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Audit conflicts – more consultation

Consultations and accounting news appears to be a bit like London buses, there’s not one for ages and then three of them arrive all at once. This week the FRC got busy with a slew of announcments, notably the Auditing Practices Board (APB) looking for input on the vexed issue of non-audit work for auditors.

Earlier this year the UK’s Treasury Select Committee published a report entitled ‘Banking Crisis: reforming corporate governance and pay in the City’. The report questioned the appropriateness of auditors providing non-audit services saying: “We strongly believe that investor confidence, and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company, and recommend that the Financial Reporting Council consult on this proposal at the earliest opportunity”.

The APB has responded to the Select Committee with a Consultation Paper inviting views on an issue which has concerned the corporate governance community since the collapse of Polly Peck and BCCI in the late 1980s. The consultation paper does not address any market specific issues, instead these are being handled by an ongoing review of Ethical Standards and the FRC’s Audit Inspection Unit.

Commenting on the consultation, Richard Fleck, Chairman of APB said: “The question of whether restrictions should be placed on the non-audit services that auditors can provide to the entities they audit was a key issue at the time of the Enron debacle in 2002. Since then there have been a number of developments including greater involvement by audit committees in overseeing what non-audit services are provided, greater transparency on the fees paid for non-audit services and the issuance by the APB in 2004 of Ethical Standards for Auditors which prohibit a number of non-audit services from being provided in certain circumstances. The aim of the APB Consultation Paper is to seek views, especially from investors, on whether there is support for the Treasury Select Committee’s view that investor confidence and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company.”

On the same day the APB also announced its final revisions to Ethical Standard 3 “Long Association with the Audit Engagement”. The revised standard means that from December 15th, audit partners can work for clients for longer than five years under certain conditions, namely that the they are invited to do so by an internal audit committee. Previously the audit partner could stay if they believed their client was experiencing “exceptional circumstances”.

Companies will then have to provide a clear justification for retaining the partner in the annual report. The FRC’s Audit Inspection Unit will then review the reasoning behind any extensions and the associated disclosures provided to shareholders.

The Financial Reporting Council has also now been added to the list of public bodies which can act as a safe harbour for whistleblowing employees. The Public Interest Disclosure (Prescribed Persons) (Amendment) Order 2009 means that employees will be protected if they make a qualifying disclosure in good faith to the FRC, the AADB, the FRRP and the POB – provided that they reasonably believe that the information disclosed is substantially true and that the wrongdoing falls within the scope of the FRC’s responsibilities.


Consultation Paper >>

Revised Ethical Standard re Partner Rotation >>

Public Interest Disclosure Amendment >>

What do you think?