Companies (Audit, Investigations and Community Enterprise) Act 2004

Overview

The Companies (Audit, Investigations and Community Enterprise) Act 2004 forms part of HM Government's strategy restore investor and general public confidence in companies and financial markets following the major corporate failures of WorldCom and Enron. The Act amends relevant provisions of the Companies Acts 1985 and 1989.

The legislative changes complement a package of non-legislative measures designed to strengthen corporate governance and audit practice, which includes, but is not limited to, measures such as: 

• Changes to the Combined Code on Corporate Governance in July 2003 following a review on the role and effectiveness of non-executive directors
• Guidance on audit committees in January 2003 
• The Financial Reporting Council taking over the functions of the former Accountancy Foundation

In addition, the Act is intended to assist social enterprise by creating a new type of company, the "community interest company" (CIC). The Act is divided into three main parts:

• Part 1 is intended to strengthen the independence of the system of supervising auditors, the enforcement of accounting and reporting requirements, the rights of auditors to information and the company investigations regime; and relaxes the prohibition on provisions made by companies to indemnify directors against liability to third parties.
• Part 2 makes provision for the establishment of a new corporate vehicle, the “community interest company”, intended to make it simpler and more convenient to establish a business whose profits and assets are to be used for the benefit of the community. There will be a statutory "lock" on the profits and financial assets of CICs and, where a CIC is limited by shares, power to impose a "cap" on any dividend. Companies wishing to become a CIC are required to pass a community interest test and to produce an annual report showing that they have contributed to community interest aims. A new, independent Regulator will be responsible for approving the registration of CICs and ensuring they comply with their legal requirements. He will have powers to obtain information from CICs, appoint, suspend or remove CIC directors, make orders in respect of the property of CICs, apply to the court for a CIC to be wound up and set the dividend cap.
• Part 3 contains supplementary provisions concerning repeals, revocations, commencement, extent and the Act's short title.