Provision C.3.1 of the UK Corporate Governance Code provides that listed company boards in the UK should establish an audit committee of at least three, or in the case of smaller companies two, independent non-executive directors. In smaller companies the company chairman may be a member of, but not chair, the audit committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as chairman.
A smaller company is one that is below the FTSE 350 throughout the year immediately prior to the reporting year.
The main role and responsibilities of the audit committee should include:
The audit committee’s terms of reference should be available on a company’s website and a section of the annual report should describe the work of the committee in discharging those responsibilities by FSA DTR 7.1.5 R and 7.2.7 R
The audit committee should have primary responsibility for making a recommendation to the board on the appointment, reappointment and removal of the external auditor.
The annual report to shareholders should explain to shareholders how, if the auditor provides non-audit services, auditor objectivity and independence is safeguarded.
The audit committee should monitor and review the effectiveness of the internal audit activities. Where there is no internal audit function, the audit committee should consider annually whether there is a need for an internal audit function and make a recommendation to the board, and the reasons for the absence of such a function should be explained in the relevant section of the annual report.
The audit committee should review arrangements by which staff of the company may, in confidence, raise concerns about possible improprieties in matters for financial reporting or other matters. The audit committee’s objective should be to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.
The FRC Guidance on Audit Committees (formerly known as the Smith Guidance) was first published in 2003 and updated in 2008 and 2010. It is intended to assist company boards when implementing the sections of the UK Corporate Governance Code dealing with audit committees and to assist directors serving on audit committees in carrying out their role.
In July 2010 the FRC began consultation on limited changes to the guidance to provide advice to audit committees on determining whether a company’s auditor should be permitted to provide particular non-audit services. This consultation is being carried out in parallel with a consultation on revisions to the Auditing Practices Board’s Ethical Standards for Auditors, and both follow a review of the provision of non-audit services by auditors to audit clients.
The ICAEW brings together listed company audit committee chairmen from across the FTSE 500 to share best practice and discuss emerging trends and how they are tackling them in their role.