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Newsflash – Draft Minimum Standard for Audit Committees issued for consultation

November 2022

The FRC has launched a consultation on its draft proposal for a minimum standard for audit committees. 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”.

There are a number of matters which you need to be aware of in considering your response to this consultation:

  • The Standard is not intended to cover all aspects of the audit committee’s remit – it just covers the appointment of the auditor and ongoing oversight of the audit and the auditor;
  • 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 draft Standard

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

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

Responsibilities

Key new audit committee responsibilities included within the Standard are as follows:

  • 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 has been expanded to incorporate considerations of the need to expand audit market diversity and also 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.

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.

Next steps

Following the consultation, the plan is for the standard to be available to committees on a voluntary basis by the end of 2023, ahead of the planned legislation that will make the standard mandatory. The consultation period closes on Wednesday, 8 February 2023. We strongly encourage audit committees to respond to this consultation.

To read the full consultation click here.

Our library of governance publications is available to help you at www.deloitte.co.uk/governancelibrary.

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