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FCA consults on changes to audit committee requirements as a result of EU audit reform

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08 Sep 2015

The Financial Conduct Authority (FCA) has issued a consultation paper that, among other things, proposes changes to audit committee requirements for companies with securities admitted to trading on an EEA regulated market, as a result of the UK implementation of the EU Audit Directive (2014/56/EU). The consultation follows a recent policy announcement by the Department for Business, Innovation and Skills (BIS) on the UK implementation of the EU audit reforms.

The key proposals contained within part 8 of the FCA consultation paper (CP15/28: Quarterly Consultation Paper No. 10) are:

  • For financial years commencing on or after 17 June 2016, the audit committee requirements of DTR 7.1 change:
    • Composition: A majority of audit committee members must be independent, rather than at least one - this will not be an issue for entities which comply with the UK Corporate Governance Code, but may affect those entities which do not, for example those with a standard listing of debt or equities. The members of the audit committee as a whole must have competence relevant to the issuer’s industry sector
    • Role: The rules clarify that the audit committee’s role in monitoring internal quality control and risk management systems and, where applicable, its internal audit, regarding the financial reporting of the issuer must not breach its independence. The audit committee must explicitly take into account any findings and conclusions of external inspections when monitoring the audit, and must report to the board the outcome of the audit, explaining how the audit contributed to the integrity of financial reporting and the audit committee’s role in that process. 
  • Issuers are exempt from the statutory audit committee requirement if they are:
    • a subsidiary of another issuer which is subject to DTR 7.1 or equivalent rules in another EEA state;
    • an issuer of asset backed securities, provided the reason why no audit committee is needed is explained;
    • a credit institution which has only debt securities admitted to trading which has not been required to publish a prospectus; or
    • are a UCITS or AIF fund.
  • The requirement in DTR 7.2.10R for a UK issuer to include in its directors’ report a description of the group’s internal control and risk management systems has been broadened from the process for preparing consolidated accounts to the financial reporting process for the undertakings included in the consolidation, taken as a whole. This is unlikely to be a difference in practice unless the existing disclosure had been drafted in a very legalistic way.
  • The reference in DTR 4.2.10R(4)(b) for the basis of preparation for half-yearly reports under UK GAAP will be updated to refer to Financial Reporting Standard (FRS) 104 Interim Financial Reporting.

The Prudential Regulation Authority (PRA) will consult separately in mid-September as regards corporate governance and audit committee requirements for banks, building societies and insurance undertakings. If such an entity is also admitted to trading on an EEA regulated market, it will have to follow both sets of rules.  The FRC will also be consulting later in the year on possible changes to the UK Corporate Governance Code and its associated Guidance on Audit Committees which might be required as a result of the implementation of the EU Audit Directive.

The FCA are also consulting on implementation of the Accounting Directive (largely tidying up of cross-references), referring to the FRC rather than Accounting Standards Board (ASB)/Auditing Practices Board (APB), implementing a regulation regarding prospectuses, and tidying up an anomaly regarding cancellation of listing after a takeover where there is a small free float.

Comments are invited until 5 November 2015.

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