UK: Brydon Review - terms of reference published

The terms of reference for Sir Donald Brydon's review of the quality and effectiveness of the UK audit market were published yesterday: see here (pdf). The review is wide ranging and will include the needs and expectations of stakeholders, the scope of the audit and assurance. Perhaps surprisingly for a review described as being independent, the terms of reference note that one of the accountancy professional bodies - the ICAEW - has agreed to provide £500,000 towards the cost of the review. It is, however, stressed that all of the organisations supporting the review have recognised the unconditional nature of their contributions.

Sir Donald recently gave evidence before the Parliamentary future of audit inquiry. A transcript of his evidence is available here. All of the evidence - whether oral or written - received by this inquiry can be found here.

UK: ICAEW proposes a 'framework code' for corporate governance

The ICAEW has published the fifth and final paper in its thought leadership series on corporate governance: see here (pdf). In the paper, the ICAEW sets out the case for what it calls a 'framework code': a set of fundamental principles the purpose of which is to promote a good culture of corporate governance across society and within companies. According to the ICAEW, a framework code:

"... would apply to everyone in corporate governance [and] would typically include directors, shareholders, auditors, and remuneration and recruitment consultants. Where specific codes already exist, they should be tested against the framework code. A framework code would also cover all intermediaries in the investment chain, such as proxy agents, as well as other types of finance providers such as bondholders and lenders, the media, professional bodies, NGOs, governments and regulators in so far as their actions affect corporate governance at individual companies or more widely..".

UK: ICAEW asks - how diverse should boards be?

The ICAEW has published a fourth paper - titled 'How diverse should board be?' - as part of its Dialogue in Corporate Governance: see here (pdf).

UK: ICAEW paper - 'When is comply or explain the right approach?'

The ICAEW has published a third paper - titled 'When is comply or explain the right approach?' - as part of its Dialogue in Corporate Governance: see here (pdf).

UK: ICAEW asks 'what are the overarching principles of corporate governance?'

The ICAEW has published the second paper in its Dialogue in Corporate Governance: New challenges initiative: see here (pdf). The paper asks: what are the overarching principles of corporate governance? Five principles are provided for discussion including leadership, capability and accountability. These principles provide one view of governance and are discussed with a strong focus on the role of the board of directors. This is not surprising because, as the ICAEW states, the principles are generally derived from the UK Corporate Governance Code.

UK: ICAEW dialogue in corporate governance - for what should companies be responsible?

The Institute of Chartered Accountants in England and Wales is considering five questions as part its recently launched Dialogue in corporate governance: new challenges initiative. The first question is: what should companies be responsible for? The ICAEW provides its response in an accompanying paper: see here (pdf). The remaining questions are: what are the overarching principles of corporate governance? When is comply or explain the right approach? How diverse should boards be? Who should be covered by codes?

UK: the duty to keep accounting records - ICAEW guidance for directors published

The ICAEW has published Technical Release 01/11 - Guidance for Directors on Accounting Records under the Companies Act (2006): see here (pdf).

UK: realised and distributable profits under the Companies Act (2006) - updated ICAEW guidance

The ICAEW has published, as part of its Technical Releases series, updated guidance on realised and distributable profits under the Companies Act 2006: see here (pdf).

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 |

UK: distributions under the Companies Act (2006) - determining realised profits and losses: ICAEW/ICAS guidance

The ICAEW and ICAS have published additional guidance - in the form of an exposure draft - on the determination of realised profits and losses in the context of distributions under the Companies Act (2006): see here (pdf). The guidance supplements an earlier technical release, number 01/09, available here (pdf). 

UK: ICAEW/ICAS guidance - realised profits/losses and distributions under the Companies Act 2006

The ICAEW and ICAS have published a joint technical release: 01/09 - Guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006.

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 | 

Isle of Man: auditor oversight - consultation on draft rules

The Financial Supervision Commission has published a consultation paper regarding regulations to be made under the Companies (Amendment) Bill 2008 (which is awaiting Royal Assent). The purpose of the regulations is to establish a framework which will permit Manx auditors to audit firms listed on regulated markets within the EU in accordance with the EU Statutory Audit Directive (2006/43/EC). This will be achieved by the Isle of Man assuming public oversight of auditors but delegating this to the UK Financial Reporting Council's Professional Oversight Board and the Institute of Chartered Accountants in England and Wales. An identical approach is being adopted by the other Crown Dependencies (i.e., Jersey and Guernsey). 

UK: ICAEW technical releases - profits, losses and distributions under the Companies Act 2006

Towards the end of 2008, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland issued a couple of technical releases: Technical release 07/08 provides draft guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006 and is an updated version of Technical Release 01/08. The differences between Technical Releases 07/08 and 01/08 are highlighted in Technical release 08/08.

UK: ICAEW Technical Release 06/08: directors' duties and responsibilities regarding financial and accounting matters

The ICAEW has published a new technical release: number 06/08, titled "Guidance on directors' duties and responsibilities of a financial or accounting nature". In the introduction it is stated:

This statement was issued in October 2008 by the Institute of Chartered Accountants in England and Wales, principally concerning the main duties and responsibilities of a financial or accounting nature owed by directors to their company and its shareholders and others, but also including an overview of more general duties and responsibilities. It sets out, where appropriate, what is considered to be good practice rather than what may be acceptable as the legal minimum required. It is hoped that the statement will be useful to members acting as directors and to members generally in conveying to directors the extent of these responsibilities. It is stressed, however, that the statement is not intended to cover other aspects, however important, of a director’s position".

English counsel have confirmed that this statement is consistent with the English law as at 1 October 2008 had the 2006 Act been fully implemented as at that date".

UK: materiality in financial reporting - ICAEW technical release 03/08

The ICAEW has updated its guidance (published earlier in Tech 32/96) on the concept of materiality in financial reporting. According to the ICAEW the guidance has been updated "to take account of the latest UK literature and IFRS, and to make sure that its principles remain in line with the latest thinking on materiality. This will help to minimise divergent practices in the application of materiality judgements in the preparation of financial statements".  The revised guidance - Tech 03/08 - is available here and in the introduction it is stated:

This guidance refers primarily to the financial statements of commercial entities reporting in compliance with companies legislation and therefore intended to give a true and fair view. However, its principles can be applied more generally to financial statements prepared by other organisations (eg, charities, pension schemes, government departments, local authorities and public sector businesses), although the assessment of users’ needs may vary ... The principles set out in this guidance may also be relevant to other information, such as that provided in an operating and financial review, a business review, a half-yearly report, interim management statements, information about post balance sheet events or in corporate governance disclosures".

UK: Auditing: Code of Best Practice Governance for Accountancy firms auditing public interest entities

Last year the FRC's Market Participants Group recommended that every firm auditing a public interest entity should comply with a best practice governance code similar in style to the UK’s Combined Code. As part of this effort, the FRC and ICAEW have announced that Norman Murray will chair the Audit Firm Governance Working Group, which will develop this new code. For further information click here.