Chartered IIA welcomes FRC changes to UK Corporate Governance Code

The Chartered Institute of Internal Auditors (IIA) has welcomed stronger focus on internal controls in the revised UK Corporate Governance Code announced by the FRC yesterday (22 January).

The revisions will enhance transparency and accountability of UK plc and help support the growth and competitiveness of the UK and its attractiveness as a place to invest.

Given stakeholder support for the importance of good corporate governance, the FRC has prioritised revisions to the Code in one significant area – Internal Controls. As signalled on 7 November, the FRC dropped its earlier proposals for revisions to the Code related to the role of audit committees on environmental, social and governance issues; expanding diversity and inclusion expectations; over-boarding provisions, and expectations on Committee Chairs’ engagement with shareholders.

In relation to Internal Controls, the existing expectations in the Code will remain. The existing Code also includes the provision that monitoring and review should cover all material controls, including financial, operational, reporting and compliance controls. 

Anne Kiem OBE, chief executive of the IIA, said: “It is good to see the increased focus in the revised Code on the need for companies to have a robust risk management and internal control framework. The introduction of the internal controls’ declaration should lead to better corporate governance and internal audit functions can play a key role in providing the board with independent assurance that the material controls have operated effectively.”

The main substantive change the FRC is now making is asking boards to explain through a declaration in their annual reports how they have done this and their conclusions.

It is for a board to determine what should comprise its material internal controls. The FRC is mindful that the needs for each business may vary and that the level of maturity of non-financial controls for some businesses may not be, or need to be, as mature as for their financial controls. It is for the Board to determine what level of maturity is right for its business and their own levels of required assurance in relation to the effectiveness of these controls.

The new code expectation for the board declaration will come into effect from 1 January 2026, one year after the rest of the updated code comes into effect from 1 January 2025.

Kiem added: “With the new UK Corporate Governance Code now published we urge the Government to accelerate other vital aspects of the audit and corporate governance reform programme, including bringing forward the legislation to put the Financial Reporting Council on a statutory footing with the powers it needs to transition to the new Audit, Reporting and Governance Authority. 

“It has been six years since Carillion collapsed, and during this time we have seen further corporate scandals linked to audit and governance failings, so it is somewhat astonishing that the audit regulator is still without the powers it needs to do its job properly.”