FTSE 350 firms tendering for an auditor must not “preclude” challenger firms—those outside the Big Four—from the process, according to a new set of audit committee standards published this week.

Audit committees should also seek an explanation of why an eligible firm should decline to pitch for an audit. The standards also ask committees to seek feedback from investors on the “effectiveness” of the external audits they  commission.

The standards come as one of the few concrete developments from the government’s audit reform agenda that has been running since a white paper was launched in July 2021 and has its roots in the collapse of construction giant Carillion in January 2018.

The standards were recommended in the white paper and are set to give to audit committee members new responsibilities for work around the appointment and monitoring of external auditors.

According to Mark Babington, executive director of regulatory standards at the Financial Reporting Council (FRC), the body charged with supervising UK corporate governance, publication represents a “milestone” in the process of rebuilding trust in the audit profession.

“We believe that the adoption of this standard will contribute to a stronger and more robust audit market,” he says.

The standards address a range of issues in the work of audit committees. But they also attempt to encourage more competition among auditors, reflecting concern that the market is dominated by the Big Four firms (PwC, Deloitte, KPMG and EY).

The standards say: “The tendering process must not preclude the participation of ‘challenger’ audit firms without good reason.”

The document also says audit committees should seek explanations from audit firms who refrain from pitching for work “to understand why they are unwilling to tender and whether there is anything that could be done to change that.”

A conversation with investors will form part of an audit committees efforts to collect evidence that auditor’s are performing to expectations.

But audit committees are also being asked to report on their work for a section to be included in annual reports. This reporting should include a description of how it assessed the “independence and effectiveness” of external auditors.

Regulators also want a public explanation if audit committees should disagree with their boards on which firm should be appointed external auditors, including the reasons why the board may ignore an audit committee’s recommendations.

Though the standards have been welcomed,  there is recognition that they may require change for audit committees, according to Mike Suffield, director of policy and insights at ACCA.

“The standards represent best practice, and so some audit committees may have to shift how they work in order to comply.

“But this is in the public interest – audit committee have a really important role to play in the broader corporate governance and reporting ecosystem, and this guidance will help drive a consistent and high quality approach.”

The UK’s Companies Act 2006 sets the basic for audit committee composition and duties. Some of this is echoed in the UK Corporate Governance Code. But neither set minimum standards for how the work supervising external audit is undertaken.

The new measures are the latest elements to reform audit. Some major proposals have yet to come into being, including the legal underpinning for a new regulator and its powers. In the meantime, audit committee members will be coming to terms with a new working environment.