Comments from ACCA to the Corporate Governance Unit, Financial Reporting Council
The proposed revisions relate primarily to advising the board on the annual report and on external audit, tendering external audit, and communicating to shareholders.
We support the intent of the proposed revisions. However we are concerned about what effect some of them would have in practice.
Advising the board
It is proposed that audit committees should report to their boards on:
- The significant issues that it considered in relation to the financial statements and how these issues were addressed;
- The basis for its advice that the annual report is fair, balanced and understandable and provides the information necessary for users to assess the company’s performance, business model and strategy; and
- Its assessment of the effectiveness of the external audit process and its recommendation on the appointment or reappointment of the external auditor, including the steps taken in deciding whether or not to recommend that the audit be put out to tender.
We are concerned that boards do not delegate too much to and over burden audit committees. Nevertheless, we strongly support the first point.
On the second point, we have commented in our response to the consultation on the UK Corporate Governance Code that we question how an audit committee could satisfy itself that the report has provided all the information necessary to users. This could be a very onerous task and potentially impossible. Arguably, the current reporting framework does not provide all the information necessary for investors let alone all the other users of accounts so it is not fair on audit committees to burden them with what is such an open ended task. An alternative wording might be:
‘…basis for its advice that the annual report is fair, balanced and understandable and the steps it has taken to satisfy itself that it provides the information which, in its considered opinion, is necessary for its larger long-term investors and other (specific) users to assess the company’s performance, business model and strategy.’
On the third point, we have also commented in our response to the Governance Code consultation that it is very difficult for a customer to determine audit effectiveness unless an audit was unequivocally ineffective.
Role and responsibilities
With regard to the proposed new paragraph on narrative reporting, we strongly support the idea that shareholders and other users are provided with (all) the information necessary to assess performance, business model and strategy and whether the annual report is fair balanced and reasonable.
As commented above, we think it would very difficult for audit committees to advise the board meaningfully on whether (all?) shareholders and other users are provided with (all) the information necessary to assess performance, business model and strategy and whether the annual report is fair balanced and reasonable.
Section 4.5 says ‘the audit committee should review the company’s internal financial controls (that is, the systems established to identify, assess, manage and monitor financial risks). There is more to internal control than the systems that have been formally established. It is the corporate culture that determines which systems work and which procedures are followed.
A suitable culture is the most important aspect of internal control, the guidance on audit committees should recognise this explicitly. For example, the guidance could state that the audit committee should have oversight of the processes employed to establish the cultural health of the organisation including considering whether the values set by the board are being lived throughout the organisation. This would give some meaning to the UK Corporate Governance Code supporting principle to the first main principle A.1.
Tendering external audit
The guidance should make clear when the 10-year cycle for audit tendering should start. For example, if a company has had the same auditor for the last ten years and the contract has not been put to tender in that time, should a tendering exercise start immediately?