FRC publishes consultation paper on changes to UK Corporate Governance Code and guidance for audit committees

The Financial Reporting Council, the body responsible for setting UK accounting and auditing standards, as well as drafting the UK Corporate Governance Code (Code), has published a consultation paper setting out proposed amendments to the Code and its Guidance on Audit Committees. The FRC is also consulting on proposed technical amendments to auditing and ethical standards. The proposals stem from various international audit regulation changes, including amendments to the EU Statutory Audit Directive, revisions to International Audit and Assurance Standards (on which the FRC bases UK standards), and the Competition and Markets Authority’s order on statutory audit services, which provides for 10 yearly mandatory audit retendering for FTSE 350 companies.

We summarise the principal impact on the Governance Code and the Guidance on Audit Committees below, as having the most direct relevance to the operation of listed company boards.

Proposed amendments to the UK Corporate Governance Code

The FRC is proposing the following changes to the Code:

• amendments to Code Provision C.3.1 to provide that:
  • the audit committee as a whole must have competence relevant to the sector in which the company operates; and
  • at least one member should have competence in auditing and/or accounting, rather than “recent and relevant financial experience”;
• the deletion of the requirement for 10 yearly mandatory audit retendering in Code Provision C.3.7 (on the basis that it is redundant following the CMA order which applies to financial years commencing on or after 1 January 2015); and
• amendments to Code Provision C.3.8 to ensure shareholders are informed about future audit tendering plans.

Proposed revisions to the Guidance on Audit Committees

The FRC’s revised guidance is appended to the consultation paper at Annex 4 to the consultation paper. The principal changes relate to:

• the removal of the provisions relating to audit re-tendering, as this is now dealt with by the CMA order;
• new guidance relating to the competence of the audit committee in relation to the sector in which the company operates;
• new guidance on the requirement to inform shareholders of future audit plans;
• new restrictions on the provision of non-audit services; and
• revisions to the internal audit provisions of the guidance to highlight evolving best practice.

Responses to the consultation are invited by 11 December 2015.

Source: FRC consultation paper: Enhancing Confidence in Audit: Proposed Revisions to the Ethical Standard, Auditing Standards, UK Corporate Governance Code and Guidance on Audit Committees (September 2015)