TAILIEUCHUNG - AUDIT COMMITTEES COMBINED CODE GUIDANCE: A report and proposed guidance by an FRC-appointed group chaired by Sir Robert Smith

If things go wrong, the audit committee also has a role in ensuring that they are put right – for example if an audit failure seems to be leading to poor, or even deliberately misleading, financial reporting decisions. This can put the committee into an adversarial relationship with both the external auditors and the executive, and audit committees must be ready to accept that role if necessary. The US corporate failures of 2002 point vividly to the importance of this. We believe that failures on that scale will continue to be rare, but audit committees must be capable of tackling the worst. We have drawn up specimen. | AUDIT COMMITTEES COMBINED CODE GUIDANCE A report and proposed guidance by an FRC-appointed group chaired by Sir Robert Smith Members of the group Mark Armour Ted Awty Glyn Barker Richard Delbridge Richard Fleck David Rough Secretariat Charles Bridge Liz Corrin Submitted to the Financial Reporting Council in December 2002 and published in January 2003 Electronic copies of this report are available at publications Hard copies can be obtained from Financial Reporting Council Holborn Hall 100 Gray s Inn Road London WC1X 8AL Tel 44 0 20 7611 9700 Fax 44 0 20 7404 4497 Electronic copies of the related report by Derek Higgs Review of the role and effectiveness of non-executive directors are available at cld non_exec_review The Financial Reporting Council Limited 2003 Contents Paragraphs Pages 1 The proposed guidance 3-17 Introduction The audit committee and its purpose Membership procedures and resources Relationship with the board Role and responsibilities - Financial reporting - - Internal financial controls and risk management systems - - Whistleblowing - - The internal audit process - - The external audit process - - Appointment - - Terms and remuneration - - Independence including the provision of non-audit services - - Annual audit cycle - Communication with shareholders 2 Proposed new Code provisions on audit committees 19-20 3 Background report 21-49 Main report 21-28 Appendices I Specimen terms of reference for an audit committee 29-32 II Outline annual report section on an audit committee s activities 33-34 III International comparisons 35-43 IV FRC Press Notice establishing the group and its terms of reference 44-47 V List of consultation respondents 48

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