Revisions to the UK Corporate Governance Code and guidance
05 May 2016
The FRC has published revised versions of the UK Corporate Governance Code (the 2016 Code) and Guidance on Audit Committees. The changes, which form part of a package of changes that also affect auditing and ethical standards and company law, are principally driven by the introduction of the EU Audit Regulation and Directive. The changes introduced by the 2016 Code come into effect for periods beginning on or after 17 June 2016.
Recent and relevant financial experience
Following the consultation, the FRC has decided to retain the 2014 Code’s (provision C.3.1) requirement for the board to satisfy itself that at least one member of the audit committee has “recent and relevant financial experience” rather than to introduce the EU Audit Regulation and Directive’s “competence in accounting and/or auditing”. However, the requirement for “competence in accounting and/or auditing” is included in the revised Disclosure and Transparency Rules and considered a minimum hurdle that must be achieved in the composition of the audit committee.
Competence relevant to the sector
Reflecting wording used in the EU Audit Regulation and Directive, provision C.3.1 of the 2016 Code now requires the audit committee as a whole to have “competence relevant to the sector in which the company operates”.
The C.3.7 requirement for FTSE 350 companies, on a ‘comply or explain’ basis, to put their external audit out to tender at least every ten years has been removed from the 2016 Code. However, the strict requirements regarding retendering introduced both through the EU Audit Regulation and Directive (applying to all Public Interest Entities) and through the Competition and Markets Authority’s (CMA) Orders (applying to FTSE 350 companies) are still in force.
Notice of retendering
Provision C.3.8 of the code requires companies to disclose in the audit committee report how the audit committee has assessed the effectiveness of the external auditor, the approach taken to the external auditor’s appointment or reappointment and information on the length of tenure of the current audit firm. This has been supplemented in the 2016 Code by a requirement to provide “advance notice of any retendering plans”.
No advisory vote on the audit committee report
Respondents to the FRC’s consultation offered little support for the CMA’s suggestion that audit committee reports should be the subject of an advisory vote at a company’s AGM – so this has not been added to the 2016 Code.
Guidance on Audit Committees
The Guidance has been amended much more than the Code itself but many of the changes are structural, reduce duplication, and/or help improve consistency with other more recently published FRC guidance on related matters. The main points to note are as follows:
- Composition of the board – the Guidance includes a recommendation for the audit committee report to disclose “how the committee composition requirements have been addressed”.
- Mandatory retendering – in line with the changes introduced by the 2016 Code, the material formerly included in the Guidance on external audit retendering for FTSE 350 companies has been removed.
- Pre-approval and approval of non-audit services – the Guidance includes a clearer distinction between the approval of non-audit services and setting a policy for the pre-approval of non-audit services.
- Interaction with the FRC - the Guidance requires, on a ‘comply or explain’ basis, information on the nature of any interaction the audit committee has with the FRC’s Corporate Reporting Review team. Where a company’s audit has been reviewed by the FRC’s Audit Quality Review team, it must disclose any significant findings and the actions the audit committee and the auditors are taking as a result.
- Other changes – The Guidance also includes revised “internal control and risk management” and “internal audit” sections and clarified wording on the role of the audit committee in relation to the board’s “fair, balanced and understandable” statement.
Read the 2016 Code and FRC’s Guidance.