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Reforms to exorcise auditing's dark side

Changes to the way audit committees are bodied are aimed to prevent an Enron-style scandal happening in the UK, says Jim Gough

Chairmen and women of listed companies are expected to be barred from membership of audit committees as part of a package of reforms aimed at reducing the risk of an Enron-style scandal in the UK.

And non-executive directors will also face a cap on the length of time they can sit on audit committees in the measures that will be announced tomorrow by Sir Robert Smith.

Sir Robert, non-executive chairman of the Weir Group, will unveil his recommen dations as Derek Higgs, the former investment banker, releases the findings of his study on improving the quality of non-executive directors.

Sir Robert recently caused a stir in boardrooms when he compared long-serving non-executive directors to 'old slippers' and said chairmen should be kept out of audit committees to avoid any suspicions of cronyism.

He listened to the views of investors, accountants and finance directors before completing his report which will lead to major revisions of the best practice code on corporate governance.

Sources said the ban on chairmen serving on audit committees and a cap on the length of the service will form a key part of the package.

Sir Robert, chairman of the Financial Reporting Council and former vice-chairman of Deutsche Asset Management, declined to discuss the outcome of his review ahead of tomorrow's publication. But he expressed his hope that the measures would lead to more transparency for investors.

He said: 'We carried out a series of international com parisons and there is no doubt that the UK is among the leaders when it comes to robust systems of corporate governance.

'But we have to remember that we have had corporate scandals here with the likes of Maxwell and Polly Peck. It does not just happen in the United States.

'We have to keep moving ahead on corporate governance so that people who invest in capital markets can have full confidence in the figures which are produced.

'There has been a view that the work of audit committees can be something of a black art. It is essential that we have more transparency.'

Government ministers and the 'Big Four' accountancy firms believe that enhancing the role of company audit committees is an important way of limiting the chances of Enron and WorldCom-style scandals erupting in the UK.

Ultimately, companies can face delisting if they do not comply with the combined code on corporate governance.

Businesses will have to comply with the new measures which will be added to the code — or else explain why they do not.

One of the main objectives of the Higgs review is to encourage the widening of the pool of non-executive directors companies can draw on to fill seats on the board.

Submission proposals to Higgs have included setting up a national register of potential directors as well as forcing companies to advertise positions.

City watchdogs, such as the National Association of Pension Funds (NAPF), have called for a broadening of the gene pool and attacked companies for keeping non-executive directors on board for more than nine years.

At a recent seminar on corporate governance Sir Robert echoed these fears when he said the idea of independent non-executive directors being on boards for 15 or 20 years is a 'complete nonsense'.

He stopped short of suggesting a limit on how long one auditor can be retained by a company but called for more intense and regular scrutiny.

Rather than forcing companies to change auditor every three years, he said a strengthened audit committee should have increased power to hold their 'feet to the fire'.

Last week, Sir Angus Grossart, Scotland's best known serial non-executive director, was at the centre of another shareholder revolt over his marathon chairmanship of Scottish Investment Trust (SIT).

His 27-year tenure is three times as long as the maximum term stipulated by NAPF.

In November, the 65-year-old financier suffered a rare setback when he was ousted from Edinburgh Fund Managers' board in a shareholder rebellion led by pension fund manager Hermes.

Hermes, which has become a leading campaigner on corporate governance issues, will vote against Sir Angus's reappointment at SIT's annual meeting next month.

Meanwhile, SIT announced it will not use Noble Grossart, the merchant bank chaired by Sir Angus, as an adviser again.

The move came in response to the Financial Services Authority's proposals to bar professional advisers from the boards of investment trusts.

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