The Financial Reporting Council has published final draft updates to the UK Corporate Governance Code, its Guidance on Audit Committees, ethical and auditing standards. It has also published a feedback statement which summarises the main points raised by respondents to the September 2015 consultation on the proposed amendments and the FRC's responses.


The FRC published a consultation paper in September 2015 setting out proposed changes to the Code and the Guidance to take account of:

  1. changes required by both Directive 2014/56/EU (which amends the Statutory Audit Directive) and Regulation No. 537/2014 on the statutory audit of public interest entities, which came into force on 17 June 2014. The Regulation will only become applicable from 17 June 2016 to tie in with the deadline for Member States to transpose the Directive by that date;
  2. remedies proposed by the Competition Commission in response to its market investigation into the supply of statutory audit services to large companies in the UK;
  3. changes to international auditing standards; and
  4. implementation of the Accounting Directive in the UK.

Changes to the consultation draft

In its feedback statement, the FRC confirmed that minimal changes were proposed to the Code to implement the requirements of the Directive and the Regulation and that changes to the Code, the Guidance and ethical standards were generally well-received.

Changes to the Code

Changes to the consultation draft version of the Code include:

  • the proposed amendment to provision C.3.1 to provide that the board should satisfy itself that at least one member of the audit committee has competence in accounting and/or auditing has not been made. The current formulation of "recent and relevant financial experience" will be retained;
  • the reference in provision C.3.7 to the audit committee having primary responsibility for making the recommendation on the appointment, reappointment and removal of the external auditors has been retained to ensure that the responsibility is clear and aligns with the Guidance; and
  • the proposed change to provision C.3.8 to provide that the annual report should include advance notice of external auditor retendering plans has been made, but qualified with "any" so ensure that reporting is only undertaken when focused and relevant.

Changes to the Guidance on Audit Committees

Changes to the consultation draft version of the Guidance on Audit Committees reflect the changes to the Code and include:

  • the audit committee composition section has been rearranged to provide that a range of skills, experience, professional qualifications and knowledge are important in forming an audit committee and that the requirements for recent and relevant financial experience and sectoral competence flow from that broader requirement. It is recommended that the matter of how the audit committee composition requirements have been met be included in the audit committee section of the annual report;
  • the role of the audit committee in relation to the fair, balanced and understandable statement has been clarified and sections of the internal control and risk management and role of internal audit sections have been revised; and
  • Section 4 (communication with shareholders) has been amended to reflect the expectation that interactions with investors should encompass more than just the reporting in the annual report and to provide flexibility in the placement of the committee's report. 

Changes to the Ethical Standard

In addition to changes to incorporate provisions of the Directive and the Regulation, the revised Ethical Standard reflect proposals in the FRC’s April 2014 review of the ethical framework for auditors.

Changes to the consultation draft Ethical Standard include:

  • when applying the 70% fee cap for non-audit services to an audit firm's network, the requirement applies to the audited entity, its controlled undertakings and the consolidated accounts of that group and not to the parent undertaking of the entity;
  • the threshold under which smaller listed and quoted entities can benefit from relief from certain of the restrictions on non-audit services has been increased from a market capitalisation of €100 million or less to a market capitalisation of €200 million or less. This reflects the SME capitalisation threshold in MiFID which calculates the market capitalisation of an entity on a rolling three year basis (instead of the qualifying transitional period proposed in the consultation draft); and
  • to address concerns that the proposal to prohibit contingent fees for tax services would significantly increase costs for smaller audited entities (as they would need to procure a separate provider), the relevant standard now includes a materiality consideration for listed entities below the €200 million MiFID SME capitalisation threshold, whereby the prohibition will not apply in situations where a contingent fee for tax services is not material in the context of the audit firm or the remuneration or profit share of the partner(s) involved in the engagement. 

Feedback statement

In the feedback statement, the FRC states that it has decided to publish, from 2017, the names of those companies or company audits which have been the subject of review by the FRC's Corporate Reporting Review and Audit Quality Review teams. It notes that such transparency is currently outside the Conduct Committee's operating procedures and will review those as necessary.

Next Steps

The revised Code, Guidance on Audit Committees and auditing and ethical standards are expected to be effective for the audit of financial statements for periods beginning on or after 17 June 2016. The FRC will confirm the final documents and their effective date once the legislative and regulatory processes required in connection with the UK implementation of the EU statutory audit legislation have been completed.