UK Edition
Kwasi Kwarteng, the Business Secretary, is facing warnings that his plan to make company directors personally liable for the accuracy of accounts risks stifling entrepreneurship and undermining the Covid recovery.
He has published detailed proposals he claimed will make the directors of big companies more accountable for accounting failures in the wake of scandals including Carillion and BHS.
Major errors will be punishable by fines and bonus clawbacks under the controversial new rules.
Directors of companies could be forced to repay up to two years of bonuses in the event of a financial collapse or if they are found to have hidden information from auditors. “Leaving the door open to fraud” will also trigger sanctions under the proposed regime.
The boards of all companies with more than 2,000 staff or a balance sheet worth more than £2bn will be covered by the new rules. The directors of any business with more than 500 staff and a turnover of more than £500m will also be held liable for accounting failures if the plans are implemented following a consultation.
The overall regulatory burden on big unlisted companies will also increase to bring them into line with the more stringent reporting requirements faced by quoted companies.
Sir Iain Duncan Smith, the former Conservative leader, warned the move could put people off from becoming company directors at a time when the top priority should be getting the economy moving.
“Not all directors are in day-to-day management positions on boards so there needs to be some differentiation [on who is liable], it’s got to be much clearer,” he said.
“All these things are tumbling in on companies at the moment when they are coming out of the pandemic. Raising corporation tax is really laying into companies but also this economy needs to grow and grow fast.”
Tory MP Kevin Hollinrake said the reforms had caused concern within the party: “I am concerned as a company director myself, and I know others feel the same, that it may lead to unintended consequences. I’m interested to see the extent of the responsibility.”
The CBI offered support for other elements of Mr Kwarteng’s proposals, including a new regulator to replace the Financial Reporting Council, but said the measures targeting company directors “will require careful implementation to be meaningful without stifling entrepreneurial spirits”.
Tim Martin, chairman of JD Wetherspoon, said: "There's scant indication in the proposals that whoever's drawn them up is keen on promoting an attractive enterprise culture. Directors should of course be honest, but more corporate bureaucracy won't achieve that."
Defending the plan as targeting only the biggest companies and most serious transgressions, a Whitehall source said: “It’s not as though you forget to add a zero in your accounts and get a fine.”
In his 232-page paper, Mr Kwarteng also revealed plans to make auditors inspect companies for carbon emissions as the UK seeks to meet a legal obligation to eliminate its contribution to climate change by 2050.
The consultation also confirms that Big Four auditors KPMG, EY, Deloitte and PwC must ringfence their audit and advisory arms to reduce conflicts of interest and could face a cap on their market share of FTSE 350 audits if competition in the sector does not improve.
The changes will be overseen by the UK’s new beefed-up audit watchdog, the Audit, Reporting and Governance Authority, which will replace the Financial Reporting Council and could have power over large unlisted companies as well as those on the stock market.
Mr Kwarteng argued that rebuilding confidence in business is crucial to repairing the economy and building it back from the pandemic.
“When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab,” he said.