ICSA's new terms of reference for audit committees—the changes in detail

Corporate analysis: Lexis®PSL Corporate gives a comprehensive summary of changes in ICSA’s latest version of its guidance and terms of reference for the audit committee.

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ICSA: The Governance Institute has recently updated its guidance note and terms of reference for audit committees. Key changes are:

  • Overlaps between committees—extra 'common sense' guidance has been given regarding the links and importance of liaison between the responsibilities of different board committees and the necessity for each board committee to have full knowledge of the deliberations of other committees through reports to the board (page 2)
  • Membership—a new requirement stating that the committee shall comprise, where possible, one member of the remuneration committee (in addition to the inclusion of one member of the risk committee) (term 1.1, page 6)
  • Extensions of membership—removal of previous term 1.4 which said that 'appointments to the committee shall be for a period of up to three years extendable by no more than two additional three-year periods, so long as members continue to be independent' (page 6)
  • Electronic form—a new term allowing notices, agendas and supporting papers to be sent in electronic form where the recipient has agreed to receive documents in such a way (term 5.3, page 8)
  • Annual general meeting—a broadening of term 7 to require the committee chairman to attend the annual general meeting to answer all shareholder questions rather than just those 'relating to the committee's activities' (term 7, page 8)
  • Financial reporting—a number of amendments to the wording (eg, the inclusion of 'preliminary announcements' in 8.1.1, altered wording in 8.1.2.1, and the additional reference to the 'strategic report in 8.1.2.4), and a new provision 8.1.3 to require the committee to review any other statements requiring board approval which contain financial information first, as long as it is practicable and consistent with any prompt reporting requirements (term 8.1 page 9)
  • Narrative reporting—additional wording at the end of term 8.2 requiring the committee to advise the board on whether the content in the annual report and accounts informs the board's statement on matters of the company's performance, business model and strategy required under the UK Corporate Governance Code (term 8.2, page 10)
  • Viability statement—new references to the viability statement have been added throughout (term 8.3, page 10 and term 9.4, page 17)
  • Internal audit—there have been quite a lot of changes within this section to bolster the tasks of the committee in relation to internal audit. In particular, there is a new requirement to carry out an annual assessment of the effectiveness of the internal audit function (term 8.5.6, page 12) and a new requirement to consider whether an independent, third party review of processes is appropriate (term 8.5.8, page 12)
  • External audit—the drafting has generally been updated and clarified, and the key change is that the requirement to put the external audit out to tender every 10 years has been removed (which is consistent with the deletion of this requirement within the UK Corporate Governance Code, now that it is now required under the Companies Act 2006). Instead, the committee is given new responsibilities to oversee tender processes (term 8.6.2, page 13). The committee is also given new responsibilities to monitor fees paid to the external auditor (term 8.6.9, page 14), to develop and recommend to the board a formal policy on the provision of non-audit services by the auditor (term 8.6.13, page 14) and to review the auditor's explanation of how risks to audit quality were addressed (term 8.6.16.2, page 15)
  • Risk management—new wording requires the audit committee to take particular account of the impact of risk management and internal controls being delegated to different committees (term 10.6, page 18)

For a link to the full PDF ICSA guidance note and terms of reference for audit committees, see Practice Note: ICSA guidance on terms of reference for the audit committee..

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