Research & CSDP Papers » Banking and Capital Markets

United Kingdom

19 JAN 2010

United Kingdom
January 18th 2010. A new Code for Audit firms was published yesterday by the independent working group established by the FRC (Financial Reporting Council, UK independent regulator responsible for promoting confidence in corporate reporting and governance) and the ICAEW (The Institute for Chartered Accountants of England and Wales).
The Audit Firm Governance project is the result of Recommendation 14 of the October 2007 report of the Market Participants Group (MPG): 'Every firm that audits public interest entities should comply with the provisions of a Combined Code-style best practice corporate governance guide or give a considered explanation.' The MPG was established by the UK Financial Reporting Council (FRC) to advise it on its work on Choice in the UK Audit Market.
To prepare and finalise the code, the Working Group undertook two formal public consultation processes. 

  • The first (November 2008 to January 2009) gathered evidence on key issues that informed its work in preparing the draft code. 
  • The second (July to October 2009) consulted upon a draft code.

The consultation started in July 2009 and closed in October 2009. A total of 44 responses were received from audit firms, investors, companies and members of audit committees and other interested individuals for inclusion on the public record.
The Audit Firm Governance Code (http://www.icaew.com) will come into force in June 2010; it should apply to firms that audit more than 20 listed companies (e.g.: Deloitte, Ernst & Young, KPMG, Grant Thornton, PriceWaterhouseCoopers).
The adherence at the Code will be voluntary, but encouraged by the same "comply or explain" system which is in use among corporate companies (see The Combined Code on Corporate Governance June 2008).

"The Audit Firm Governance Code (the Code) is intended to assist in promoting continuing confidence and choice in the market for the audit of listed companies and should be relevant to everyone who sees audit as playing a vital role in a market economy. The primary purpose of the Code is to provide a formal benchmark of good governance practice against which firms which audit listed companies can report for the benefit of shareholders in such companies."

Among the most important measures adopted by the new Code is that audit firms must appoint independent non-executives: "Principle. A firm should appoint independent non-executives who through their involvement collectively enhance shareholder confidence in the public interest aspects of the firm's decision making, stakeholder dialogue and management of reputational risks including those in the firm's businesses that are not otherwise effectively addressed by regulation. Provisions: C.1.1 Independent non-executives should: have the majority on a body that oversees public interest matters; and/or be members of other relevant governance structures within the firm. They should also meet as a separate group to discuss matters relating to their remit. C.1.2 The firm should disclose on its website information about the appointment, retirement and resignation of independent non-executives, their duties and the arrangements by which they discharge those duties and the obligations of the firm to support them. The firm should also disclose on its website the terms of reference and composition of any governance structures whose membership includes independent non-executives."