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FRC consults on changes to the Audit Firm Governance Code

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22 May 2015

The UK Financial Reporting Council (FRC) has issued the findings of its review of the implementation and operation of the Audit Firm Governance Code (the Code), introduced in January 2010. As a result of this review, the FRC is seeking views on possible changes to the Code. Comments are invited by 28 August 2015.

The Code was developed by an independent working group constituted jointly by the FRC and the Institute of Chartered Accountants in England and Wales (ICAEW), in response to concerns raised by market participants about the preservation of an adequate supply of high quality audits in a highly concentrated market following the collapse of Arthur Andersen.  It applies to firms which audit more than 20 listed companies, although adoption is not a regulatory requirement.

The FRC's principal conclusions from its review are as follows.

  • The quality of governance in the major UK audit firms is of considerable significance to
    investors and to the health of markets.

  • The firms are in the main well ahead of their international comparators in bringing external challenge into the partnership model through the introduction of Independent Non-Executive directors. However, there is scope for this to be built upon by adopting the principle of external challenge in the international network organisations as well as at national level.

In response to the findings of the review, the FRC is requesting views on the following.

  • Whether the purpose of the Code should be restated to more sharply define the public interest. In this context the FRC believe that the public interest rests in:
    • audit quality;
    • the broader reputation of audit firms, including oversight of non-audit businesses; and
    • prevention of a firm failure.
  • Whether there should be separate governance structures for firms' audit businesses that are ring-fenced from the rest of the firm.
  • Whether the Code should include more detail and impose more requirements in relation to the "tone at the top" and the culture of ethics and professionalism within audit firms.
  • Whether the concept of the Code should be spread elsewhere in the world and how this might be achieved.
  • How Independent Non-Executives should be appointed, including whether regulators should have a role in this, and how their independence should be protected and demonstrated.
  • Whether additional aspects of the UK Corporate Governance Code should be incorporated into the Code.
  • Issues relating to the accountability of boards, Independent Non-Executives and public interest committees of the firms, including transparency and engagement with regulators.
  • Whether the Code should be applied to a wider group of firms.

The full report and consultation document, as well as the press release, can be obtained from the FRC's website.

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