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Terms of Reference of the Audit Oversight Body

1. Preface

The Audit Oversight Body (“AOB” or “the Body”) is a committee of the Public Interest Body (PIB) of PricewaterhouseCoopers LLP in accordance with section 6 of the Members’ Agreement.

2. Purpose

The purpose of the AOB is to oversee the UK firm’s obligations with respect to the pursuit of the FRC’s objectives, outcomes and principles for operational separation of audit practices insofar as they are within the control of the audit practice (see Annex 1).

3. Duties

The AOB enhances the UK firm’s ability to fulfil certain responsibilities set out in the Audit Firm Governance Code 2016 (see Annex 2), and comply with the principles for operational separation (“the principles”) of audit practices dated 6 July 2020, as adopted by the firm’s management.

4. Appointment and membership

The AOB is comprised of up to three Audit Non Executives (ANEs) (with the expectation that in due course at least one of whom will have appropriate audit experience either as a former auditor or consumer of audit services), at least one member of the UK firm’s Supervisory Board (SB), and the UK Head of Audit ex officio.

The Chair of the AOB may not chair any other governing body of the firm, and no person shall be Chair for more than six years in aggregate.

The Chair of the AOB shall be nominated by the UK Senior Partner and approved by the PIB.

The ANEs shall be the majority on the AOB. It is required that at least one ANE is not also an INE member of the PIB (known as a ‘doubly independent’ ANE). For any doubly independent ANE appointment, the SB shall approve the ANE status from candidates nominated by the Senior Partner following consultation with the AOB, Chair of the SB and Chair of the PIB.

A member of the SB will be nominated to sit on the AOB by the Chair of the SB in consultation with the Senior Partner, AOB and Chair of the PIB. The UK Head of Audit is appointed by the UK Senior Partner and is an ex officio member of the Body.

In order to perform their role effectively, each member of the Body should obtain an understanding of the detailed responsibilities of AOB membership as well as the PwC Audit business, audit operations, risks and regulatory environment. The members of the AOB (as at 16 November 2021) are:

  • Philip Rycroft, ANE Chair and PIB member
  • Caroline Gardner, ANE
  • Victoria Raffe, ANE and PIB member
  • Hemione Hudson, Partner and Head of Audit
  • Kate Wolstenholme, Partner and SB member

5. Attendance of non-members at meetings

The General Counsel of the UK firm shall be a standing attendee of the AOB. Where appropriate, members of management may be invited to attend subject to agreement in advance of the meeting with the Chair of the AOB.

6. Meetings

The Chair of the AOB determines a rolling programme of ordinary meetings of the Body which must provide for at least four ordinary meetings in each calendar year. Additional meetings can be called at the request of the Chair, or as necessary to deliver the responsibilities of the AOB in relation to all public interest aspects of the Audit business. The ANEs can also meet as a separate group to discuss matters relating to their remit.

To ensure that the Audit business is represented in the wider governance of the UK firm and to enable cohesion with the work of the PIB, the AOB reports to the PIB after any exercise of its powers.

The quorum shall be three members of the AOB, including at least two ANEs, for any meeting of the Body. Should an ANE be absent from the quorum, their views will be sought in advance of the meeting. In an instance where this is not practicable, input and ratification of the discussion will be sought prior to any powers being exercised.

The AOB keeps minutes of its proceedings.

7. Responsibilities of the AOB

The primary responsibilities of the AOB are threefold: (1) to oversee the FRC’s objective to improve audit quality by ensuring that people in the audit practice are focused above all on delivery of high-quality audits in the public interest; (2) to promote a culture supportive of the public interest; and (3) to support (as appropriate) the firm’s senior management in the execution of their responsibilities under the principles through robust oversight and constructive challenge.

Other responsibilities of the Body include:

  • Assess the audit strategy, at least annually, within the context of the FRC’s operational separation objectives and outcomes;
  • Review the culture, values and behaviours within the audit practice;
  • Review key control processes relating to audit quality;
  • Review key audit risk management and internal control policies and procedures insofar as they impact on the public interest including independence, conflicts of interests and claims/disputes;
  • Oversee compliance by the Audit business with PwC’s Code of Conduct; and
  • Monitor progress of the UK firm’s programme to enhance audit quality.

