Following its consultation on revisions to the UK Corporate Governance Code and Guidance on Audit Committees, FRC has published a feedback statement summarising responses and its reasoned decisions on the Code and Guidance. New editions of both came into force on 1 October 2012.
Perhaps the most publicised addition made by the FRC is to state that FTSE 350 companies should retender their external audit contract at least once a decade. Unsurprisingly, this area of the FRC's consultation drew mixed responses from investors and auditors – the former supporting further measures such as caps on the length of audit appointments, with the latter suggesting alternative means of addressing the perceived lack of independence of long-standing auditors.
The FRC has sought to reach a compromise in its updated Code and has stressed that this retendering does not equate to mandatory rotation of auditors. Instead, what is desirable is the process of benchmarking to obtain the best quality and most effective audit; even if that is best secured by reappointing the incumbent auditor.
Other changes to the Code include the recommendation that the board's statement in its annual accounts should confirm that as a whole the annual report and accounts are fair, balanced and understandable. They should also provide the information necessary for shareholders to assess the company's performance, business model and strategy.
In the 'Guidance', internal audit committees are also now encouraged to report the process by which they have assessed the effectiveness of the external audit, rather than simply state whether they believe the audit has been effective.
If a company chooses not to comply with the tender requirements set out in the new code, it is important that a clear explanation is given so that its shareholders can decide if they are happy with the approach the company is taking.