The Financial Reporting Council (FRC) in the UK has published notes on best practice to help companies undertake an effective process for when they put their audit contracts out to tender.
The Corporate Governance Code contains a provision (inserted in October 2012) requiring FTSE 350 companies to put their audit contract out to tender every ten years on a "comply or explain" basis. As a result of the inclusion of this provision, the FRC has acted to provide some practical examples of how a tender might be conducted.
The key steps identified to conduct an effective tender are:
- Establish clearly the objectives for the tender, why it has been initiated and engage with major investors on these points;
- Choose which firms to invite to tender based on clear criteria and the views of investors;
- Ensure the process is led by the Audit Committee chairman;
- Provide audit firms with adequate information for them to understand the company’s needs;
- Make the decision based on audit quality not price and do not rule out the incumbent auditor without good reason;
- Manage an orderly transition to ensure a seamless handover;
- Ensure the regulatory requirements such as independence rules are met; and
- Make use of audit inspection reports.
This will be of interest to FTSE 350 equivalent companies in Ireland who follow the UK Corporate Governance Code.