UK: draft of the audit firm governance code published

The ICAEW's Audit Firm Governance Working Group has published a second consultation paper containing a draft of the Audit Firm Governance Code for auditors of public interest entities. The Code is being developed as a result of a recommendation by the Financial Reporting Council's Market Participants Group in the report Choice in the UK Audit Market. The Code has the following features (to quote directly from the consultation paper):

• It follows the transparency reporting definition of public interest entities as listed companies;
• It is targeted at shareholders in listed companies and contains principles related to their dialogue with audit firms;
• It contains a recommendation that the Code should not be implemented through regulation and that only firms that audit more than 20 listed companies should be expected to report on their application of the Code. Based on analysis published in 2009 by the UK Professional Oversight Board (POB) and reproduced in Appendix 4 [of the consultation paper], the Code will initially apply to eight firms;
• It is a cousin of the Combined Code, rather than its offspring. It follows the structure of principles and provisions, the philosophy of comply or explain, and the wording of the Combined Code in a limited number of areas. However, it recognises that a Combined Code designed for listed companies is of limited applicability to owner-managed firms;
• It recognises the qualities that audit firms are expected to demonstrate as regulated professional practices and summarises these qualities so that they can be more widely appreciated;
• It sets out a very specific role for independent non-executives of audit firms in addressing threats that the firms face in spite of their strengths as owner-managed and highly regulated professional practices. This includes being a ‘witness’ to how a firm is run, a ‘safeguard’ of a firm’s reputation especially in unregulated areas of its business, and a ‘channel’ for dialogue with stakeholders; and
• It envisages that firms will make Code-related disclosures in transparency reports.

For further information see: first consultation paper | responses to the first consultation paper | Financial Reporting Council audit choice project |