The UK Corporate Governance Code (FRC 2012) is the main source of guidance as to how this sensitive relationship should be addressed. It does this in two ways – firstly by setting out what issues relating to the external auditor and the external audit process the committee should consider, and secondly what issues concerning the external audit the committee should report on externally to the members.
Using examples drawn from current practice, the guidance explores how a small sample of FTSE 100 company audit committees address the external audit aspects of the reporting responsibilities assigned to them by the UK Corporate Governance Code (FRC 2012). The guidance should of particular interest to members of corporate audit committees as they approach the task of framing their next report.
At the time of writing, it appears likely that the provisions of the 2012 Code will be further updated to include the proposals of the UK Competition Commission issued in October 2013 – these proposals are intended to further underpin the independent nature of the auditor/audit client relationship. Both the existing FRC requirements and the new proposals are summarised in the paper.
ACCA’s Director of Special Projects, Roger Adams said: 'Framing these reports will always be a challenge. There is a fine line between providing excessive detail and delivering a succinct summary of the most significant issues. Likewise, the issues surrounding the potential impairment of auditor independence via length of service or volume of non-audit services provided, gives continuing grounds for debate. We hope that the guidance issued today and the worthy examples it contains will serve to improve the quality of audit committee reporting generally across the FTSE.'
Mr Adams continued: 'The FRC has recently drawn attention to the need for Audit Committee Chairs to pay attention to the qualitative aspects of their reports as well as to the more factual aspects. We hope that these studies will assist Audit Committee Chairs in delivering reports which are more attuned to user requirements.'
The ‘real world’ disclosures selected to illustrate current practice in the ACCA study were drawn from a number of FTSE 100 companies shortlisted for one or more categories in the 2013 PwC Building Public Trust Awards. The examples are not necessarily 'best practice' but should be seen as illustrative of the way in which audit committees are trying to fulfil their responsibilities under the 2012 edition of the UK CG Code. The analysis shows that the companies studied are responding well to the challenge of providing investors with information about significant financial statement issues considered by the committee and also with more precise data illustrating the independent or arm’s length nature of the relationship between auditor and auditee.
A follow-up paper will be published later this year by ACCA examining if and how audit committee reports issued in the first half of 2014 are tackling the new challenges posed by the proposals from the Competition Commission and the new guidance issued by the FRC.
An FRC press release dated 31 January 2014 reinforces the need for Audit Committees to pay more attention to the qualitative aspects of their reporting. The FRC suggests that when drafting their reports, Audit Committee Chairs should ensure that they are:
- demonstrating ownership and accountability by personalising the reporting;
- being specific to the company and to the current year;
- saying what was actually done. Reports should depict the specific activities during the year and their purpose, using active, descriptive language;
- disclosing judgement calls made for the year, and the sources of assurance and other evidence drawn upon to satisfy the committee of the appropriateness of the conclusion;
- considering the audience when describing issues, their context, policies, processes, conclusions and their consequences for the company and its reporting; and,
- considering where in the annual report information should be best placed, avoiding repetition.