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The Audit Firm Governance Code

The Audit Firm Governance Code applies to eight audit firms that together audit about 95% of the companies listed on the Main Market of the London Stock Exchange.

The Audit Firm Governance Code, published in January 2010, applies to eight audit firms that together audit about 95% of the companies listed on the Main Market of the London Stock Exchange. For these firms, the code sets a benchmark for good governance which other audit firms may wish to voluntarily adopt in full or in part.

The reputations that the audit firms have built upon their licence to audit are of vital public interest. One way in which they can maintain public trust in their brands is by being seen as exemplars of best practice governance.In this context, it is however important to recognise that the governance challenges faced by audit firms are different from those faced by listed companies.

In drawing on aspects of the UK Corporate Governance Code such as the comply or explain approach, the Audit Firm Governance Code establishes the principle that audit firms should appoint independent non-executives within their governance structure.

It also codifies much existing good practice and links to matters that audit firms must comply with as regulated professional partnerships.

Background to the Audit Firm Governance Code

The Audit Firm Governance project is the result of Recommendation 14 of the October 2007 report of the Market Participants Group (MPG):

‘Every firm that audits public interest entities should comply with the provisions of a Combined Code-style best practice corporate governance guide or give a considered explanation.’

The MPG was established by the UK Financial Reporting Council (FRC) to advise it on its work on Choice in the UK Audit Market.

The ICAEW was invited by the FRC to support the follow-up to Recommendation 14 by drawing up a code and for that purpose formed the independent Audit Firm Governance Working Group.

Developing the Audit Firm Governance Code

To prepare and finalise the code, the Working Group undertook two formal public consultation processes.

  • The first (November 2008 to January 2009) gathered evidence on key issues that informed its work in preparing the draft code.
  • The second (July to October 2009) consulted upon a draft code.
First consultation on audit firm governance

The first paper, the request for evidence, asked 20 questions around eight major issues. The consultation commenced in November 2008 and closed in January 2009 and a total of 43 responses were received for inclusion on the public record.

Responses were received from audit firms, investors, companies and members of audit committees and other interested individuals.

Further resources
Second consultation on audit firm governance

The second consultation paper, which included the draft code, invited comments on the content of the draft code, the balance between principles and provisions as well as matters related to the independence of non-executives and anticipated costs and benefits.

The consultation commenced in July 2009 and closed in October 2009 and a total of 44 responses were received for inclusion on the public record.

Responses were received from audit firms, investors, companies and members of audit committees and other interested individuals.

To which firms will the Audit Firm Governance Code apply?

For the purposes of the Audit Firm Governance Code, the Working Group decided that a public interest entity will be a company listed on the Main Market of the London Stock Exchange.

The Working Group recommends that the code should be applicable to those firms that audit more than 20 listed companies.

The eight firms to which the code will apply are:

  • Baker Tilly
  • BDO
  • Deloitte
  • Ernst & Young
  • Grant Thornton
  • KPMG
  • PKF
  • PricewaterhouseCoopers