Audit Committees and the External Audit: Minimum Standard issued

The FRC has issued a minimum standard for audit committees in relation to their oversight responsibilities for the external audit. This follows the Government's Response to its ‘Restoring Trust in Audit and Corporate Governance’ consultation, and was driven by a specific recommendation from the Competition & Markets Authority’s Statutory Audit Services Market Study that the FRC “should have the power and a requirement to mandate minimum standards for both the appointment and oversight of auditors”.

A consultation process took place earlier this year and just a small number of changes have been made to the final version of the Standard. The title has been changed to reflect the focus on the audit committee’s role in relation to external audit only and the section on oversight of auditors has been expanded to include more guidance on how the audit committee should undertake an assessment of the effectiveness of the audit process.

There are a number of other matters to be aware of in relation to the new Standard:

• The Standard is applicable to the FTSE350 only (although is noted as representing good practice for more general application). Companies within scope are encouraged to begin to apply the Standard as soon as they are able;
• Until the establishment of ARGA, the FRC does not have powers to enforce the Standard and so until that time, the intention is that the Standard is adopted on a ‘comply or explain’ basis by FTSE350 audit committees; and
• The FRC states that the majority of the text in the Standard is taken from existing publications including the UK Corporate Governance Code, Guidance on Audit Committees and Audit Tenders: Notes on Best Practice. The key new aspect is primarily to reflect the Government’s focus on diversity in the audit market.

The content of the new Standard

In addition to an initial section on ‘Scope & Authority’, the Standard comprises the following sections:

• Responsibilities
• Tendering
• Oversight of auditors and audit
• Reporting

Responsibilities

This section reflects the audit committee responsibilities set out in the UK Corporate Governance Code in relation to the external audit but also includes some additional responsibilities:

• requiring that the company manages its non-audit relationships with audit firms to ensure that it has a fair choice of suitable external auditors at the next tender and in light of the need for greater market diversity and any market opening measures which may be introduced
• engaging with shareholders on the scope of the external audit (where appropriate)
• inviting challenge by the external auditor, giving due consideration to points raised and making changes to financial statements in response where appropriate

Tendering

This section of the Standard includes the recommendations from the FRC’s ‘Audit Tenders: Notes on Best Practice’ but also incorporates considerations of the need to expand audit market diversity and challenges to those firms eligible to participate in a tender process but who choose not to and how that is in the public interest. In particular, the Standard states “The Audit Committee should remind eligible firms that refuse to tender that they may as a result be ineligible to bid for non-audit services work.”

Oversight of auditors and audit

This section emphasises the need for the audit committee to create a culture which recognises the work of and encourages challenge by the auditor. The Standard also notes that engagement level Audit Quality Indicators can be used as evidence of the effectiveness of the external audit and the
auditor.

This is the section of the final Standard to receive the most significant amendment further to the consultation process. Reflecting the importance of the audit committee’s assessment of the effectiveness of the external audit process, this section has been expanded to include elements from the ‘Guidance on audit committees’ in relation to that assessment (see paragraphs 16 & 17 of the Standard).

Reporting

The audit committee will be required to report on the activities it has undertaken to meet the requirements of the Standard. Where, in line with the new responsibility to engage with shareholders on the scope of the audit, shareholders have requested that certain matters be covered in an audit and that request has been rejected, an explanation of the reasons why should be provided.

To access the full standard click here.