The FRC said that its earlier review had found that engagement between investors and audit firms had not worked as well as it had hoped and there was some concerns among investors about the the role which independent non-executives (INEs) play and about their independence. It is hoped that the changes in the code will address some of these issues. Like the main corporate governance code firms apply the code using the comply or explain principle.
The revised code recommends that the transparency reports produced by firms become a more useful document for investors which provides commentary on the firm’s performance, position and prospects and contains the disclosure required by the code such as how its governance structures and management team operate, their duties and the types of decisions they take. Additionally the revised code states that within the transparency report the audit firm should give details of any additional provisions from the UK corporate governance code which it has adopted within its own governance structure.
In order to enhance the role of the independent non-executives (INEs) the revised code also recommends that firms disclose in their transparency reports information on their appointment or retirements; their remuneration; their duties and the arrangements by which they discharge those duties; and the obligations of the firm to support them. The firms also need to disclose in the report the reasons for their governance structure in relation to the INEs. The code suggests that the INEs could be part of the board of form A new provision in the code also recommendst that INEs should have regular contact with the ethics partner, who should under the ethical standards have a reporting line to them.
Stephen Haddrill, FRC chief executive said, “The UK audit firm governance code plays an integral role in enhancing justifiable trust and confidence in the value of audit among the public, particularly investors. The firms’ transparency reports need to reflect this by including content that is of greater relevance to stakeholders.”
The FRC said it would conduct regular reviews of transparency reports to highlight best practice and innovation in governance. It will consider the extent to which firms are adopting provisions from the UK corporate governance code and assess whether there is scope for their future incorporation into the audit firm governance code.