The UK Financial Reporting Council (FRC)
has released its proposed changes to the Smith Guidance on audit
committees as part of the implementation phase of its project on
choice in the UK audit market.

The Smith Guidance is intended to assist company boards in
implementing the sections of the Combined Code on Corporate
Governance that deal with audit committees, and to assist directors
serving on audit committees in carrying out their duties.

The FRC’s proposed changes follow from 15 recommendations made by
the FRC’s Market Participants Group (MPG) in its final report last
October. The report’s recommendations were designed to enhance the
efficiency of the UK audit market.

In particular, the MPG report made four recommendations relating to
audit committees. These included requiring company boards to
provide information to shareholders about auditor selection;
disclosing any contractual obligations (such as loan agreements)
when appointing certain types of audit firms; requiring large
companies to plan for the risk of withdrawal of their audit firm;
and ensuring committees regularly review sections of the Smith
Guidance that deal with auditor independence.

The first proposed change to the Smith Guidance would require audit
committees to periodically assess the risks associated with the
possible withdrawal of their external auditor from the market and
consider whether any mitigating action would be appropriate. The
second proposed change would involve the audit committee report
explaining to shareholders how it reached its recommendation to the
board on the appointment, reappointment and removal of the external
auditors.

FRC chief executive Paul Boyle commented: “Decisions made by audit
committees exert an important influence on the audit market and so
it is important that they have available to them up-to-date
guidance. We look forward to receiving views on our
proposals.”

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The consultation closes on 6 June 2008 and a revised version of the
Smith Guidance will be published later this year.