The AOB shall be entitled to make recommendations or objections to management in relation to the agreed responsibilities where appropriate. In particular, if the AOB determines that the audit strategy is inconsistent with pursuit of the FRC’s objectives and outcomes, they shall be entitled to refer matters to the firm’s Executive Board for consideration, being the governance body with responsibility for approving the audit strategy in the context of the firm as a whole. The Executive Board shall be obliged to take account of the views of the AOB and where a resolution cannot be reached, the procedure for dealing with a fundamental disagreement may be invoked (see Section 9 and Annex 3).

The AOB shall also be consulted by the Senior Partner of the firm with respect to the appointment of the Head of Audit. The AOB shall have the right to interview any candidate nominated for Head of Audit, and make recommendations or objections prior to the appointment. If at any time, the AOB determines that the Head of Audit is unable to meet their regulatory obligations, the Chair of the AOB may seek the removal of the Head of Audit. Objections to appointment, or requests for removal of the Head of Audit shall be raised through consultation with the Senior Partner and the appropriate governance mechanisms of the firm. The Senior Partner shall be obliged to take account of the views of the AOB and where a resolution cannot be reached, the procedure for dealing with a fundamental disagreement may be invoked (see Section 9 and Annex 3).

In determining whether recommendations or objections should be made to the firm’s Executive Board in relation to the AOB’s responsibilities, a simple majority vote will be taken. In the instance where the number of votes for and against a decision are equal, the Chair of the AOB shall have the casting vote.

The Chair of the AOB shall report to the PIB after each meeting to provide information on the execution of their responsibilities, and where relevant any recommendations or action to be taken. In the event of a conflict of interest or a divergence of views between the AOB and the PIB on the subject of audit quality, the AOB shall be entitled to make representations to the firm’s Executive Board directly.

The AOB has the authority to commission reviews from Internal Audit on compliance with the principles, either directly, or in coordination with the firm’s other oversight governing bodies.

The PIB retains responsibility for the review of policies and procedures relating to the UK firm as a whole.

8. Committees of the AOB

The AOB is assisted in the discharge of its duties by the Audit Partner Remuneration and Admissions Committee (APRAC). The primary responsibilities of the APRAC are twofold: (1) to oversee the audit partner remuneration process to ensure individual audit partner remuneration is determined above all by contribution to audit quality; and (2) to oversee the process by which candidates are selected for admission to the partnership to practice as audit partners.

The Committee shall be comprised of three ANEs who will meet at least twice a year.

9. Procedure for Dealing with any Fundamental Disagreement

The procedure for dealing with any fundamental disagreement which arises with respect to the matters over which the AOB has oversight in accordance with these Terms of Reference and that cannot otherwise be resolved between the ANEs and members of the UK firm’s management team is set out in Annex 3. The AOB shall consult with the PIB in respect of any such disagreement before invoking such procedure.

Approved by the Public Interest Body and adopted by the members of the Body on 22 February 2022

Audit Oversight Body contact details

Email UK secretariat

Annex 1

Objectives, outcomes and principles for operational separation of audit practices

Objective 1 - Improve audit quality by ensuring that people in the audit practice are focused above all on delivery of high-quality audits in the public interest.
Objective 2 - Improve audit market resilience by ensuring that no material, structural cross subsidy persists between the audit practice and the rest of the firm.

In pursuing these objectives, the FRC will seek to ensure that audit remains an attractive and reputable profession and increase deserved confidence in audit.

Desired outcomes:

  • Audit practice governance prioritises audit quality and protects auditors from influences from the rest of the firm that could divert their focus away from audit quality.
  • The total amount of profits distributed to the partners in the audit practice should not persistently exceed the contribution to profits of the audit practice.
  • Individual audit partner remuneration is determined above all by contribution to audit quality, taking account of the degree of difficulty and risk of the audits.
  • Audit practice financial reporting is transparent to the regulator and public, allowing effective monitoring of audit practice performance and financial resilience.
  • The culture of the audit practice supports audit quality and the public interest by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism/judgement.
  • Auditors should act in the public interest and work for the benefit of shareholders of audited entities and wider society; they are not accountable to audited entities’ executive management and are not (nor viewed as or considered to be) consultants.

