205488 Audit Combined Code WEB
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205488 Audit Combined Code WEB

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Audit Committee InstituteSponsored by KPMGAudit Committee InstituteCombined Code (revised July 2003)The revised Combined Code, issued by the Financial Reporting Council on 23 July, is derived from Derek Higgs’ review into the role and effectiveness of non-executive directors and Sir Robert Smith’s guidance for audit committees.The revised Code contains main and supporting principles and provisions. The Listing Rulesrequire companies to make a two-part disclosure statement. In the first part, companies have to report on how they apply the code principles – in future this will extend to cover both the 14 main and 21 supporting principles. The form and content of this part of the statement are not prescribed. In the second part of the statement, companies have to confirm the extent of their compliance with the 48 detailed Code provisions and explain the rationale behind any non-compliance.It is anticipated that the revised Combined Code will replace the 1998 Code currently annexed to the Listing Rules and apply in respect of accounting periods beginning on or after 1 November2003. The Financial Services Authority will consult on the necessary rule changes, but not on the Code itself.The following pages highlight the changes to the Combined Code.©2003 KPMG LLP , a UK limited liability partnership and the UK member firm of KPMG International, a Swiss nonoperating association. All rights reserved.A DirectorsThe BoardMain principleA.1 Every company should ...

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Audit Committee Institute Sponsored by KPMG
Audit Committee Institute
Combined Code (revised July 2003) The revised Combined Code, issued by the Financial Reporting Council on 23 July, is derived from Derek Higgs’ review into the role and effectiveness of non-executive directors and Sir Robert Smith’s guidance for audit committees.
The revised Code contains main and supporting principles and p require companies to make a two-part disclosure statement. In th to report on how they apply the code principles – in future this w 14 main and 21 supporting principles. The form and content of t not prescribed. In the second part of the statement, companies ha their compliance with the 48 detailed Code provisions and explai non-compliance.
It is anticipated that the revised Combined Code will replace the to the Listing Rules and apply in respect of accounting periods b 2003. The Financial Services Authority will consult on the neces the Code itself.
The following pages highlight the changes to the Combined Cod
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassocioatni.Allrightsreserved.
A Directors The Board
Main principl
A.1
Every respo
Supporting pri
The bo pruden set the place f should and ot All dir As part challen perfor perfor financi respon appoin
Code provision
A.1.1
A.1.2
A.1.3
A.1.4
A.1.5
The bo formal a state decisio
The an the chi nomin the boa
The ch present the cha A.6.1)
Where propos resigna circula
The co its dire
Key: Unchanged
Revised
an effective board which is collectively pany.
l leadership of the company within a framework of risk to be assessed and managed. The board should t the necessary financial and human resources are in and review management performance. The board ds and ensure that its obligations to its shareholders
in the interests of the company.
board, non-executive directors should constructively ategy. Non-executive directors should scrutinise the eed goals and objectives and monitor the reporting of on the integrity of financial information and that ement are robust and defensible. They are ls of remuneration and have a prime role in executive directors, and in succession planning.
to discharge its duties efficiently. There should be a rved for its decision. The annual report should include ding a high level statement of which types of hich are to be delegated to management.
an, the deputy chairman (where there is one), irector and the chairman and members of the tees. It should also set out the number of meetings of al attendance by directors.
non-executive directors without the executives tor, the non-executive directors should meet without raise the chairman’s performance (as described in emed appropriate.
t be resolved about the running of the company or a ir concerns are recorded in the board minutes. On provide a written statement to the chairman, for ncerns.
surance cover in respect of legal action against
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassociaotni.Allrightsreserved.
Revised principle
Now addresses the collective responsibility and accountability of the board.
Revised provision.
Now recommends inclusion of a statement on how the board operates.
Revised provision.
Now refers to the deputy chairman and disclosure of the number of board and committee meetings.
New provision.
New provision.
New provision.
Chairman and chief executive
Main principl
A.2
Sup
Co
A.
A.
