A series of 'comply or explain' changes have been put forward by The Financial Reporting Council (FRC) as it unveiled a series of minor tweaks to the UK Corporate Governance Code.
It now wants FTSE 350 companies to put their external audit contracts out to tender at least every decade to 'ensure a high quality and effective audit, whether from the incumbent auditor or from a different firm'. The accounting watchdog says it will now hold a series of discussions with companies, auditors and investors to discover whether guidance on tendering would be worthwhile.
It has also called for audit committees to furnish shareholders with information on how they have carried out their responsibilities and assessed the effectiveness of the external audit process.
Other drivers include ensuring boards confirm that the annual report and accounts are fair, balanced and understandable and that companies explain and report on the progress of their boardroom diversity drive.
It has also formally implemented its request to encourage companies to provide fuller explanations to shareholders as to why they choose not to follow any of the code's provisions. This element was originally announced in October 2011, but was deferred to 'avoid piecemeal changes to the Code'.
The FRC also made a series of changes to the Stewardship Code which asked investors to explain how they manage conflict of interest issues and their use of proxy voting agencies.
Richard Sexton, PwC's board member for reputation and policy, said: 'The responses to the consultation make it clear that the whole market supports a comply or explain approach. More regular tendering on this basis should help counter any misconception that long audit tenure reflects a lack of competition by showing that the quality of the audit is periodically subject to challenge. The changes will also provide investors with greater transparency around the auditor appointment process and the effectiveness of the audit.
'Tendering is fundamentally different to rotation, which we and many market participants remain strongly opposed to, as it does not automatically rule the incumbent out of the process, nor dilute the critical governance principle that allows companies and shareholders to appoint the best provider in their eyes.
'It is important to note that under this comply or explain provision it will be perfectly valid for companies to take an alternative approach to testing the market or to defer a formal tender if that is their choice, provided they explain the reasons.'
The updated Code will apply from 1 October 2012.