The Financial Reporting Council ("FRC") published its consultation paper in June 2023 regarding the proposed changes to the UK Corporate Governance Code (the "Code") (Click Here). The consultation is one of several measures the Government and FRC are implementing following the 2021 White Paper regarding audit and governance reform - (Click Here).

The main changes proposed to the Code are in respect of internal control, assurance, and resilience, and alignment to the legal and regulatory requirements of the Audit Reporting and Governance Authority ("ARGA"), the proposed successor regulator to the FRC. The intention is that ARGA will be granted statutory powers to mandate, among other things, standards for overseeing audit committees, investigating and sanctioning directors for breaches of corporate reporting or audit related duties, the introduction of a new statutory Resilience Statement and Assurance Policy and deciding upon which Individuals and firms should be approved to audit PIEs ("Public Interest Entities").

An overview of the proposed changes proposed by the Consultation:

  • A revised framework of prudent and effective controls to provide a stronger basis for reporting on and evidencing their effectiveness.
  • Updating the Code to ensure that it aligns with changes to legal and regulatory requirements as set out in the Government's response to the White Paper, such as the creation of the ARGA. The amendments to the Strategic and Directors' Reports and strengthening reporting on malus and clawback arrangements.
  • Improving the functioning of comply-or-explain - taking account of recently published FRC research and reports.
  • Sustainability and ESG reporting - making necessary revisions to reflect the responsibilities of the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with a company's audit and assurance policy.
  • Overboarding/Time Commitments– all significant director appointments should be listed in the annual report, describing how each director has sufficient time to undertake their role effectively in light of commitments to other organisations. This should describe any actions taken as a result of this assessment.
  • Diversity and Inclusion– there is a proposal that companies consider diversity beyond gender and ethnicity. The FRC is also proposing measures to improve clarity on company approaches to succession planning in relation to diversity and inclusion.
  • Board performance reviews– the FRC proposes that companies should commission externally facilitated board performance reviews. Currently, the Code states that this option should be considered – (Click Here).
  • The FRC will also be updating the guidance which accompanies the Code, namely the Guidance on Board Effectiveness, the Guidance on Risk Management, Internal Controls and Related Financial and Business Reporting and the Guidance on Audit Committees (together, the" Guidance").

The FRC have published "The Audit Committees and the External Audit: Minimum Standard" ("Standard") (Click Here) which applies to audit committees of FTSE 350 companies and is effective immediately. Compliance with the Standard will operate on a 'comply or explain' basis until ARGA has been created and legislation brought forward to mandate compliance with the Standard. The voluntary adoption period will allow audit committees time to prepare for the requirements of the Standard and proactively enhance their practices.

Actions and how we can help you?

  • Gap analysis of the application of the Code and Standard and your terms of reference.
  • Advice regarding the proposed changes to the audit committee:
  • The responsibilities of the audit committee, including managing non-audit relationships to ensure a fair choice of suitable external auditors at the next tender, reviewing the effectiveness of the external audit process and engaging with shareholders.
  • The role of the audit committee in the tender process and the manner in which such tenders should be conducted.
  • The role of the audit committee in relation to oversight of auditors and the audit itself, particularly the effectiveness of that process.
  • Audit committee reporting responsibilities.
  • Advice regarding the responsibility of the audit committee for ESG and the establishment of a sustainability committee.
  • Board effectiveness review and advice regarding the process and support regarding an internal or external review.
  • Enhancing your annual report and advice on the updated Code and Standard regarding reporting.
  • Advice regarding the proposed changes to the Strategic and Directors' reports.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.