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UK Corporate Governance Code shakes up audit

The Financial Reporting Council (FRC) has published revisions to the UK Corporate Governance Code (CGC), which now includes a requirement for external audit contracts to be put out to tender every ten years.

Other additional requirements added to the CGC include:

  • Audit committees showing shareholders how they have carried out their responsibilities;
  • Boards confirming the fairness, accuracy and comprehensibility of annual reports and accounts; and,
  • Companies explaining and reporting on progress with, their boardroom diversity policies.

The Code also requires that companies “provide fuller explanations to shareholders as to why they choose not to follow a provision of the Code.” However, the requirements, which will apply from 1 October, are on a ‘comply or explain’ basis.

FRC chair Baroness Hogg said it has tried to minimise revisions “and change only those elements of the codes where consultation indicated real improvements could be made”.

PwC UK board member for reputation and policy Richard Sexton said this is a clear indicator that the “whole market supports a ‘comply or explain’ approach” adding that more regular tendering on this basis could help counter any “misconception that long audit tenure reflects a lack of competition by showing that the quality of the audit is periodically subject to challenge”.

“The changes will also provide investors with greater transparency around the auditor appointment process and the effectiveness of the audit,” Sexton noted.

“PwC has always maintained that the audit market is fiercely competitive and this new provision will create more opportunities to demonstrate that competitiveness on a regular basis. Tendering is fundamentally different to rotation, which we and many market participants remain strongly opposed to, as it does not automatically rule the incumbent out of the process, nor dilutes the critical governance principle that allows companies and shareholders to appoint the best provider in their eyes.”

The Institute of Chartered Accountants of England and Wales head of corporate governance Jo Iwasaki said the institute also supports the introduction of an audit contract re-tender every ten years but only if the ‘comply or explain’ option gave businesses “the freedom to carry out tendering at a time when it is right for them”.

She added that “increased communication over audit tenure, details on the timing of tenders and the selection process,” would allow investors to “assess the effectiveness of both the process and the external auditor”.

According to Iwasaki frequent tendering can also potentially help to “increase competition”.

Sexton noted that under the ‘comply or explain’ provision companies will be able to “take an alternative approach to testing the market or to defer a formal tender if that is their choice, provided they explain the reasons”.

 

Stewardship Code updates

The FRC also issued amendments to the Stewardship Code which includes:

  • Clarification of the respective responsibilities of asset managers and asset owners;
  • Explanation by investors regarding managing conflicts of interest, collective engagement and the use of proxy voting agencies; and,
  • Independent verification of the processes supporting asset managers’ stewardship.

Lastly the FRC has also updated its Guidance on Audit Committees, and said it will carry out further consultation on the CGC after the government’s remuneration reporting and voting legislation has been finalised.

 

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