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AIA

Ten-year tenders ahead for FTSE 350 auditors

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28th Sep 2012
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An update to the Combined Code for corporate governance coming into force on Monday 1 October will require FTSE 350 companies to put their external audit contract out to tender at least every 10 years.

The result of a Europe-wide initiative to improve audit independence and transparency in the wake of the financial crisis, the audit pitching requirement is a considerable step back from the mandatory joint engagements and rotation of auditors originally suggested by European competition commission Michel Barnier last year. Strenuous lobbying from the Big Four and professional bodies appears to have trimmed the more radical proposals, which can be detected in warm comments on the new code from ICAEW head of corporate governance Jo Iwasaki: “This may help alleviate the perception that long tenure reduces audit quality and auditor independence…
“More frequent tendering, which the revised Corporate Governance Code intends, may help increase competition.”

The audit retendering rule is accompanied by several other tweaks to the code:

  • Audit committees will have to give shareholders information on their deliberations, including their assessment work on the external audit process
  • Boards will have to confirm that annual report and accounts are true and fair when taken as a whole, with particular emphasis on ensuring that narrative reviews accurately reflect the company’s financial performance,
  • Progress reports will be required on boardroom diversity policies.
  • Under the “comply or explain” principle that underpins the code, companies will have to give shareholders fully explanations why they have chosen not to follow a provision of the combined code.

“Investors should also benefit from increased communication over audit tenure, details on the timing of tenders and the selection process, as it will allow them to assess the effectiveness of both the process and the external auditor," commented the ICAEW's Jo Iwasaki.

Elements of the accompanying Stewardship Code have been updated to clarify the responsibilities of asset managers and how investors manage conflicts of interest. One suggestion is for asset managers to get their stewardship activities independently verified to provide greater assurance to their clients.

The FRC also published updated audit guidance for audit committees to reflect the changes to the governance code, along with transitional arrangements to minimise disruption from the introduction of audit tendering.

FRC chair Baronness Hogg commented: “The changes to the UK Corporate Governance Code are designed to give investors greater insight into what company boards and audit committees are doing to promote their interests, and to provide them with a better basis for engagement.

“We have aimed to keep these revisions to a minimum and change only those elements of the codes where consultation indicated real improvements could be made.”

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