The Debate: Implementing the Combined Code

There is a tough task ahead

By Sir Bryan Nicholson

The combined code provisions on audit committees, together with the related guidance produced by Sir Robert Smith, are a central part of the new combined code, providing a focus for the independent scrutiny of these issues.

Over the coming year, listed companies must implement the new code for the first time. After much discussion and consultation, the time for action has arrived.

Education, discussion and the sharing of best practice will no doubt continue, and rightly so. We cannot expect changes of this significance to fall neatly into place from day one: audit committees will learn by their own experience and by that of others. That said, it is vital that audit committees make a serious effort to carry out their enhanced functions to the full in the year ahead. This will be a considerable task, falling in many cases to just three part-time non-executives, and weighing particularly heavily on the committee chairman.

I therefore take very seriously the code provisions that board committees should be given the resources to do their jobs and that directors should have access to the advice and services of the company secretary, as well as to independent professional advice.

I also attach great importance to the transparency provisions relating to audit committees. Full reporting back to shareholders on how the committee has discharged its duties is essential if shareholders are to be able to hold the board and the committee to account.

As to the committees’ tasks, monitoring the integrity of the companies’ financial statements and control systems come near to the top of the list.

But if I had to pick any function, I believe that the monitoring and reinforcement of the external auditors’ independence is at the heart of it.

This is no easy task. Often the arguments for retaining the existing auditor will seem clear and tangible, while the arguments for a change may appear speculative and uncertain. The same goes for auditor provision of non-audit services. Audit committees will need to weigh the issues carefully, but also to be tough when necessary.

• Sir Bryan Nicholson is chairman of the Financial Reporting Council

Knowledge is the vital attribute
By Tim Copnell

In an age of ‘smoke and mirrors’, where both financial transactions and accounting standards are becoming increasingly elaborate, it is no longer possible for audit committee members to operate effectively with only a passing knowledge of finance.

Under the revisions to the combined code, audit committee members would normally be expected to have experience of financial matters, and at least one member should have recent and relevant financial experience.

This goes beyond a basic familiarity with financial statements and broadly means the ability to understand the rules and, more importantly, the principles that underpin the preparation of financial statements.

Each board should determine the definition of, and criteria for, recent and relevant experience. It would ordinarily comprise past employment, a qualification in finance or accounting or a related service.

All members should have experience pertinent to the business and at least one will have experience of the company’s industry. A committee’s effectiveness is certainly enhanced by, or dependent upon, the members’ experience, knowledge and competence in business, financial reporting, internal controls and auditing.

Periodic briefings, reports and presentations by management, external auditors and internal auditors for committee members should cover operational and financial issues specific to the company and the industry, and updates on new standards.

Companies should offer, and committees should insist on, the kind of training that will enhance their financial literacy. Audit committee members must be in a position to challenge management and draw sufficient attention to dubious practices.

In discharging its oversight responsibilities, the committee should be supplied with an overview of the risks, policies, procedures and controls.

Members cannot be expected to provide protection for shareholders unless they are independent of mind, diligent, knowledgeable and in possession of relevant and reliable information.

• Tim Copnell is director of the KPMG-sponsored Audit Committee Institute.