Both the FRC and The Department for Business, Innovation and Skills (BIS) consulted on matters requiring changes to the Code, Guidance on Audit Committees, the standards for auditors and changes to legislation respectively during 2015. BIS is expected to lay updated legislation in Parliament soon.

Although the 2016 UK Corporate Governance Code, Guidance on Audit Committees, ISAs (UK & Ireland) and Ethical Standard are marked as “final draft”, no further changes other than minor errata are anticipated before they take final effect.

2016 UK Corporate Governance Code

There are few changes to the Code and those are restricted to the Preface and to section C.3 (Audit Committee and Auditors). There is now a provision indicating that the audit committee as a whole will need competence relevant to the sector in which the company operates. In addition, the audit committee report within the annual report is now required to provide advance notice of any plans to retender the external audit, whilst the previous provision on FTSE 350 companies tendering the external audit every ten years has been removed.

Guidance on Audit Committees

More extensive changes to the Guidance on Audit Committees bring the Guidance up to date, reflecting the updates to the Code since this Guidance was last published and the FRC’s Financial Reporting Lab’s work on the Reporting of Audit Committees.

The changes affect both the activities of the audit committee and the disclosure in the audit committee report within the annual report.

The key revisions affect: the role and composition of the audit committee; the interaction with internal audit; the relationship with the external auditor regarding the audit and non-audit services; the disclosures on areas relating to those changes and disclosures around the FRC’s interaction with the company’s financial reporting or external audit.

Ethical Standard

There is now one FRC Ethical Standard which covers the independence requirements for auditors as well as reporting accountants (previously in the Ethical Standard for Reporting Accountants) and for engagements to report to the Financial Conduct Authority (FCA) on client assets.

The Ethical Standard incorporates the EU reforms as well as certain areas where the FRC wanted to align more closely with the Code set by the International Ethics Standards Board for Accountants (IESBA) or where they felt changes were needed.

This is a principles-based standard, which nevertheless contains a lot of detailed rules. Auditors are required to consider the broad principles even if they think they have complied with all of the rules.

Key revisions to the Ethical Standard relate to incorporating the EU reforms for public interest entities (PIEs) for non-audit services. A “PIE” is a public interest entity, defined in EU law as being an entity governed by Member State law with securities (debt or equity) admitted to trading on an EEA regulated market (including those with a Premium or Standard Listing on the main market of the London Stock Exchange but excluding those traded on AIM), a credit institution (in the UK, a bank or building society) or insurance undertaking (those insurance companies, friendly societies and Lloyd’s syndicates that apply the Solvency II regime). There are additional changes over and above the EU changes affecting existing rules on providing tax services to listed entities on a contingent fee basis – a term covering a listing on any exchange worldwide – as well as a general clarification of the principles relating to advocacy in respect of tax.

In addition, the new EU rules on applying a cap of 70% cap on fees for non-audit services when compared to a three year history of statutory audit fees are explained in detail.Care will be needed in applying the Ethical Standard to multi-jurisdictional group situations as the rules around extraterritoriality are complex.

In addition to changes relating to non-audit services, there are also changes for auditors relating to personal independence – a broadening in scope of “covered persons” and persons connected to engagement team members who cannot have certain prohibited financial, business or employment relationships, and a clarified rule on gifts and hospitality offered to or accepted by the auditor. .

ISAs (UK & Ireland)

The FRC has made changes to reflect the EU reforms throughout their standards and has also implemented three major IAASB projects – the disclosures project (which stresses the importance of the audit of disclosures), auditor reporting, and the auditor’s responsibilities for other information accompanying financial statements.

Key changes include the requirement for enhanced auditor reporting for all PIEs and all listed companies; this is a change from the existing UK enhanced auditor reporting regime which only applied to those companies required to or choosing to comply with the Code. The change will affect UK and Irish companies with listings outside the UK and Ireland, including entities with listed debt, together with unlisted banks, building societies and insurance undertakings.

There will also be some changes to the contents of the enhanced audit report which may add to the length of reports, including:

• An expansion of the auditor’s description of significant risks and their response to include key observations, where necessary;
• a description of the extent to which the audit was considered capable of detecting irregularities including fraud;
• disclosure of the auditor’s tenure, including previous reappointments and renewals; and
• a declaration of the auditor’s independence including confirmation that no prohibited services were provided.

Some changes are also made to auditor’s reports on all entities, whether listed, PIE and/or neither:

• an amendment to the auditor’s reporting on the going concern basis of accounting;
• a revised description of the scope of an audit; and
• for statutory audits, an opinion as to whether the directors’ report and any strategic report have been prepared in accordance with the legal requirements. This is not an audit of the content of these reports and is limited to confirming that the relevant information has been produced.

Click for:

• Press release (link to FRC website)
• Feedback Statement and Impact Assessment: Consultation - enhancing confidence in audit (link to FRC website)
• Revised Auditing Standards 2016 (link to FRC website)
• Revised Ethical Standard 2016 (link to FRC website)
• Final Draft: UK Corporate Governance Code 2016 (link to FRC website)
• Final Draft: Guidance on Audit Committees 2016 (link to FRC website)
• Investor Briefing Note: Implementation of the Audit Regulation Directive (link to FRC website)
• Our previous UK Accounting Plus news item on the FRC consultation in September 2015
• Our previous UK Accounting Plus news item on the BIS consultation in October 2015
• Our UK Accounting Plus project page on audit reform
• Our related Governance in brief publication

The report examines the evidence as to whether financial reporting encourages short-termism and questions whether financial reporting could provide better information to its users on long-term performance. It looks in particular at five areas in which current financial reporting has been accused of encouraging short-termism;

• through the effects of using fair values;
• by not providing information on long-term performance;
• through excessive frequency of reporting;
• by writing off rather than capitalising spending on long-term assets such as intangibles; and
• by ignoring long-run effects on the natural world or on society as a whole.

