Audit Firm: Governance Code

The market for large audits in the UK is dominated by four firms and the risk of the withdrawal of a major firm is a matter of continuing concern to the UK Financial Reporting Council (FRC) and many others. In January 2010 the FRC and Institute of Chartered Accountants in England and Wales (ICAEW) published the Audit Firm Governance Code.

It is applicable to those firms that audit more than 20 listed companies and it is applicable from financial years beginning on or after 1 June 2010. The Code currently applies to seven audit firms that together audit about 95% of the companies listed on the Main Market of the London Stock Exchange. For these firms, the code sets a benchmark for good governance which other audit firms may wish to voluntarily adopt in full or in part. It also codifies much existing good practice and links to matters that audit firms must comply with as regulated professional partnerships.

The seven firms to which the code currently applies are:

• Baker Tilly LLP
• BDO LLP
• Deloitte LLP
• Ernst & Young LLP
• Grant Thornton LLP
• KPMG LLP
• PricewaterhouseCoopers LLP

The Code is designed to play four major roles:

• enhance the stature of firms as highly visible exemplars of best practice governance;
• enrich firms’ transparency reports;
• encourage changes in governance which improve the way that firms are run; and
• strengthen the regulatory regime by achieving transparent and effective governance without disproportionate regulation.

The FRC monitors the extent to which these firms comply with the Code. Regular reviews are conducted by FRC to check compliance by firms with all the provisions of the code.

Additional Thoughts

High quality corporate governance is mandatory to foster investment in the economy. Audit firms play the role of watchdogs in the economy and it is essential for them to implement sound governance practices within their own organizations. The Code in this regard will help the audit firms by more sharply defining the public interest, particularly by explicitly recognizing the importance of audit quality.