Key: Unchanged
Revised
sponsibilities at the head of the company the executive responsibility for the o one individual should have unfettered
f the board, ensuring its effectiveness on all e chairman is also responsible for ensuring that the information. The chairman should ensure effective rman should also facilitate the effective contribution ensure constructive relations between executive and
ould not be exercised by the same individual. chairman and chief executive should be clearly the board.
he independence criteria set out in A.3.1 below. e chairman of the same company. If exceptionally, a ecome chairman, the board should consult major ts reasons to shareholders at the time of the
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassocioatni.Allrightsreserved.
Unchanged (in substance).
New supporting principle.
Revised provision.
Now explicitly recommends the separation of the chairman and chief executive roles.
New provision.
Board balance and independence
Main principl
A.3
The board should include a balance of executive and non-executive directors (andRevised principle. in particular independent non-executive directors) such that no individual or smallNow emphasises the group of individuals can dominate the board’s decision taking.importance of independent non-executive directors.
Supporting principle
The board should not be so large as to be unwieldy. The board should be of sufficient size that the balance of skills and experience is appropriate for the requirements of the business and that changes to the board’s composition can be managed without undue disruption.
To ensure that power and information are not concentrated in one or two individuals, there should also be a strong presence on the board of both executive and non-executive directors.
The value of ensuring that committee membership is refreshed and that undue reliance is not placed on particular individuals should be taken into account in deciding chairmanship and membership of committees.
No one other than the committee chairman and members is entitled to be present at a meeting of the nomination, audit or remuneration committee, but others may attend at the invitation of the committee.
Code provision
A.3.1
A.3.2
A.3.3
New supporting principles.
The board should identify in the annual report each non-executive director it considers to be Revised provision. independent. The board should determine whether the director is independent in character and Now addresses the perception of judgement and whether there are relationships or circumstances which are likely to affect, or independence and provides greater could appear to affect, the director’s judgement. The board should state its reasons if it determines clarity over those relationships that a director is independent notwithstanding the existence of relationships or circumstances or circumstances which could which may appear relevant to its determination, including if the director: affect, or appear to affect, a director’s judgement. has been an employee of the company or group within the last five years; has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company; has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme; has close family ties with any of the company’s advisers, directors or senior employees; holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; represents a significant shareholder; or has served on the board for more than nine years from the date of their first election.
Except for smaller companies at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller company should have at least two independent non-executive directors.
Key: Unchanged
Revised
dent non-executive directors to be the senior t director should be available to shareholders if they rmal channels of chairman, chief executive or finance ch contact is inappropriate.
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassociaotni.Allrightsreserved.
Revised provision.
Previous recommendation was for non-executives to comprise at least one third of the board, with the majority being independent.
Clarifies guidance for smaller companies.
Revised provision.
Now addresses the senior independent director’s raison d’etre.
Appointments to the board
Main principl
A.
Sup
Co
A.
A.
A.
A.
A.
A.
Key: Unchanged
Revised
d transparent procedure for the oard.
n merit and against objective criteria. Care should be time available to devote to the job. This is anships.
in place for orderly succession for appointments to to maintain an appropriate balance of skills and oard.
ich should lead the process for board appointments majority of members of the nomination committee rs. The chairman or an independent non-executive chairman should not chair the nomination committee successor to the chairmanship. The nomination f reference, explaining its role and the authority
the balance of skills, knowledge and experience on prepare a description of the role and capabilities
ination committee should prepare a job specification ment expected, recognising the need for availability nificant commitments should be disclosed to the e annual report. Changes to such commitments rise, and included in the next annual report. No hairmanship of a FTSE 100 company.
non-executive directors should be made available for set out the expected time commitment. Non-ey will have sufficient time to meet what is expected ts should be disclosed to the company before time involved and the board should be informed of
cutive director taking on more than one non-executive chairmanship of such a company.
ld describe the work of the nomination committee, to the appointments. An explanation should be given open advertising has been used in the appointment of
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassocioatni.Allrightsreserved.
