Corporate Governance - Financial Reporting Council issues final draft updates to the UK Corporate Governance Code and Guidance for Audit Committees

In October 2015 we reported on the FRC's consultation paper seeking views on its proposed amendments to auditing standards, ethical standards for auditors, the UK Corporate Governance Code and its Guidance for Audit Committees.

These proposals were the FRC's combined response to the audit reform requirements of the EU's Regulation on the statutory audit of public interest entities (PIEs), the amended Statutory Audit Directive, the Competition and Markets Authority (CMA) Order on statutory audit services for large companies in the UK and some recent changes to international auditing standards.

PIEs are large EU listed entities, credit institutions and insurance undertakings.

In this article we look briefly at the final draft update to the UK Corporate Governance Code and to the FRC's Guidance on Audit Committees.

UK Corporate Governance Code

Changes are being made to Section C of the Code on Accountability in the context of audit committees and auditors as follows:

  • the amendment proposed in the consultation paper that at least one audit committee member should have competence in auditing and accounting is not being made and the existing requirement for recent and relevant financial experience is being retained
  • wording has been added to C.3.1 to provide that the audit committee as a whole is required to have competence relevant to the sector in which the company operates
  • the requirement for FTSE 350 companies to put the external audit contract out to tender at least every 10 years has been deleted as this is now covered by the EU's Regulation on the statutory audit of PIEs which takes direct effect from 17 June 2016
  • the requirement that that the audit committee has primary responsibility for making the recommendation on the appointment, reappointment and removal of external auditors has been retained
  • the proposal that advance notice of retendering for the audit be included in the annual report has been adopted but qualified to say 'any retendering' to ensure reporting is only required when it is thought relevant.

The FRC's feedback statement which is found here has an appendix which summarises the differences between the revised code and the current version (effective 1 October 2014)

Guidance on Audit Committees

Changes are being made to the guidance published in 2012 to take account of the changes to the Code set out above and to reflect the Regulation, the Directive and the CMA's Orders and recommendations. It has also been amended to reduce duplication with elements of the Code and should now be read in conjunction with Section C.3 of the Code.

Changes include, among other things, rearranging the audit committee composition section to provide that a range of skill, experience, professional qualifications are important considerations in forming an audit committee and that the requirement for recent and relevant financial experience and sectoral competence flow from that broader requirement.

The FRC has also stated that from 2017, the names of companies whose audits have been the subject of review by the FRC's Corporate Reporting Review and Audit Quality Review teams will be published. The Conduct Committee's operating procedures will need to be amended to allow this to happen.

Timing and Comment

The revised Code and Guidance on Audit Committees are likely to be effective for financial periods beginning on or after 17 June 2016. The effective date will be confirmed by the FRC once the process of implementing the EU Audit Directive has been completed. Companies should review the composition of their Audit Committees and terms of reference, but it seems unlikely that there will be many instances where the amendments will result in change to the composition of audit committee or how they discharge their responsibilities.

The draft UK Corporate Governance Code can be found here, the draft guidance on Audit Committees hereand the FRC press release here.