Hewitt plans audit shake-up

Trade secretary seeks to rebuild investor condence after US corporate scandals.

Patricia Hewitt, the industry secretary, will today propose significant changes to the auditing profession in the wake of the Enron and WorldCom scandals that have shaken confidence in world stock markets.

If made law, her plans will mean that executive directors and possibly chief executives are debarred from appointing company auditors.

Instead, company audit committees, made up exclusively of non-executive directors, will be given sole responsibility for their appointment.

Ms Hewitt will admit that "the current checks and balances are just not working" and that confidence has been lost in auditors' independence. She will argue that auditors should be rotated and prevented from doing consultancy work for any company for which they also act as auditors.

The industry secretary will also call for international action against some share option schemes and the treatment of pensions. Share option schemes, according to Ms Hewitt, are coming under fire because they "can dilute shareholder value, may incentivise irresponsible behaviour and are not properly being reflected in the balance sheet". Some of these ideas have already been floated within Britain's accountancy profession, but it is the first time that Ms Hewitt has given them her personal backing.

The comments are much tougher than any others made by cabinet ministers since the extent of fraud in corporate America came to light.

Domestic reforms are now expected to be proposed by the joint Treasury-DTI committee set up to review accountancy standards. The committee, including ministers and regulators, is due to produce its interim report later this month. Some of the work may be also be examined by the committee on non-executive directors chaired by Derek Higgs.

In a speech today in Cambridge billed as a primer for the white paper on company law reform this month, Ms Hewitt will blame "a small number of crooked directors", saying "their action has had immense repercussions on the whole business community".

Reflecting fears expressed in the stock market this week, she will warn that "confidence has been lost in the independence of auditors as a result of Enron - whether or not it was a special case".

The relationship between the company and the auditor was blurred, "to put the point kindly".

"One way to tackle this may be through the rotation of audit firms, or audit partners. We should also look at the extent to which the audit firm should also be able to supply non-audit services to its audit clients."

Adding that directors have a crucial role in restoring confidence, Ms Hewitt will say she supports the idea that "audit committees be given an enhanced role in the appointment of auditors".

But it is not expected she will back a competition commission inquiry into the British auditing profession, despite calls for such a review.

Ms Hewitt will also back plans to revise the controversial FRS17 accounting rule. The proposed new standard has been blamed for accelerating the closure of final salary pension schemes. She will say she has "some sympathy with insurers' worries about just showing a snapshot of pension liabilities in their accounts".

She will promise not to "meddle for the sake of it", acknowledging that "the last thing British business and society needs is an ill-considered, hastily rushed through knee-jerk reaction. But our approach must involve a mixture of action on both the international and domestic stage".