Revised principle. Now explicitly refers to rigorous procedures.
New supporting principles.
Revised provision.
The previous exemption for small boards has been removed and the provision now recommends that the committee should consist of a majority of independent non-executive directors and not be chaired by the chairman of the board when dealing with the appointment of a successor to the chairmanship.
New provision.
New provision.
New provision.
New provision.
New provision.
Information and professional development
Main principl
A.5
Sup
Co
A.5
A.5
A.5
Key: Unchanged
Revised
ely manner with information in a form and o discharge its duties. All directors should and should regularly update and refresh
at the directors receive accurate, timely and clear to provide such information but directors should seek ry.
rs continually update the skills and knowledge and fil their role both on the board and on board e necessary resources for developing and updating its
pany secretary’s responsibilities include ensuring its committees and between senior management and ng induction and assisting with professional
le for advising the board through the chairman on all
ors receive a full, formal and tailored induction on ny should offer to major shareholders the opportunity
cially non-executive directors, have access to any’s expense where they judge it necessary to Committees should be provided with sufficient
e and services of the company secretary who is ard procedures are complied with. e company secretary should be a matter for
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassociaotni.Allrightsreserved.
Revised principle. Now specifically addresses professional development.
New supporting principles.
Revised provision.
Now addresses the role of the chairman and specifically refers to shareholders.
Revised provision.
Now makes specific reference to non-executive directors and sufficient resources.
Revised provision.
Now refers to appointment as well as removal.
Performance evaluation
Main principl
A.
Sup
Co
A.
Re-
Ma
A.
Co
A.7
A.7
Key: Unchanged
Revised
rigorous annual evaluation of its own nd individual directors.
hether each director continues to contribute o the role (including commitment of time for board s). The chairman should act on the results of the trengths and addressing the weaknesses of the board bers be appointed to the board or seeking the
ow performance evaluation of the board, its een conducted. The non-executive directors, led by sponsible for performance evaluation of the ther directors.
re-election at regular intervals, subject to he board should ensure planned and
New Principle.
New supporting principle.
New Provision.
Revised principle. Now specifically refers to continued satisfactory performance and planned and progressive refreshing of the board.
shareholders at the first annual general meeting after Unchanged. (in substance) ter at intervals of no more than three years. The Was provision A.6.2. re-election should be accompanied by sufficient nformation to enable shareholders to take an informed
for specified terms subject to re-election and to moval of a director. The board should set out to esolution to elect a non-executive director why they chairman should confirm to shareholders when performance evaluation, the individual’s demonstrate commitment to the role. Any term for a non-executive director should be subject to into account the need for progressive refreshing of e longer than nine years (e.g. three three-year terms), than nine years could be relevant to the determination as set out in provisions A.3.1).
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New provision
Remuneration The level and make up of remuneration
Main principle
B.1
Sup
Co
B.1
B.1
B.1
B.1
B.1.5
B.1.6
The remuneration committee should carefully consider what compensation commitments (including pension contributions and all other elements) their directors’ terms of appointment would entail in the event of early termination. The aim should be to avoid rewarding poor performance. They should take a robust line on reducing compensation to reflect departing directors’ obligations to mitigate loss.
Key: Unchanged
Revised
ne year or less. If it is necessary to offer longer notice d from outside, such periods should reduce to one
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassocioatni.Allrightsreserved.
Unchan ed in substance .
Revised provision.
Now stresses the robust line reducing compensation to reflect departing directors’ obligations to mitigate loss.
Revised provision.
Now recommends that notice periods be set at one year or less.
