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 proposed revisions follow feedback received to a review of the Code in May 2015.  A total of 22 responses were received with a “vast majority” or respondents seeing the introduction of the Code as a positive development which has enhanced audit firm governance.  All respondents agreed that the Code should continue to operate on a “comply or explain” basis but were also keen that the Code be applied to the governance and oversight of firms’ non-audit businesses.  Audit firms believed that the Code was working well, advising against significant changes.  Investors called for enhanced transparency from the firms and clearer guidance about the role and responsibilities of the Independent Non-Executives (INEs) and increased oversight by the FRC on the firms’ application of the Code.

As a result of the feedback the FRC is proposing to make the following changes:

• sharpen the Code’s purpose and ensure audit quality is clearly embedded in this;
• promote a clear focus on audit quality in the work of the INEs;
• strengthen investors’ engagement with the firms;
• improve transparency in the firms’ reporting against the Code;
• promote the adoption of some aspects of the Corporate Governance Code which it considers to be most applicable to audit firms, on a comply or explain basis; and
• promote the adoption of independent challenge within the governance of the firms’ international networks. 

Comments on the proposed changes are invited until 11 March 2016.

The press release and full consultation are available on the FRC website.