EY response to updated FRC UK Corporate Governance and Stewardship code
Hywel Ball, EY Assurance leader for the UK & Ireland, said: “We put forward a strong alternative proposal to mandatory tendering (see notes below) which we believe would better safeguard audit quality and at the same time help achieve the FRC’s objectives. That said, we are pleased by the FRC statement that the aim of the new provision is to ensure a high quality and effective audit. We also welcome news that it is considering issuing guidance on tendering; something which we would fully support.
“We have reservations about mandatory tendering, even on a “comply or explain” basis, because we do not believe a bare requirement is the best way of increasing auditor independence or improving audit quality. However we welcome more tendering in an already competitive FTSE350 market and will play our part in making it work in practice.
“We are seeing increased activity and a more energised market as companies review their audit arrangements. As they do this, it is important to preserve the audit committee’s governance role in auditor choice and to ensure high audit quality remains at the forefront of purchasing decisions.”
Good week for corporate governance following FRC’s earlier announcement on corporate reports
EY also welcomed the FRC’s Financial Reporting Review Panel report earlier in the week reporting that the quality of UK corporate reporting is good. It also set out that the improvement of the reporting of principal risks and uncertainties, and what companies did to mitigate those risks.
Andrew Hobbs, Associate Partner for EY’s Regulatory & Public Policy team said:
“There has been clear progress following the various initiatives over the past two years to encourage more concise reporting, with institutional shareholders prompted to engage more closely on this and other aspects of corporate governance and reporting.
“Despite the current economic climate and day-to-day challenges faced by today’s boards, this feedback is certainly worth acknowledging. It shows that with everything else directors have to contend with right now, they are investing the time and effort to make sure they get their reporting right.”
EY set out an alternative solution in place of mandatory retendering, involving:
- A much more comprehensive assessment of audit quality and auditor independence than is currently contemplated. We provided an in-exhaustive list of eight areas this would cover. We asked the FRC to provide guidance on how to do it.
- A high quality report to shareholders by audit committees setting out their conclusions on the assessment and any action the committee has taken or intends to take.
- An advisory vote for shareholders on the report.
- Guidance for audit committees on how tenders should be run. Among other things it would recommend a two-stage tender process: where the committee picks a firm on the basis of quality first, leaving price to be negotiated second.
- That FRC takes account of the committee's assessment and any tendering materials in its inspection activities of individual audits. In exceptional circumstances, the FRC could recommend (but not compel) that audit committees put the audit out to tender.