UK: FRC publishes update on developments in audit

The Financial Reporting Council has today published an update in relation to its audit work (and its role as the competent authority for audit): see here (pdf). The update notes that some investors have raised concerns that not all audit firms serve investor interests in dealing with perceived conflicts of interest. It is also explained that in 2017/18 the FRC will review the effectiveness of the governance and culture of the eight firms adopting the Audit Firm Governance Code.

UK: FRC publishes revised edition of the UK Audit Firm Governance Code

A revised edition of the UK Audit Firm Governance Code was published today by the Financial Reporting Council: see here (pdf). Further information about the changes and additions made to the Code (including a very useful table summarising the differences) is available in the accompanying feedback statement: see here (pdf). One change proved particularly controversial on consultation: the requirement to have at least three non-executive directors. The revised Code suggests that there should be three such directors but recognises that two may be appropriate for some firms (provision C.1.1).

Japan: Advisory Council recommendations on strengthening the audit framework

The Advisory Council on the Systems of Accounting and Auditing, set up by the Financial Services Agency to make recommendations to improve the external audit framework in Japan, published its report and recommendations earlier this year. An English translation of the report and recommendations was published this week: see here (pdf).

The recommendations are grouped within five areas: the management of audit firms; the information given to the shareholders; detecting fraud; assessing audit quality; and the audit environment generally (including companies' governance arrangements). Creating an audit firm governance code is one of the recommendations made by the Advisory Council in its report. The report appears not to recommend the introduction, at this stage, of mandatory audit firm rotation but suggests, instead, that further analysis is undertaken by the FSA, exploring the experiences in other jurisdictions.

Japan: Advisory Council on Accounting and Auditing - recommendations

The Advisory Council on the Systems of Accounting and Auditing set up by the Financial Services Agency held its fourth meeting a couple of days ago and has published a series of recommendations including the creation of an audit firm governance code: see here (pdf).

UK: FRC consultation - revising the Audit Firm Governance Code

The Financial Reporting Council has published a consultation paper setting out proposed revisions to the Audit Firm Governance Code, following an earlier consultation this year: see here (pdf). Amongst the proposals put forward by the FRC is a restatement of the Code's purpose. Appendix 1 of the consultation document contains the revised version of the Code being proposed by the FRC.

UK: FRC review of the implementation and operation of the audit firm governance code

The Financial Reporting Council has published the results of its review of the implementation and operation of the Audit Firm Governance Code, in a consultation paper published yesterday: see here (pdf). The paper seeks views on a number of proposals and questions, including a change in the stated purpose of the Code.

UK: PwC and the Audit Firm Governance Code

Principle C.1. of the UK Audit Firm Governance Code (2010) provides that firms should appoint independent non-executives, the involvement of which is intended, amongst other things, to enhance shareholder confidence in the public interest aspects of firms' decision-making. In this regard, PwC UK has announced this week (see here):

... the appointment of five Non-Executives in response to the new governance code for audit firms ... The appointed Non-Executives are Dame Karen Dunnell, Sir Ian Gibson, Professor Andrew Hamilton, Sir Richard Lapthorne and Paul Skinner and come from the fields of business, academia and the public and professional services sectors. The Non-Executives will sit on PwC’s newly constituted Public Interest Body in the UK, including the senior partner and the Chairman of the supervisory board, where they will be joined by partners of the firm but will have a majority".

UK: non-executives on E&Y's global advisory board

Earlier this year the Audit Firm Governance Code was published. Principle C1 of the Code provides that a firm should:

appoint independent non-executives who through their involvement collectively enhance shareholder confidence in the public interest aspects of the firm’s decision making, stakeholder dialogue and management of reputational risks including those in the firm’s businesses that are not otherwise effectively addressed by regulation".

The Financial Times newspaper reports - see here - that Ernst and Young is to appoint four non-executive directors to its global advisory board and that it is the first of the 'big four' firms to announce plans to do so. Further information is available in E&Y's press release: see here.

Australia: the ASX Corporate Governance Principles and Recommendations

Earlier this year the Australian Securities Exchange Corporate Governance Council published for consultation proposed changes to the second edition of its Corporate Governance Principles and Recommendations. The submissions have been published (here) along with the Council's response (here, pdf). The majority of submissions provided strong support for the Council's changes, which address, for example, board structure and diversity and the remuneration committee.

A copy of those Principles and Recommendations which have been amended is available here (pdf). A comparative table showing the Principles and Recommendations before and after the changes is available here (pdf). An overview of the changes is available here (pdf).

UK: choice in the audit market - FRC progress report

The Financial Reporting Council has published its fifth progress report on the implementation of the recommendations of the Market Participants Group (here, pdf) on promoting choice in the UK audit market: see here (pdf).

The report summarises recent developments, including the publication of the audit firm governance code, and also describes the results of recent FRC research. It is noted that the revised Guidance to Audit committees has had a limited impact on disclosure and, with regard to market concentration, the FRC reports:

It is apparent that, despite previous increases in the number of FTSE 350 companies retaining a non‐Big Four auditor from 2006 – 2009, this trend has now ceased and may even have reversed. The February 2010 figures also show a slight drop in the number of smaller listed companies retaining a non‐Big Four auditor.

[Of] the thirteen FTSE 350 companies the [Professional Oversight Board] is aware have changed auditor since February 2008, none has switched from a Big Four to a non‐Big Four firm, and two which previously retained a non‐Big Four auditor have changed to a Big Four firm. There appears therefore to be little indication that concentration in the audit market is reducing or is likely to reduce in the near future".

UK: Audit Firm Governance Code published

The ICAEW's Audit Firm Governance Working Group has today published a governance code for firms auditing public interest entities: see here. The following firms, which between them audit approximately 95% of companies listed on the main market of the London Stock Exchange, will be subject to the code: Baker Tilly, BDO, Deloitte, Ernst & Young, Grant Thornton, KPMG, PKF and PricewaterhouseCoopers.

The code was prepared at the request of the Financial Reporting Council, as part of its audit choice project, and will operate on the 'comply or explain' basis. The code's purpose, to quote from its introduction, is to:

... provide a formal benchmark of good governance practice against which firms which audit listed companies can report for the benefit of shareholders in such companies".

The Code has six sections (leadership, values, independent non-executives, operations, reporting and dialogue) and, like the UK's Combined Code on Corporate Governance, contains principles and provisions. For example, principle C.1. provides:

A firm should appoint independent non-executives who through their involvement collectively enhance shareholder confidence in the public interest aspects of the firm’s decision making, stakeholder dialogue and management of reputational risks including those in the firm’s businesses that are not otherwise effectively addressed by regulation".

For further information see: ICAEW Working Group press release (pdf) and background information | FRC audit choice project |