Consultations on the UK Corporate Governance Code, Stewardship Code and Auditing Standards, published
20 April 2012
FRC PN 359
The Financial Reporting Council has today begun consultation on proposed revisions to the UK Corporate Governance Code and International Standards on Auditing (UK and Ireland) to give effect to its Effective Company Stewardship proposals. The FRC is also consulting on updates to the Stewardship Code.
The UK Corporate Governance Code, which celebrates its twentieth anniversary this year, sets out good practice for UK listed companies on issues such as board composition and effectiveness, risk management, audit committees and relations with shareholders. The Stewardship Code, first published in 2010, sets out good practice for institutional investors on monitoring and engaging with investee companies and reporting to clients and beneficiaries. The proposed changes to the UK Corporate Governance Code include:
Requesting FTSE 350 companies to put the external audit contract out to tender at least every ten years;
Asking boards to explain why they believe their annual reports are fair and balanced;
Encouraging more meaningful reporting by audit committees;
Providing more guidance on explanations that should be provided to shareholders when a company chooses not to follow the Code; and
The new Code will also embody provisions previously announced requiring boards to report on their gender diversity policies.
Read or download the Consultation Document: Revisions to the UK Corporate Governance Code and Guidance on Audit Committees
The proposed changes to the Stewardship Code include:
Clarifying what is meant by stewardship, and the respective responsibilities of asset owners and asset managers; and
Asking investors to disclose their policy on stock lending, and whether they recall lent stock for voting purposes.
Read or download the Consultation Document: Revisions to the UK Stewardship Code
The FRC is also consulting on proposed changes to the Guidance for Audit Committees to support the changes to UK Corporate Governance Code and to give effect to the FRC’s Effective Company Stewardship proposals.
The proposed changes to the auditing standards are mainly directed at:
Enhancing auditor communications by requiring the auditor to communicate to the audit committee information that the auditor believes the committee will need to understand the significant professional judgments made in the audit; and
Extending auditor reporting by requiring the auditor to report, by exception, if the board’s statement of why the annual report is fair and balanced is inconsistent with the knowledge acquired by the auditor in the course of performing the audit, or if the matters disclosed in the report from the audit committee do not appropriately address matters communicated by the auditor to the committee.
Read or download the Consultation Paper: Proposed Revisions to International Standards on Auditing (UK and Ireland)
Commenting on the consultations, Baroness Hogg explained:
“The revisions on which we are consulting this time are deliberately limited. We want to build on the proven track record of the UK Corporate Governance Code and the promising initial response to the Stewardship Code by reinforcing rather than fundamentally changing the codes. We will maintain the ‘comply or explain’ approach to improving standards of governance and ownership.
“The auditing standard proposals are designed to enhance the relevance and value of the audit for users and the public by stimulating greater transparency about the judgments made by boards and auditors.“
Subject to the outcome of the consultations, all the proposed changes will apply to financial years beginning on or after 1 October 2012.
Notes to editors:
The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.
Under the UKLA’s Listing Rules, all companies with a Premium Listing of equity shares are required to report on whether they have complied with the provisions of the UK Corporate Governance Code and, if not, explain to shareholders the reasons why they have not done so.
Under the FSA’s Conduct of Business Rules, all investment firms authorised to manage funds on behalf of others are required to disclose the nature of their commitment to the Stewardship Code or, where they do not commit to the Code, explain their alternative investment strategy.
For all audits, one proposed change is to explicitly require the auditor to read the other information in the annual report to identify any information that is apparently incorrect based on, or materially inconsistent with, the knowledge acquired by the auditor in the course of performing the audit.