FRC Principles

Governance

Audit Board purpose

P1 The Audit Board should be responsible for providing independent oversight of the audit practice, with a focus on the pursuit of Objective 1. The firm’s most senior governance body should be responsible for providing oversight with a focus on the pursuit of Objective 2.

P2 The Audit Board and the management of the audit practice should establish and promote a culture supportive of the public interest.

Audit Board composition

P3 The Audit Board should be chaired by and have a majority of Audit Non-Executives (ANEs).

Independence of Audit Board from the firm

P4 At least one of the ANEs should not be a firm INE (‘doubly independent’). The Chair of the Audit Board should be an ANE and may also be a firm INE but should not chair any other governance body in the firm.

Skills of Audit Board

P5 At least one ANE on the Audit Board should have experience of audit at an appropriate level of seniority, either as a former auditor or consumer of audit services.

Audit Board oversight of Audit CEO and Audit Strategy

P6 The Audit Board should oversee the firm’s audit strategy to ensure that it is consistent with pursuit of the objectives and outcomes set out above. It should be able to require changes where it considers that the strategy is not consistent.

P7 The Audit Board shall be consulted by the Senior Partner of the firm with respect to the appointment of the CEO of Audit and have the opportunity to object to the appointment. The Audit Board may seek the removal of the Audit CEO.

Audit Board oversight of partner promotion and remuneration

P8 Remuneration of audit partners and audit partner promotion should be overseen by a sub-committee of the Audit Board comprising ANEs only. Admissions of partners will remain a partnership responsibility and subject to the governance procedures of the partnership. However, the selection of candidates to be admitted to the partnership to practice as audit partners will be overseen by the Audit Board.

Other governance matters

P9 Appointments of individuals to the Audit Board should be subject to a formal, rigorous and transparent procedure.

P10 The Audit Board should have the authority to commission reviews from Internal Audit to support their oversight role.

Services within the “ring-fence”

P11 Statutory audit should be provided by the audit practice. The audit practice may also provide:

  • permitted audit-related and non-audit services to PIE entities audited by the firm;
  • audit-related and non-audit services to non-PIE entities audited by the firm which are not prohibited; and
  • services to other entities not audited by the firm that are either:
    • included on the “white-list” in paragraph 5.40 of the Ethical Standard 2019, and are commissioned by those charged with governance at the entity, or
    • are non-audit assurance engagements where the recipient of the assurance is a third party (e.g. a regulator, government or lender) separate from the client of the audit firm. These assurance engagements should be performed in accordance with a recognised assurance standard (e.g. ISAE 3000, ISAE 3402, SOC1 etc).

Specialists supporting audit

P12 Specialists supporting audit (and other permitted services provided by the audit practice) can be located elsewhere in the firm provided their services are supplied and charged to the audit practice on an arms-length basis.

Other ring-fence matters

P13 Partners and staff in the audit practice should spend the majority of their time on work in the audit practice. This does not preclude the secondment of staff to other areas of the business (in either direction) or the appointment of audit partners to firmwide leadership roles.

P14 Revenues from audit work should make up at least 75% of the revenue of the audit practice.

Financial

P15 Transactions between the audit practice and the rest of the firm should be conducted and priced on an ‘arms-length’ basis. The audit practice should not receive fees for introducing business to other parts of the firm.

P16 The audit practice should produce a separate profit and loss account with overhead absorption on an equitable basis.

P17 As part of its annual assessment of whether firms are delivering these objectives and outcomes, the FRC will assess whether the overall distribution of profits to the partners in the audit practice and to those in the rest of the firm is consistent with their respective contributions to firm profits, with no material, structural ross subsidy persisting in either direction. This assessment will take account of any non-recurring items and investment to improve audit quality. If the FRC’s assessment is that a material, structural cross subsidy persists, the firm should produce an action plan to remove the subsidy over a period to be agreed with the FRC.