The paper concludes that current evidence does not suggest that current financial reporting practices impedes long-term investment, except in relation to the frequency of reporting where there can be a trade-off between the benefits of transparency and the costs of ensuring that investors’ expectations of performance are met at the frequent intervals required.

An executive summary and the full research paper are available from the ICAEW website.

The FRC welcome the steps taken by the TCFD to ensure that adequate consideration is given to the assessment of and reporting on the impacts of climate change. The FRC believes that the disclosure recommendations should apply to both financial and non-financial companies and stress that any disclosure recommendations made should be flexible to enable a company “to tell its story”. In order to not detract from the key messages in the annual report, the FRC encourage the TCFD to consider the placement of information outside the annual report when recommending disclosures that “might go beyond the needs of the annual report’s intended audience.”

Despite welcoming the steps taken by the TCFD, the FRC expresses concerns about the length of the consultation period and the ability of stakeholders to respond in a “considered and meaningful way”. This is particularly important given the fact that consideration of climate risks is still at the stage of breaking into mainstream business dialogue with few examples of good practice to date.

 The full comment letter is available on the FRC website.

The Update reports on the EFRAG Technical Expert Group (EFRAG TEG) meeting on 28 - 29 April.  The Update also lists EFRAG publications issued in April:

• EFRAG’s draft endorsement advice on Disclosure Initiative – Amendments to IAS 7;
• EFRAG’s draft endorsement advice on Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12; and
• EFRAG’s paper related to the Measurement Chapter of the IFRS Conceptual Framework (link to EFRAG website). 

Please click to download the April EFRAG Update from the EFRAG website.

An agenda with supporting papers and details on how to register for the public meeting can be found on the EFRAG website.

The webcast discusses the IFRS 16 requirements relating to the recognition exemptions and provides Ms. Lloyd's insight on the scope exemptions, practical examples, and implementation information.

The report stresses that ECON members see shortcomings in the governance of the IFRS Foundation and the IASB, notably in terms of transparency, prevention of conflicts of interest and diversity of Board members. The report also calls for also a more diversified and balanced financing structure also based on fees and public sources. The report's authors feel that their position is backed by the high degree of funding of the IASB's budget (14%) and of EFRAG (60%) by the European Union and conclude that this means that both organisations have to follow the European Parliament standards of democratic legitimacy, transparency, accountability and integrity.

The following documents are publicly available (all on the European Parliament website):

• Draft report discussed during the ECON meeting and submitted amendments (3 documents in all, 101 proposed amendments) - please scroll down to agenda item 10
• Recording of the meeting with votes on the amendments beginning at 12:22 hours

A new paper published in the Journal of Accounting Research looks into the economic consequences of disclosure and financial reporting regulation (including IFRS adoption), drawing on U.S. and international evidence. The authors highlight the challenges with quantifying regulatory costs and benefits, measuring disclosure and reporting outcomes, and drawing causal inferences from regulatory studies, but come to the following conclusions:

• There is a general lack of evidence on market-wide effects and externalities from regulation even though such evidence is central to the economic justification of regulation.
  
• Evidence on causal effects of disclosure and reporting regulation is still relatively rare.
• There is also a lack of evidence on the real effects of such regulation.

The article concludes with several specific suggestions for future research. It can be downloaded (for a charge) through the Wiley Online Library or accessed free of charge through SSRN.

The Reports on Payments to Government Regulations 2014 were introduced into UK law in December 2014.  Under the Regulations, an entity will be required to prepare and deliver a report to Companies House if it is a UK registered company or partnership and meets the test to be either a large undertaking or a public interest entity (PIE), and is engaged in mining, oil and gas or primary forestry logging activities.  Such companies will be required to report publicly payments made to governments in the countries where they undertake extractive and logging operations.  The amended EU Transparency Directive extended the requirements to include entities with securities traded on an EU regulated market (both debt and equity), therefore including non-EU incorporated companies with securities admitted to trading on an EU regulated market.  This requirement was implemented by the Financial Conduct Authority in January 2015.

The guidance seeks to answer the following questions:

• Which entities are under an obligation to prepare and deliver a report?
• Does every entity have to prepare a report or can a consolidated report be prepared for a group?
• Are any entities exempted from preparing reports under the UK Regulations?
• What are the reporting requirements for entities that are subject to equivalent disclosure regimes?
• Do the reports only cover payments made by the entities that have to prepare reports or do the reports cover payments made by other group entities?
• Which business activities are within the scope of the UK Regulations?
• Which types of payment have to be included in the report?
•  Who has the obligation to include payment information in a report in situations where a payment is made on behalf of multiple parties?
• Which government entities that receive payments have to be covered in the reports?
• How should payments be attributed to projects?
• When and how should reports be delivered? 

The guidance is available on the IOGP website.