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Company Law reform proposals 'excessive'

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15th Sep 2005
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Deloitte has branded some company law reform proposals 'excessive' and 'unnecessary' and says they will damage the competitiveness of UK markets.

Martin Scicluna, Deloitte's chairman in the UK, said the proposed changes to penalties for directors caused much concern.

"We believe the proposed changes to the penalties for directors who approve defective accounts, from fines to a potential seven-year jail sentence, is excessive and unnecessary," he said.

"There has been no evidence reported by the Financial Reporting Review Panel (FRRP) of systematic weaknesses that need to be addressed. These proposals would make dealings between the FRRP, companies and auditors much more legalistic and directors would become more reluctant to make voluntary revisions of their accounts.

"Imposing more severe penalties and disproportionate sanctions will increase compliance costs for all companies and their shareholders and damage the competitiveness of UK companies and capital markets. It will also send out the wrong message to entrepreneurs that incorporating a small business could result in going to jail for a very long period. We believe further consideration of these issues is still required.'

The Institute of Chartered Accountants of Scotland (ICAS) has also urged the government to remove the proposed new criminal offence for auditors of "knowingly or recklessly issuing a misleading, false or deceptive audit report".

ICAS points out that the levels of subjectivity involved in reporting financial statements mean there could be practical difficulties in interpretation.

James Barbour, director of accounting and auditing says: 'In our opinion if this approach is retained then it would be better to remove the term 'misleading', as something could be deemed to be 'misleading' only with the benefit of hindsight. If a report was 'false' or 'deceptive' it is more a question of fact."

Meanwhile, the London Stock Exchange (LSE) is concerned about unintended consequences of the proposals on auditor offences. "We are concerned that proposals on auditors do not lead to a Sarbanes-Oxley style regime, resulting in more detailed rules (as opposed to a principle-based regime) with associated box-ticking mentality for auditors and increased burdens on companies," said a spokesman.

Both Deloitte and ICAS have welcomed many of the proposals which, they say, will form more coherent law and are designed to improve modern business practice and enhance a long-term investment culture. But they are concerned that a few of the proposed reforms will overshadow these benefits.

The LSE has also welcomed the deregulatory changes but is mindful of the risks of increasing the regulatory burden on companies.

A spokesman from the Institute of Directors was more relaxed about the proposed penalties. "It gives the court a wide range of penalties to deal with everything from the fairly minor to, at the worst end of the scale, the absolutely fraudulent with serious consequential effects.

"Increasing personal liability is in some ways appropriate ' these things are done by individuals. All that fining a company does is cause the shareholders to lose more money."

But she did query the term 'misleading'. "There is a fairly high standard of proof required and statutes are generally written in vague language which allows the courts to set precedents but I think 'misleading' could be quite hard to define."

Further information on all the proposals for Company Law reform can be found at:
http://www.dti.gov.uk/cld/facts/clr.htm

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