal at bankrupt US energy trader Enron and subsequent debacles at groups such as WorldCom.

It is due to be followed by a further set of proposals next week when the government's so-called "post-Enron group" gives its interim report to ministers.

Ms Johnson, pointing to the recent loss of investor confidence, said: "We need an improved quality of information available to create market confidence."

Under draft clauses for a putative bill, an employee refusing to answer an auditor's questions would be liable to a fine of £5,000.

If the information given is "knowingly or recklessly misleading, materially deceptive or incorrect", the maximum penalty would be an unlimited fine and/or two years in prison. Directors would face the same range of penalties.

Ms Johnson said two years' imprisonment was "a substantial deterrent" against concealing the true state of company accounts.

Promising legislation to modernise company law in the course of this parliament, she said current law was "creaking with age" and had become a competitive disadvantage.

Existing legislation, stretching back to 1852, is enshrined in more than 700 pages but the new law, Ms Johnson said, would be the biggest single piece of legislation in British history and could emerge as even more than 700 pages.

Under the proposals, welcomed by business groups and said to save small business £168m a year, companies will no longer have to hold annual meetings or appoint company secretaries.

Small companies will need to file short, simple accounts while the 1,000 largest companies will have to provide an operating and financial review. Quoted companies must publish accounts on websites four months from year-end while private companies must file accounts within seven months - compared with 10 now - and public ones within six months (seven months now).