FRC Guidance on Audit Committees

The FRC Guidance on Audit Committees (formerly known as the Smith Guidance) was first published in 2003 and updated in 2005. It is intended to assist company boards when implementing the sections of the Combined Code on Corporate Governance dealing with audit committees and to assist directors serving on audit committees in carrying out their role.

A new edition of the guidance was issued in October 2008. A limited number of changes have been made to implement some of the recommendations of the Market Participants Group (MPG), which was established to provide advice to the Financial Reporting Council on market-led actions to mitigate the risk that could arise in the event of one of more of the Big Four audit firms leaving the market. The Group’s final report, containing 15 recommendations to enhance the efficiency of the UK audit market, was published in October 2007. Copies of the report can be found here.

 2005 Guidance on Audit Committees (120kb)

 2008 Guidance on Audit Committees (219kb)

Printed copies of the revised guidance can be obtained free of charge from FRC publications, tel: 020 8247 1264 or email: customer.services@cch.co.uk

The main changes to the guidance are:

• Audit committees are encouraged to consider the need to include the risk of the withdrawal of their auditor from the market in their risk evaluation and planning;
• Companies are encouraged to include in the audit committee’s report information on the appointment, reappointment or removal of the auditor, including supporting information on tendering frequency, the tenure of the incumbent auditor and any contractual obligations that acted to restrict the committee’s choice of auditor;
• A small number of detailed changes have been made to the section dealing with the independence of the auditor, to bring the guidance in line with the Auditing Practices Board’s Ethical Standards for auditors, which have been issued since the guidance was first published in 2003; and
• An appendix has been added containing guidance on the factors to be considered if a group is contemplating employing firms from more than one network to undertake the audit.

Consultation on amendments to the guidance was carried out between March and June 2008. A summary of the main points raised by respondents, and a regulatory impact assessment, are available below. Copies of individual responses can be found here.

 Revisions to Audit Committee Guidance - Summary of Responses (152kb)

 Revisions to Audit Committee Guidance - Regulatory Impact Assessment (91kb)

The amendments to the guidance are a mixture of changes to recommended best practice and recommended disclosures to be made in the annual report. Companies are invited to adopt best practice with immediate effect, but the recommendations on disclosure are only intended to apply to reports covering operating periods ending on or after 30 June 2009; this means that they will take effect at the same time as new disclosure requirements contained in the revised Combined Code and FSA Corporate Governance Rules published earlier in 2008.