Leader: Is the combined code made to be broken?
Smith guidance proposals sound suseful, but it is only guidance
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.