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FRC Guidance on Audit Committees (“The Smith Guidance”)

ecoDa Round Table on Audit Committees: Lessons from the UK Dr. Roger Barker Head of Corporate Governance Institute of Directors 18 March 2009, Hotel Silken Berlaymont, Brussels. FRC Guidance on Audit Committees (“The Smith Guidance”).

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FRC Guidance on Audit Committees (“The Smith Guidance”)

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  1. ecoDa Round Table on Audit Committees: Lessons from the UKDr. Roger BarkerHead of Corporate GovernanceInstitute of Directors18 March 2009, Hotel Silken Berlaymont, Brussels

  2. FRC Guidance on Audit Committees (“The Smith Guidance”) Establishment of the audit committee (including discussion of the committee’s membership, resources and procedures) Relationship between the audit committee and the main board Responsibilities of the audit committee Communication between the audit committee and shareholders

  3. The Need for Proportionality “Audit committee arrangements need to be proportionate to the task, and will vary according to the size, complexity and risk profile of the company”.

  4. Retaining Board Equality “Nothing in the guidance should be interpreted as a departure from the principle of the unitary board. All directors remain equally responsible for the company’s affairs as a matter of law”. 4

  5. The Limits of the Audit Committee “It is not the duty of audit committees to carry out functions that properly belong to others, such as the company’s management in the preparation of financial statements or the auditors in the planning or conducting of audits. To do so could undermine the responsibility of management and auditors”. 5

  6. Guidelines of the Enhanced Disclosure Working Group of Leading Investors Morgan Stanley Investment Management APG Investments Standard Life Investments California Public Employees’ Retirement System (CalPERS) Ernst & Young 6

  7. Key Issues From an Investor Perspective Information flows to the audit committee Risk and internal controls Valuation of assets and liabilities Write downs and impairment provisions Securitisation, off-balance sheet and contingent liabilities Internal and external auditors Executive compensation and risk Substance not form Audit committee charter Audit committee membership 7

  8. Audit Committees and Executive Remuneration “The audit committee should provide (a) a brief but informative description of its interaction with the compensation or remuneration committee in respect of executive compensation policies and practices and (b) comfort that the compensation policies and practices for top executives are appropriate for maintaining a robust control environment”. 8

  9. Audit Committees: Fulfilling Expectations “If audit committees are to provide the degree of assurance that boards and investors are looking for, their members will have to devote considerably more time to their duties and be appropriately rewarded for so doing”. Sir Adrian Cadbury (2002: 96) 9

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