Remuneration of partners

P18 Remuneration policies and practices for partners in the audit practice should be designed to reward primarily high quality work and positive leadership behaviours. The firm should have measures in place to reduce reward in cases of poor quality work. Partners and staff in the audit practice should not be incentivised for sales passed to other parts of the firm.

Transparency

P19 Firms should publish information about the governance of the audit practice and the terms on which transactions occur between the audit and non-audit business and the nature of these transactions.

P20 Firms should produce annually a separate profit and loss account for the audit practice to a level which is consistent with the firm’s own published statutory financial statements. This profit and loss account should be assured by the firm’s auditors. Firms should submit more detailed financial information supporting the profit and loss account to the FRC no later than four months after the financial year end.

After an agreed transition period, firms should publish the audit practice’s profit and loss account described above in their Transparency Reports.Firms should provide to the FRC their budget for the audit practice and sensitivities for the coming year.

Accountability

P21 Firms should appoint one individual (or a small number of individuals with clearly defined and non-overlapping responsibilities) from the Senior Management team to be responsible and accountable for ensuring the outcomes and principles for operational separation are delivered, embedded and monitored.

Transitional Arrangements

P22 Firms should provide a transition timetable to ensure that each of these principles is implemented as soon as practicable and they are met [and] implemented in full by 30 June 2024 at the latest.

An implementation plan should be submitted to FRC by 23 October 2020. The FRC will agree a transition timetable including a medium-term plan with a firm.

In the first year of submission, the profit and loss account may be done on a ‘best efforts’ basis. Firms will not be required to publish the profit and loss account during an agreed transition period ending not later than 30 June 2024.

Annex 2

Duties of Independent Non-Executives set out in the Audit Firm Governance Code (Revised [2016])

The Independent Non-Executives through their involvement collectively enhance shareholder confidence in the public interest aspects of the UK firm’s decision making, stakeholder dialogue, and management of reputational risks including those in the UK firm’s businesses that are not otherwise effectively addressed by regulation. The Independent Non-Executives shall have oversight of the UK firm’s policies and procedures for promoting audit quality, helping the UK firm to secure its reputation more broadly including in its non-audit business, and reducing the risk of firm failure.

The Independent Non-Executives have a duty of care to the UK firm. The Independent Non-Executives should command the respect of the UK firm’s partners and collectively enhance shareholder confidence by virtue of their independence, number, stature, experience and expertise. The Independent Non-Executives should have regular contact with the UK firm’s Ethics Partner.

The Independent Non-Executives should be involved in reviewing people management policies and procedures and the effectiveness of the UK firm’s risk management and internal control policies and procedures. The Independent Non-Executives should oversee compliance with the UK firm’s Code of Conduct.

The UK firm should report to the Independent Non-Executives on issues raised under its whistleblowing policies and procedures.

The Independent Non-Executives should be involved in the UK firm’s responsibility for dialogue with listed company shareholders, as well as listed companies and their audit committees, about matters covered by the Audit Firm Governance Code, to enhance mutual communication and understanding and ensure that the UK firm keeps in touch with shareholder opinion, issues and concerns.

Annex 3

Procedure for Dealing with any Fundamental Disagreement (relevant extract from Members’ Agreement dated 1 January 2021)

25.1 The Non-Executives have the right to report to the Members a fundamental disagreement (“Fundamental Disagreement”) between them and:

25.1.1 the Senior Partner; or

25.1.2 the Management Board; or

25.1.3 the Supervisory Board

that cannot otherwise be resolved in accordance with the following provisions of this paragraph 25. This right applies to any Non-Executive, whether or not they are also a member of the Public Interest Body.

25.2 The majority of the Non-Executives on the Public Interest Body must first agree that there is a Fundamental Disagreement or, where the Non-Executives are on a committee or subcommittee of the Public Interest Body, the majority of the Non-Executives on that committee or subcommittee, having consulted with the Non-Executives on the Public Interest Body, must first agree that there is a Fundamental Disagreement.

25.3 The Non-Executives must raise the Fundamental Disagreement with the person or board with whom they fundamentally disagree.

25.4 The Non-Executives and the person or board with whom they disagree must meet as soon as reasonably practical and in any event within 15 Working Days of a written request from the Non-Executives to them and must discuss the disagreement and seek to resolve the same.

