On 15 October 2008, the Financial Reporting Council published an updated version of its paper entitled "Guidance on Audit Committees". The guidance, originally published in 2003 and formerly known as the Smith Guidance, is intended to assist listed companies in making suitable arrangements for their audit committees and to assist directors serving on audit committees carry out their role. Although boards are not required to follow the guidance, it is intended to assist them when implementing the relevant provisions of the Combined Code.
The main changes to the guidance are as follows:
- Audit committees should consider including the risk of their auditor withdrawing from the market in their risk evaluation and planning.
- The audit committee section of the annual report should explain how the audit committee reached its recommendation to the board on the appointment, reappointment or removal of the auditor. This explanation should normally include supporting information on tendering frequency, the tenure of the incumbent auditor and any contractual obligations that acted to restrict the committee's choice of auditor.
- A small number of changes have been made to the section dealing with auditor independence to bring the guidance in line with the Auditing Practices Board's Ethical Standards for auditors which were issued after the guidance was originally published in 2003.
- An appendix has been added providing guidance on the factors which ought to be considered if a group is contemplating employing firms from more than one audit network to undertake their audit.
While listed companies are invited to adopt the best practice contained within the guidance with immediate effect, the recommendations on disclosure of information in annual reports apply only to financial years ending on or after 30 June 2009 (which means that they will take effect at the same time as new disclosure requirements contained in the June 2008 edition of the Combined Code and Chapter 7 of the Disclosure and Transparency Rules).
View the Guidance on Audit Committees (26 page pdf).