PracticeAuditCrack the code

Crack the code

The new governance code for audit firms aims to improve transparency, but could simply become an exercise in bureaucracy

While there were many recommendations in the recently released audit firm
governance code, clearly the key feature is the appointment of non-executives
within the firm’s governance structure to act as an effective conduit to
institutional shareholders and the firm’s stakeholders.

For public companies and, nowadays, for many other clients, our appointment
and reappointment as auditor is driven by the decisions of audit committees.
Members of audit committees need assurance about the standing and quality of
firms they appoint as auditors. Information about the firm, its quality and its
processes are already in the public domain in the form of our public report from
the Audit Inspection Unit and our transparency report.

However, I hope that the additional material required by the code and the
involvement of non-executives in the firm will provide additional assurance that
the audit committees are right to place their confidence in us.

Our firm recognises that our distinct culture is derived from our partners
and staff and that underlying everything the firm’s leadership has a duty to
them as key stakeholders.

Their livelihood and professional reputation is bound up with that of the
firm. Much of what the code requires is already in place at the firm and we have
a strong governance structure led by our board.

However, the public nature of the confirmations made by the firms coming from
the code and the presence of non-executives will, I hope, be a positive signal
to them.

Of course, I also hope that our non-executives will bring insight to the firm
that will help us further to develop our business.

Our fear is that the code will not have the wider impact on the outside world
that it is intended to have; that institutional shareholders either will not
engage with our non-executives or, if they do, the message will not be heard by
those at the sharp end of decisions, or that audit committees will not be aware
of the code and place any weight on it.

If this happens, the code will partly have been an exercise in additional
bureaucracy for the firm. We made the point strongly to the working party
developing the code that steps had to be taken alongside launching the code to
engage with stakeholders about its significance.

The main challenge for the firm in introducing the code is to recruit
non-executives who are both of the right calibre and able to command the respect
of the firm’s partners.

All in all though, we have a positive expectation of the benefits of the
code. Time will tell.

Ian Mills is senior partner at PKF (UK) LLP.

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audit firms take non-executive action

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