Guidance on audit committees

The Guidance on Audit Committees (The Smith Guidance) was first published in 2003. It is intended to assist company boards when implementing the sections of the Combined Code on Corporate Governance dealing with audit committees and to assist directors serving on audit committees in carrying out their role.

 The Smith Guidance on Audit Committees (120kb)

The Financial Reporting Council is currently consulting on proposed changes to the guidance as part of the implementation phase of its Choice in the UK Audit Market project. This follows the recommendations of the Market Participants Group (MPG), which was established in October 2006 to provide advice to the Financial Reporting Council on market-led actions to mitigate the risk that could arise in the event of one of more of the Big Four audit firms leaving the market. The Group’s final report, containing 15 recommendations to enhance the efficiency of the UK audit market, was published last October. Copies of the report can be found here.

A number of the MPG’s recommendations were targeted at companies. Four of these have particular relevance to audit committees. The recommendations called for:

• Company boards to provide information to shareholders relevant to their auditor selection decision.
• Company boards to disclose any contractual obligations (such as loan agreements) to appoint certain types of audit firm.
• Large companies to consider the need to include the risk of the withdrawal of their auditor from the market in their risk evaluation and planning.
• Sections of the Smith Guidance dealing with auditor independence to be reviewed for consistency with the relevant ethical standards for auditors.

 Consultation on proposed changes to Guidance on Audit Committees (The Smith  Guidance) (146kb)

Consultation closed on 6 June 2008 and copies of individual responses can be found here. The results of the consultation, and any revised guidance, are expected to be published in the second half of October 2008.