On January 22, 2024, the Financial Reporting Council (FRC) issued its revised UK Corporate Governance Code (Code). While the changes from the 2018 version are few, the revisions carry significant implications for audit professionals and others within the corporate governance framework. The revised Code is effective for periods beginning on or after January 1, 2025, other than provision 29 (discussed below), which is effective for periods beginning on or after January 1, 2026.
What is the UK Corporate Governance Code?
The UK Corporate Governance Code is the set of good practice Principles and Provisions that the FRC maintains for UK listed companies, applied on a "comply or explain" basis. The FRC describes it as follows: "The Code is maintained by the FRC and incorporates a set of Principles of good corporate governance. It is supported by a number of more specific Provisions and underpinned by the Financial Conduct Authority's Listing Rules."
In plain terms, the Code sets out how a board should lead a company, divide responsibilities, choose and evaluate its directors, manage audit, risk and internal control, and set pay. It has five sections: Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession and Evaluation; Audit, Risk and Internal Control; and Remuneration. Companies in the commercial companies category or the closed-ended investment funds category apply the Principles under the Listing Rules and either comply with the Provisions or explain why they depart from them.
Comply or explain means a company states in its annual report whether it complied with all Provisions throughout the financial year or departed from any of them. Where it departs, it names the Provision and gives an explanation. The FRC states that a meaningful explanation sets out the background, the rationale, any risks and mitigating actions, and when the company intends to comply. The Code is a source of good practice rather than a rulebook, and investors judge whether each explanation is satisfactory.
Enhancements to Provision 29
The previous provision 29 required that the board should monitor the company’s risk management and internal control systems and, at least annually, carry out a review of their effectiveness and report on that review in the annual report. The monitoring and review should cover all material controls, including financial, operational and compliance controls. This has now been expanded upon to also require the following in the annual report:
- A description of how the board has monitored and reviewed the effectiveness of the framework.
- A declaration of the effectiveness of the material controls as at the balance sheet date.
- A disclosure of any material controls which have not operated effectively as at the balance sheet date, the action taken or proposed, to improve them and any action taken to address previously reported issues.
This aims to strengthen board accountability for the effectiveness of the risk and internal control framework and also covers material controls and the board's approach to these.
Updates to audit committee reporting
Audit committee reporting has also been updated to address gaps identified during the Government’s consultation and ensures consistent and high-quality approaches across audit committees, introduced in May 2023.
Where the board is asked to describe the work of the audit committee in the annual report, the details have now been removed and replaced with a reference to the Audit Committees and External Audit Minimum Standard. This standard was issued as a direct response to the Government’s consultation on restoring trust in audit and corporate governance. It was designed to enhance performance and ensure a consistent approach across audit committees by setting clear expectations and guidelines.
The Code has expanded on the reporting of directors’ remuneration and now includes the need for a description of the malus and claw back provisions, including:
- The circumstances in which malus and clawback provisions could be used.
- An explanation of the selected period for malus and clawback and its suitability for the organization.
- Disclosure of whether these provisions were applied during the last reporting period, including context and reasoning if applicable.
Internal audit teams will likely play an expanded role in verifying remuneration disclosures, particularly in assessing whether clawback provisions were appropriately enforced and whether the disclosure aligns with best practices.
Why proactive alignment strengthens internal audit’s governance role
The revised UK Corporate Governance Code is a deliberate step toward strengthening corporate governance practices and restoring trust in business accountability. By proactively aligning with these standards, audit professionals can ensure their organizations are well-prepared to meet these expanded expectations, while reinforcing the critical role of internal audit in driving effective governance.