NEW GUIDANCE NOTES FOR AUDIT COMMITTEES

On 26 March 2004, the Institute of Chartered Accountants in England and Wales (ICAEW) issued new guidance for audit committees covering 3 areas of the Combined Code, as part of a series designed to help non-executive directors of audit committees to understand the Combined Code on Corporate Governance.

1 Whistleblowing Arrangements

The Combined Code provides that audit committees should review the arrangements that are in place for company staff to raise concerns in confidence about possible improprieties in financial reporting and other matters. In addition, the audit committees should ensure that arrangements are in place for a proper and independent investigation of such matters.

These arrangements are known as whistleblowing procedures and the guidance is to help non executive directors to assess internal whistleblowing procedures by providing background information on and key aspects of whistleblowing procedures.

1.1 Background information on whistleblowing
The guidance emphasises that whistleblowing is a way to combat criminal and regulatory misbehaviour and to protect the reputation of a company and its management. It points out that employees are a valuable source of this type of information and having whistleblowing arrangements in place encourages employees to disclose such information. It is the role of the audit committee to ensure that effective and adequate arrangements are in place.

1.2 Key elements of whistle blowing
The following were highlighted in the guidance as key elements of effective whistleblowing arrangements:

(a) The culture of whistleblowing should be that the interests of employees be protected and the company offer confidentiality to employees where requested;
(b) The Board and senior management of the company should be aware of the requirements of legislation and regulations that apply to the company so that they can be communicated to the employees;
(c) A system whereby employees are made aware of the whistleblowing policy should be in place. There should also be a feedback system reporting on the outcome of an enquiry raised as a result of whistleblowing;
(d) Employees should be aware of the availability of confidential advice and procedures;
(e) Appropriate procedures should be in place for the effective dealing with wrongdoers;
(f) Where reported concerns are not upheld, this should not be grounds for action against a whistleblower; and
(g) The effectiveness of whistleblowing policies should be reviewed regularly.

2 Monitoring the Integrity of Financial Statements

The role of audit committees under the Combined Code is to monitor the integrity of financial statements and other formal announcements relating to the financial performance of a company.

The guidance gives an overview of the Combined Code's provisions and the type of issues the audit committee should consider.

2.1 Information to be reviewed
Both formal announcements relating to a company's performance and related information presented with the financial statements should be reviewed. When reviewing the related information, the audit committee should also consider the form and context in which the financial information appears.

The audit committee should also consider the process by which the financial statements and other financial information are produced.

2.2 Financial statements
Financial statements should give a true and fair view of the profit or loss of a company for its financial year and should comply with the requirements of the Companies Act 1985.

2.3 Judgments
Where senior management and the board have exercised their judgment on financial statements, the guidance offers advice on where judgements will be considered significant and therefore require more attention from the audit committee.

3 The Internal Audit Function
The Combined Code provides that the audit committee should monitor and review the effectiveness of a company's internal audit function and activities. Where there is no such function, the audit committee should consider annually whether there is a need for an internal audit function.

The guidance provides background on internal audit functions and how they operate, what standards internal auditors may follow and how the function might interact with the audit committee. For example:

(a) The audit committee should ensure that the role of the internal audit within the company is sufficient to meet the requirements of the organisation;
(b) The audit committee should ensure that the role of the internal audit is clearly set out in its terms of reference or charter;
(c) The internal audit should be able to communicate its findings to the audit committee; and
(d) Adequate procedures should be in place to evaluate the effectiveness of internal audit within an organisation.

For further information and the full text of the guidance, please see the ICAEW's website at http://www.icaew.co.uk/

If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Katy Knight, Clive Hopewell or Alexander Keepin (London), Francis Rundall or Richard Norton (Cheltenham) or Geoff Sparks (Guildford) and on 0207 203 5000.

Please note that the summaries above are a general indicative guide only. They are not exhaustive. This information has been prepared by the firm as a service to our clients. As it is a general guide, we recommend that you seek professional advice before taking action. No liability can be accepted by the firm for any action taken or not taken as a result of this information. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.