25.5 If the Fundamental Disagreement is not resolved as a result of such meeting, the Non-Executives and the other relevant person or board (unless it is the Senior Partner) must, within five Working Days following such meeting, notify the Senior Partner of the Fundamental Disagreement and of their views on such disagreement. The Non-Executives and the Senior Partner must reasonably co-operate to seek a resolution of the Fundamental Disagreement. The Senior Partner may take such action as in their opinion is reasonably necessary to seek to resolve the Fundamental Disagreement. Any Member must take such steps as the Senior Partner requires to give effect to such action.

25.6 If the Fundamental Disagreement is not resolved under paragraph 25.5 above within 15 Working Days of the Senior Partner’s receipt of the notification of the Fundamental Disagreement, the Non-Executives and the other relevant person or board (unless it is the Supervisory Board) must, within five Working Days, notify the Supervisory Board of the Fundamental Disagreement and of their views on such disagreement. The Supervisory Board must meet as soon as reasonably practical, and in any event within 15 Working Days of receipt of the notification, with the parties to the Fundamental Disagreement either separately or together or both or by itself in accordance with arrangements which the Supervisory Board determines.

25.7 If the Fundamental Disagreement is not resolved as a result of such meeting or the Fundamental Disagreement is with the Supervisory Board, the Non-Executives or the other relevant person or board may, within 15 Working Days following such meeting, propose to the others in writing that the matter be referred to non-binding mediation and, if such proposal is accepted, the mediator (if not appointed by agreement between the parties) will be nominated by CEDR (or any body that may succeed to, or replace, CEDR from time to time). The fees and expenses of the mediator are borne by the LLP.

25.8 If the Fundamental Disagreement is not resolved as a result of such discussion or mediation, the Non-Executives, or those of them who have the Fundamental Disagreement, may, within five Working Days, report the same to the Members together with such recommendations or advice as they reasonably consider appropriate.

25.9 Where the Senior Partner, Management Board, Supervisory Board or Members do not within 20 Working Days after the report referred to in paragraph 25.8 above take action which is reasonably likely to resolve the Fundamental Disagreement, or the Fundamental Disagreement is not otherwise resolved within such period, the relevant Non-Executives may resign and may report their resignation publicly in such form as such Non-Executives and the LLP may agree or, in default of agreement within a reasonable time after the expiry of such period of 20 Working Days, not exceeding five Working Days, in such form as such Non-Executives reasonably consider appropriate.

26 Once a majority of the Non-Executives on the Public Interest Body has agreed that there is a Fundamental Disagreement, or where the Non-Executives are on a committee or subcommittee of the Public Interest Body, and the majority of the Non-Executives on that committee or subcommittee, having consulted with the Non-Executives on the Public Interest Body, has agreed that there is a Fundamental Disagreement in accordance with paragraph 25.2 above:

26.1 the LLP must not remove any Non-Executive under the agreement between them and the LLP before the end of their term of office save for serious breach of their obligations or other grounds to terminate that agreement without the need to give notice; and

26.2 where the term of office of a Non-Executive expires (and the Non-Executive is not reappointed as a Non-Executive) in the course of the process set out in paragraph 25 above, such process shall nevertheless continue as if, solely for these purposes, the Non-Executive had continued as a Non-Executive.

Explanatory note: The procedure for dealing with any fundamental disagreement is set out in the Members’ Agreement (extract above). In addition to that procedure, the Supervisory Board has powers to take action in response to proposals by senior management of the firm. These powers include:

  • power to initiate a process for removal of the Senior Partner;
  • power to suspend any action proposed by the Management Board which the Supervisory Board considers to be materially prejudicial to partners and to initiate processes to refer the proposed action to the firm’s partners where, following the suspension, the Supervisory Board is unable to approve it within a specific period;
  • power to refer to a partner vote any matter which in the Supervisory Board’s view involves a significant change in form or direction of the UK firm (with approval by a special majority of partners required); and
  • an additional protection is that proposals for transactions which are outside the UK firm’s ordinary course of business require Supervisory Board approval before the Management Board is able to proceed with them.

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UK Secretariat

London, PwC United Kingdom

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