Audit firm governance code: ICAS responds to FRC consultation

By James Barbour, Director, Technical Policy

26 August 2015

James Barbour, Director, Technical Policy, summarises the key points in ICAS' response to the FRC's consultation – Audit Firm Governance Code – A review of its implementation and operation.


ICAS response to FRC consultation

Download


Lack of visibility

ICAS highlights in its response that there appears to be a lack of visibility of the Code's application to external parties. For example firms do not appear to be referring to the Audit Firm Governance Code (AFGC) in their respective audit tenders.

Validity of stated purpose of the Code

ICAS believes that this is still valid.  We understand that the inclusion of one of the original objectives, namely:

"Benefit capital markets by enhancing choice and helping to reduce the risk of a firm exiting the market" was to ensure that the linkage to the Market Participants Group's recommendations was maintained. We were always doubtful as to the extent that the Code would help to enhance the level of competition and choice. That said, the firms, as noted above, could do more to promote their adherence to the Code, even if just to better market themselves.

Public interest

The FRC should not seek to define the public interest in this context more than has already been done. The role of the Independent Non-Executives (INEs_ is relatively clear under the existing code, therefore, we are not convinced that there is a need to better define their role. There was always going to be a learning curve in the early years of the Code as the INEs got used to the different entity structures of the larger firms in comparison to those of corporate entities.

Scope of governance arrangements

ICAS does not believe that there should be separate governance arrangements for audit.  We firmly believe that the Code should apply firm wide. There are other services being provided by the firms that could have a serious impact on their reputation. Indeed, audit as a service line is continuing to decrease in overall firm revenue terms.

International developments

Whilst it has been good to note the Code being applied in certain cases beyond UK firms it does not naturally have extraterritorial reach. Conceptually it would be good for this to happen, however, due to differences in how the firms are structured globally there would be a number of practical challenges that would need to be overcome. Additionally, as well as the UK firms having a responsibility to spread the word and promote good governance on a global basis, the FRC also has a responsibility via IFIAR to do likewise.

Independence of INEs

ICAS believes that independence of mind is absolutely crucial but that appearance of independence is also important. Ultimately, it is the integrity and objectivity of the particular individuals that is of paramount importance. That said, an evolutionary development of the Code might be to introduce specified terms of service akin to provision B.2.3 of the UK Corporate Governance Code.

"B.2.3. Non-executive directors should be appointed for specified terms subject to re-election and to statutory provisions relating to the removal of a director. Any term beyond six years for a non-executive director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board."

Appointment process for INEs

Firms should not be required to follow a standard process and there is no need for all such positions to be publicly advertised. Head-hunters would be the normal means of identifying and approaching suitable candidates.

We are not persuaded that there is a need for investors of audited entities to have any engagement in this regard and we are not convinced that they would want to in any case. We do not believe that any regulator should have a role in the appointment of INEs. There will be opportunities for informal feedback to be given to the firms regarding their respective appointments.

Increased inclusion of UK Corporate Governance Code requirements

It is our view that each of the following could be introduced.

  • The inclusion in firms' transparency reports of a viability statement providing an assessment of long term solvency and liquidity
  • Term limits on INEs' appointment
  • Transparency around the remuneration of INEs
  • A minimum number of INEs per firm
  • A requirement for at least one INE to have recent and relevant financial experience
  • An independent Chairman
  • Greater consideration of diversity
  • A formal role for INEs on remuneration, nomination, risk and/or audit committees

The first of these would be of particular value as it would give an indication of the financial health of a firm, however, there would undoubtedly be practical issues in implementing such a provision e.g. how do you define the firm in this context, could it be applied solely to the UK firm etc?

Accountability of boards, INEs and public interest committees

Practically speaking, the INE's accountability/duty of care can only be to the firm. However, the INE themselves would be expected to adopt an attitude of recognising the importance for the firm to maintain its reputation and standing in the business community.

Topics

  • Audit and Assurance

Previous Page