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'Directors' know how' is a monthly article which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

The FRC and BIS consult on implementing the EU Audit Directive and Regulation

Both the Financial Reporting Council (FRC) and the Department for Business, Innovation and Skills (BIS) have published consultations on implementing aspects of the EU Audit Directive and Regulation. The consultations focus on areas where Member States have various options allowed in terms of how they implement the two pieces of legislation.

The FRC's consultation covers aspects of the Directive and Regulation that relate to issues covered in the FRC's auditing and ethical standards, such as:

  • Imposing additional requirements to international auditing standards;
  • Providing for proportionate application of audit standards and some simplified requirements;
  • Extending more stringent requirements to other entities in addition to those designated as public interest entities (PIE), such as extending the scope to include AIM companies;
  • Prohibiting additional non-audit services for public interest entities that may pose a threat to auditor independence; and
  • Implementing the cap on fees for non-audit services for audited public interest entities.

The FRC's consultation closes on 20 March 2015.

BIS's consultation covers aspects of the Directive and Regulation that relate to changing the UK audit regime, such as:

  • Allowing an audit firm to continue to act as auditor for a PIE for a maximum of 20 years, subject to re-tendering at least every 10 years;
  • Making it so that a PIE must state in its annual report when the next auditor appointment will be based on a re-tender; 
  • Making the FRC the single competent authority with ultimate responsibility for audit regulatory tasks, as well as giving the FRC responsibility for implementing certain elements of the directive and regulation through its ethical standards for auditors; and
  • Not taking up the member state option to expand the definition of public interest entities to include additional entities for the purpose of application of the provisions of the regulation and directive applying to audits of PIEs beyond those required (listed companies, credit institutions and insurers – subject to consultation).

BIS's consultation closes on 19 March 2015.

We will be responding to both consultations, focusing our response primarily on not bringing AIM companies into the scope of the directive and regulation's requirements.

FRC publishes report on the developments in governance and stewardship

The FRC has published a report on the implementation and take-up of the UK Corporate Governance and Stewardship Codes in 2014. Highlights include:

  • Compliance with the UK Corporate Governance remains high with over 90% of companies in the FTSE 350 reporting complying with all or all but one or two provisions. However, explanations are still of varying quality and the FRC will seek to emphasis that the Code is not a rulebook in 2015.
  • The FRC will publish a discussion document on succession planning this year.
  • The FRC notes that there is wider engagement between large companies and their shareholders, but that this is not filtering down.
  • The reporting of signatories (ie investors) of the Stewardship Code is of variable quality. In addition, the FRC remains concerned that many do not do what they have signed up to. As a result, the FRC will start a project in the first half of 2015 on how it can foster a culture of stewardship and how it can monitor adherence to the Code.
  • The FRC continues to receive mixed reports about the quality of reporting, engagement and voting between proxy advisors and their clients.

ISS publishes new voting guidelines

Institutional Shareholder Services (ISS) published its first UK and Ireland Proxy Voting Policies in January 2015. This is the first year ISS has operated a standalone policy – previously it used the NAPF's Governance and Voting Guidelines. However, with the formal agreement ending between ISS and the NAPF, ISS has taken the opportunity to outline its approach.

The policies build upon the NAPF's Governance and Voting Guidelines and codifying ISS's practice going forward. They are not meant to differ materially from the approach applied in 2014.

BIS publishes FTSE 350 Cyber Governance Health Check

BIS published its second FTSE 350 Cyber Governance Health Check in January 2015, which assesses the extent to which boards and audit committees of FTSE 350 companies understand and oversee risk management measures that address cyber security threats to their business. Highlights include:

  • 58% of companies in the FTSE 350 had assessed themselves against the government’s “10 Steps“ cyber security guidance.
  • 88% of companies now include cyber-risk in their risk register.
  • 30% of board received regular high level cyber security intelligence from their CIO or Head of Security (up from 18% in 2013).
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