Governance code for audit firms released by ICAEW

After decades spent promoting the virtues of good governance, the audit industry will have to prove that it practices what it preaches with the release of a corporate code.

The 18-page document represents the first codification of audit governance standards, anywhere in the world.

Adherence will be voluntary, but encouraged by the same “comply or explain” system which has proven successful among corporate companies.

Some see it as Enron’s final legacy, a code which sets down on paper the governance structure and practices audit firms should follow.

Designed for the UK’s largest eight audit firms, which together audit 95% of companies listed on the main market of the London Stock Exchange, the code will place pressure on firms to adopt many of the the same corporate practices as their clients.

With non-executive directors, internal controls, whistle blowing policies and audited financial statements, much of the code is codifying standard practice, however, some measures might trigger some uncomfortable change for the firms, which all welcomed the code and committed themselves to implementing it.

In the minds of the code’s drafters is the possibility of a Big Four collapse, which some estimate would leave as many as 20% of the 7,200 largest businesses in the G20 without an auditor.

The code, compiled by the ICAEW and encouraged by the Financial Reporting Council, grew out of this fear and, it is hoped, will bring a stabilising element to the industry.

Sir Christopher Hogg, chairman of the FRC, applauded ICAEW’s thorough approach to the project and welcomed the code.

The code is likely to be one of the lasting legacies of Sir Christopher, who steps down in May.

“The code lays foundations for the future and rightly reflects the belief that prescriptive requirements are not a substitute for effective governance and that good governance complements regulation,” he said.

“I strongly encourage audit firms and investors to grasp the opportunities the Code presents to strengthen their dialogue.”

Further reading:

Wyman warns over non-exec restrictions