A draft governance code for audit firms
has been published by an independent working group set up by the
Institute of Chartered Accountants in England and Wales at the
request of the Financial Reporting Council.
The code is being designed primarily to serve
investors and the working group has proposed it should apply to the
eight firms that together audit more than 95 percent of the
companies on the main market of the London Stock Exchange.
The draft code draws on aspects of the
Combined Code on Corporate Governance, including the structure of
principles and provisions and the ‘comply or explain’ approach.
However, it recognises governance challenges
facing audit firms are different from those faced by listed
companies. For example, while it advocates independent
non-executives, their role would be different to that of
non-executive directors in listed companies.
PricewaterhouseCoopers UK (PwC) head of
assurance Richard Sexton said the firm is supportive of effective
governance because it underpins quality and trust.
“Conceptually we absolutely support something
that captures best practice and we think we do a lot of things that
are mentioned within the proposed code already,” he said.
The one area where PwC is “digesting the
proposals” is the concept of independent non-executives.
“It’s not that we don’t see the value, indeed
we already have an advisory board – people who help us to think
about strategy,” Sexton said.
“But the concept of putting people in a
position of responsibility for reviewing our strategy, a
responsibility for assisting us with risk management, we find the
paper a little dismissive of some of the difficulties around
independence conflicts that such individuals might run into.”
Sexton notes the consultation paper recognises
‘there should be no initial list of relationships between an
independent non-executive and an audit client of the firm’.
“We think that means that at the point of
appointment there should be no investment that an independent
non-executive holds in a client of a firm,” Sexton said.
“PwC has a market share of about 40 percent of
the FTSE 100, a little over 30 percent of all listed clients, which
already creates quite a high hurdle for our partners today, never
mind someone that we might bring in.
“In addition, for an organisation such as ours
that works with a very wide range of companies outside of those
that are audit clients, there are a number of commercial conflicts
that one has to manage quite carefully.
“So if you were bringing in people who are
active executives, for example in the financial services world,
could they really be heavily involved in reviewing our financial
“Would that not potentially give them a
concern from their own personal conflict? Whether or not it was
real, because some of this is about perception.
“So we think there is a way to go with that to
really understand that independence and conflict discussion.”
The working group is seeking comments from
audit firms, investors, listed companies and other stakeholders
before the code is finalised towards the end of the year. The
deadline for responses is 10 October.