Leader: Is the combined code made to be broken?

Audit committee members could find themselves in a much more difficult job in future, if all the proposals for changing their roles get the go ahead. Last week the Financial Reporting Council put out for consultation proposed changes to the Smith Guidance on audit committees and two areas immediately appear problematic.

The first says that audit committees should now assess ‘periodically’ what the company will do if the external auditor suddenly withdraws from the market.

This is loaded. If you are a large corporate, and your auditor comes from the Big Four and disappears over night, it is probable that you you will have to go to outside the remaining Big Three because of the likelihood of conflicts of interest. Unless, of course, you make sure now that none of the three have connections with the company in any other way, which means work for second tier firms right away.

Then there’s the recommendation that audit committees should report any contractual obligations restricting the choice of auditor. This way we will see what exactly is driving corporates to stick with the Big Four, and the non-Big Four firms gain an insight into what, and who, they have to persuade to win big public company work.

Though there is much more in the proposals to debate these two alone leap out as useful ways of aiding the non-Big Four firms in their efforts to compete. But, this will only be guidance. Audit committees will be able to duck these recommendations, if they chose. And if you’re wondering what can happen to guidance look at Stuart Rose of Marks & Spencer. This week saw Sir Stuart assume the job of executive chairman, strictly not on when it comes to the Combined Code. But then the code is only guidance.

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