In July 2016, the U.K. Financial Reporting Council (FRC) published a revised version of the Audit Firm Governance Code. The 2016 version replaces the original code, which was issued in 2010. The revised version “sharpens the Code’s purpose; promotes good governance of audit in particular; strengthens transparency; and introduces some additional provisions from the Corporate Governance Code.” Prior to the issuance of the new code, the FRC began a consultation process late last year, which closed on 11 March 2016. Accompanying the new code is a feedback statement that summarises the “main points from the responses, the decisions taken by the FRC and the reasons for those decisions.” The new edition of the Code will apply to reporting periods beginning on or after 1 September 2016.


The Code is intended to benefit investors and improve their faith in accounting practices. However, the FRC recognises that other stakeholders may also have an interest in the Code, including audit committee members, audit regulators, and partners and employees of audit firms.

The code covers leadership, values, independent non-executives, operations, reporting, and dialogue (with listed company shareholders). Appendices cover independence considerations, a corporate governance code checklist that identifies those provisions of the U.K. code that are already included in the Audit Code, as well as those that are relevant to audit firms.

New provision

Firms should introduce KPIs for their Boards and INEs on the performance of their governance system, and report on performance against these in their transparency reports.


The feedback statement is in many ways a more useful document for the observer than the code itself because it includes the 2010 code provisions in parallel with the 2016 provisions, highlighting all changes made to the code. The boxes to the left, for example, give each of the five new provisions to the code.

New provision

Independent non-executives should have regular contact with the Ethics Partner, who should under the ethical standards have a reporting line to them.


There were 12 responses to the consultation process; eight from audit firms, two from professional accountancy bodies, one from an association of investors, and one from an academic. As a result of the feedback, which largely centered around the requirement to have independent non-executive directors (INEs), and the number thereof, and crossover between the Audit Code and the general Governance Code, the FRC made many amendments that it says:

Sharpen the Code’s purpose and ensure audit quality is clearly embedded in this

Promote a clear focus on audit quality in the work of the INEs

Strengthen investors’ engagement with the firms

Promote a culture of ethics and professionalism within the firms

Improve transparency in the firms’ reporting against the Code

Promote the adoption of some aspects of the Corporate Governance Code which we consider to be most applicable to audit firms, on a comply or explain basis

Promote the adoption of independent challenge within the governance of the firms’ international networks

New provision

Independent non-executives should be appointed for specific terms and any term beyond nine years should be subject to particularly rigorous review and explanation.


There are currently eight firms which apply the Code: BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars, PricewaterhouseCoopers, and RSM U.K. Audit.

The transparency report required by the code is audit firms’ principle mode of communicating with shareholders and other stakeholders. The FRC will regularly review these reports, which should include a report on the work of the board or its INEs, a separate report from the INEs explaining how they have overseen the United Kingdom audit practice in particular, as well as the wider U.K. business more generally, information on whether the INEs believe the appropriate culture exists throughout the organisation, an explanation of why the firm has INEs on a board or on a public interest committee, how the INEs have applied the Code, and, in an extension of the original code, details of any provisions from the U.K. Corporate Governance Code, which it has adopted or may adopt.

New provision

The responsibilities of an independent non-executive should include, but not be limited to, oversight of the firm’s policies and processes for:
Promoting audit quality.
Helping the firm secure its reputation more broadly, including in its non-audit businesses.
Reducing the risk of firm failure.


The provisions of the code for INEs are similar to, but not exactly the same as, those for non-executive directors in the general governance code. The optimal number of INEs is set at three.  But since the Code is a comply or explain code, the FRC recognises that in some smaller firms it may not be possible to retain that many. On the other hand, since the Code requires the INEs to be in the majority on board or equivalent governance structure, this would reduce the size of the board to three. At least one of the INEs should have audit or accounting experience. In several places the Code stresses that the responsibilities of the INEs are:

New provision

The transparency report should be fair, balanced and understandable in its entirety.

Promoting audit quality

Helping the firm secure its reputation more broadly, including in its non-audit businesses

Reducing the risk of firm failure

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