Based on the experience of company secretaries and best practice as carried out in some of the UK’s largest listed companies, the Institute of Chartered Secretaries and Administrators (ICSA) recently published a useful guidance note on terms of reference for audit committees.
ICSA’s guidance note includes model audit committee terms of reference. These have been designed for companies who want to comply with the provisions of the 2016 UK Corporate Governance Code (the Code) and the 2016 FRC Guidance on Audit Committees (the FRC Guidance).
The 2016 revisions to the Code and FRC Guidance, reflected in the guidance note, implement the EU Statutory Audit Directive 2014/56/EU and Regulation (EU) No. 537/2014. In relation to a company’s external audit, the revised FRC Ethical Standard, published in June 2016, is also referred to in the guidance note.
The model terms of reference are a guide for companies to adapt to their needs and the key changes to them include:
- recommending that one member of the remuneration committee sits on the audit committee and, for companies with risk committees, that one member of the risk committee sits on the audit committee.
- increasing or amending the duties of the audit committee to include:
- undertaking a first review, if practical to do so, of statements requiring board approval which contain financial information.
- approving annually the company’s internal audit charter and considering whether an independent, third party review of internal audit processes is appropriate.
- providing greater detail in relation to the audit committee’s role when recommending to the board the company’s policy on the provision of non-audit services by its auditor.
Companies should consider reviewing their audit committee’s terms of reference against the model terms of reference included in ICSA’s guidance note.
The current corporate governance thinking that board committees need to work together is also recognised in ICSA’s guidance note. When reviewing the audit committee’s terms of reference companies should also consider reviewing their suite of board committee terms of reference in recognition of the links and overlap between the responsibilities of their board committees.