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Consultations on the UK Corporate Governance Code, UK Stewardship Code and International Standards on Auditing



United Kingdom

Consultations on the UK Corporate Governance Code, UK Stewardship Code and International Standards on Auditing

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In April 2012, the Financial Reporting Council ("FRC") launched three simultaneous consultations on a number of proposed changes to the UK Corporate Governance Code (the "Governance Code") (including the Guidance on Audit Committees), the UK Stewardship Code (the "Stewardship Code") and International Standards on Auditing (UK and Ireland) ("Auditing Standards").

The proposed revisions seek to implement the FRC's proposals to encourage effective company stewardship as set out in the Effective Company Stewardship – Next Steps paper published last year as a response to an earlier consultation.

The principal proposed changes to each of the Codes and to the Auditing Standards are set out below.

Governance Code

  • introduction of regular tendering for the external audit contract at least every ten years - it is proposed that this new requirement will apply to FTSE 350 companies only;
  • the directors will need to explain in the annual report the basis upon which they consider the report to be fair, balanced and understandable; and
  • the responsibilities of the audit committee will be expanded to include the role of advising the directors on whether the annual report is fair, balanced and understandable.

Stewardship Code

  • clarification of the meaning of stewardship, and the responsibilities of two types of institutional investors – asset owners and asset managers; 
  • a new requirement for signatories to the Stewardship Code to disclose not only whether proxy voting and other advisory services are being used but also the extent to which recommendations made by such services are being relied upon; and
  • a new requirement for such signatories to disclose their stock lending policies, including whether lent stock is recalled for voting purposes.

Auditing Standards

  • the auditors will need to communicate to the audit committee information which they consider necessary for the committee to understand significant professional judgements made in the audit; and
  • the auditors will be required to report by exception if the board's statement in the annual report explaining the basis upon which the directors consider the report to be fair, balanced and understandable is inconsistent with the knowledge acquired by the auditor in performing the audit, or if the annual report does not accurately address matters communicated by the auditor to the audit committee.

Subject to the outcome of the consultations, which all close on 13 July 2012, the proposed revisions are to apply to financial years beginning on or after 1 October 2012.

The consultation papers are available on the FRC's website.

Aleksandra Cison is a Solicitor in the Corporate Group of Field Fisher Waterhouse LLP in London.

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