A draft governance code for audit firms has been published by an independent working group set up by the Institute of Chartered Accountants in England and Wales at the request of the Financial Reporting Council.
The code is being designed primarily to serve investors and the working group has proposed it should apply to the eight firms that together audit more than 95 percent of the companies on the main market of the London Stock Exchange.
The draft code draws on aspects of the Combined Code on Corporate Governance, including the structure of principles and provisions and the ‘comply or explain’ approach.
However, it recognises governance challenges facing audit firms are different from those faced by listed companies. For example, while it advocates independent non-executives, their role would be different to that of non-executive directors in listed companies.
PricewaterhouseCoopers UK (PwC) head of assurance Richard Sexton said the firm is supportive of effective governance because it underpins quality and trust.
“Conceptually we absolutely support something that captures best practice and we think we do a lot of things that are mentioned within the proposed code already,” he said.
The one area where PwC is “digesting the proposals” is the concept of independent non-executives.
“It’s not that we don’t see the value, indeed we already have an advisory board – people who help us to think about strategy,” Sexton said.
“But the concept of putting people in a position of responsibility for reviewing our strategy, a responsibility for assisting us with risk management, we find the paper a little dismissive of some of the difficulties around independence conflicts that such individuals might run into.”
Sexton notes the consultation paper recognises ‘there should be no initial list of relationships between an independent non-executive and an audit client of the firm’.
“We think that means that at the point of appointment there should be no investment that an independent non-executive holds in a client of a firm,” Sexton said.
“PwC has a market share of about 40 percent of the FTSE 100, a little over 30 percent of all listed clients, which already creates quite a high hurdle for our partners today, never mind someone that we might bring in.
“In addition, for an organisation such as ours that works with a very wide range of companies outside of those that are audit clients, there are a number of commercial conflicts that one has to manage quite carefully.
“So if you were bringing in people who are active executives, for example in the financial services world, could they really be heavily involved in reviewing our financial services strategy?
“Would that not potentially give them a concern from their own personal conflict? Whether or not it was real, because some of this is about perception.
“So we think there is a way to go with that to really understand that independence and conflict discussion.”
The working group is seeking comments from audit firms, investors, listed companies and other stakeholders before the code is finalised towards the end of the year.
The deadline for responses is 10 October.
GOVERNANCEThe code would apply to eight UK audit firms
• Baker Tilly
• BDO Stoy Hayward
• Ernst & Young
• Grant Thornton
Source: ICAEW/FRC working group