Procedure Main principl
B.2
Sup
Co
B.2
B.2
B.2
B.2
Key: Unchanged
Revised
rent procedure for developing policy on the remuneration packages of individual ved in deciding his or her own remuneration.
the chairman and/or chief executive about their her executive directors. The remuneration committee y consultants in respect of executive director senior management are involved in advising or e should be taken to recognise and avoid conflicts
at the company maintains contact as required with its in the same way as for other matters.
ommittee of at least three, or in the case of smaller independent non-executive directors. vailable its terms of reference, explaining its role d. Where remuneration consultants are appointed, ther they have any other connection with the
legated responsibility for setting remuneration for all ing pension rights and any compensation payments. monitor the level and structure of remuneration for r management’ for this purpose should be determined first layer of management below board level.
rticles of Association, the shareholders should utive directors, within the limits set in the Articles of s, the board may however delegate this responsibility ef executive.
to approve all new long-term incentive schemes cant changes to existing schemes, save in the s.
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassocioatni.Allrightsreserved.
Unchanged.
New supporting principles.
Similar to existing Code provisions B.2.5 and B.2.6.
New provision.
Revised provision.
The remuneration committee’s remit is now extended beyond director’s remuneration to include senior management.
Unchanged.
Unchanged.
C Accountability and audit Financial reporting
Main principl
C.1
The board should present a balanced and understandable assessment of the company’s position and prospects.
Supporting principl
The board’s responsibility to present a balanced and understandable assessment extends to interim and other price-sensitive public reports and reports to regulators as well as to information required to be presented by statutory requirements.
Code provision
C.1.1
C.1.2
The directors should explain in the annual report their responsibility for preparing the accounts and there should be a statement by the auditors about their reporting responsibilities.
The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary.
Internal control
Main principl
C.2
Co
C.2
Key: Unchanged
Revised
m of internal control to safeguard shareholders’
a review of the effectiveness of the group’s system reholders that they have done so. The review should ial, operational and compliance controls and risk
©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassociaotni.Allrightsreserved.
Unchanged
New supporting principle Text unchanged from old provision D.1.2
Unchanged.
Unchanged from existing Code provision D.1.3.
Unchanged.
Unchanged (in substance).
Audit committee and auditors
Main principl
C.3
Co
C.3
C.3
C.3
C.3
C.3
C.3
C.3
Key: Unchanged
Revised
sparent arrangements for considering how they ternal control principles and for maintaining an ’s auditors.
tee of at least three, or in the case of smaller independent non-executive directors. The board r of the audit committee has recent and relevant
it committee should be set out in written terms of
atements of the company, and any formal financial performance, reviewing significant in them; l controls and, unless expressly addressed by a of independent directors, or by the board itself, to risk management systems; f the company’s internal audit function; r it to put to the shareholders for their approval in tment, re-appointment and removal of the external nd terms of engagement of the external auditor; r’s independence and objectivity and the into consideration relevant UK professional
ngagement of the external auditor to supply non-audit cal guidance regarding the provision of non-audit
atters in respect of which it considers that action or endations as to the steps to be taken.
ee, including its role and the authority delegated to it parate section of the annual report should describe ose responsibilities.
ents by which staff of the company may, in proprieties in matters of financial reporting or ve should be to ensure that arrangements are in investigation of such matters and for appropriate
ew the effectiveness of the internal audit activities. audit committee should consider annually whether there ke a recommendation to the board, and the reasons for ained in the relevant section of the annual report.
sponsibility for making a recommendation on the the external auditors. If the board does not accept the include in the annual report, and in any papers ent, a statement from the audit committee explaining s why the board has taken a different position.
lders how, if the auditor provides non-audit services, guarded.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular ACI Combined Cod individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such informationisaccurateasofthedateitisreceivedorthatitwillcontinuetobeaccurateinthefuture.Nooneshouldauctpon Designed and produced by such information without appropriate professional advice after a thorough examination of the particular situation. ©2003KPMGLLP,aUKlimitedliabilitypartnershipandtheUKmemberfirmofKPMGInternational,aSwissnonoperatingassociaotin.Allrightsreserved.Printed in the United Kingdom. The KPMG logo and name are trademarks of KPMG International.
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Unchanged.
Revised provision.
Now specifies recent and relevant financial experience.
Revised provision.
Now provides greater clarity over an audit committee’s duties.
New provision.
New provision.
New provision.
New provision.
New provision.