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
- 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.