Mandatory audit tendering introduced in UK governance code

by Kevin Reed

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28 Sep 2012

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Financial Reporting Council

FTSE 350 COMPANIES will have to explain if they fail to put their audit out to tender at least every ten years.

Accounting watchdog the FRC has amended the UK's governance code. FTSE 350 companies should put the external audit out to tender at least every ten years "with the aim of ensuring a high-quality and effective audit".

More regular tendering should "help counter any misconception that long audit tenure reflects a lack of competition by showing that the quality of the audit is periodically subject to challenge", said Richard Sexton, board member for reputation and policy, PwC.

"PwC has always maintained that the audit market is fiercely competitive and this new provision will create more opportunities to demonstrate that competitiveness on a regular basis.

"Tendering is fundamentally different to rotation, which we and many market participants remain strongly opposed to, as it does not automatically rule the incumbent out of the process, nor dilute the critical governance principle that allows companies and shareholders to appoint the best provider in their eyes."

The FRC will talk to companies, auditors and investors about whether tendering guidance is needed.

The UK Corporate Governance Code will also include a requirement for audit committees to provide shareholders with information on how the committee has carried out its responsibilities, including the effectiveness of the external audit process.

Boards will also have to confirm the annual report and accounts taken as a whole are "fair, balanced and understandable", and that the narrative sections of the report correlate with the financial statements.

Progress with boardroom diversity will also need to be outlined.

Those that choose not to follow any code provisions will have to provide fuller explanations to shareholders as to why they have chosen not to follow it.

More to follow.

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