ICSA issues revised guidance on terms of reference for audit committeesPrint publication
Companies are required to go through a formal process of considering their internal audit and control procedures, assessing the effectiveness of the external audit process, and overseeing the relationship with their external auditor. As part of this process, it is essential that the audit committee is properly constituted with a clear remit and identified authority, and that it has processes in place to enable directors serving on audit committees to perform their role.
ICSA has published a revised guidance note which has been revised primarily to reflect the updated editions of the UK Corporate Governance Code and Financial Reporting Council (FRC) Guidance on Audit Committees both published in April 2016.
Changes to the model terms of reference for audit committees are numerous but include:
- deletion of the provision limiting the extension of appointments to two further periods of three years (following an initial period of appointment of up to three years), provided that the members of the committee continue to be independent
- a new recommendation that one member of the remuneration committee and, where relevant, one member of the risk committee should also sit on the audit committee
- a recommendation that all members of the committee should be independent, non-executive directors
- a provision that notices, agendas and supporting papers can be sent in electronic form where the recipient has agreed to receive documents in such a way
- an expansion of the duties of the committee to include:
- in relation to financial reporting, that the committee reviews any other statements requiring board approval which contain financial information first, where to carry out a review prior to board approval would be practicable and consistent with any prompt reporting requirements under any law or regulation including the Listing Rules or Disclosure Guidance and Transparency Rules sourcebook
- in relation to narrative reporting, where the committee is requested by the board to advise it on whether the content of the annual report and accounts is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy, the committee should also advise the board on whether the annual report and accounts informs the board’s statement in the annual report on these matters
- that the internal audit charter must be approved annually by the committee to ensure it is appropriate for the company’s current needs. The committee must ensure that the internal audit has unrestricted scope and there must be open communication between different functions. The committee should consider whether an independent, third party review of internal audit processes is appropriate
- in relation to the external audit, the terms of reference have been amended to refer to the revised FRC Ethical Standard published in June 2016
- in relation to the committee’s duty to develop and recommend to the board the company’s formal policy on the provision of non-audit services by the auditor, the policy should consider the nature of the non-audit services, whether the external audit firm is the most suitable supplier, the fees for non-audit services and the criteria governing compensation
- when the audit committee works and liaises with all other board committees, it should take particular account of the impact of risk management and internal controls being delegated to different committees.
The provisions of the UK Corporate Governance Code ensure that companies are required not only to go through a formal process of considering their internal audit and control procedures and evaluating their relationship with their external auditor, but to be seen to do so in a fair and thorough manner. The guidance provided by ICSA is useful as it draws on the experience of company secretaries and is based on best practice carried out in some of the UK’s largest listed companies.