Terms of Reference of the Audit Oversight Body

Preface

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

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 (as updated from time to time) insofar as they are within the control of the audit practice and to enhance the UK firm’s ability to fulfil certain responsibilities set out in the Audit Firm Governance Code.

Appointment and membership

Composition of AOB:

The AOB is comprised of up to three Audit Non Executives (ANEs) 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 firm’s Head of Audit (Head of Audit) ex officio. The ANEs shall be the majority on the AOB. ANEs are appointed for specific terms and have a maximum tenure of nine years in total.

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.

AOB Chair:

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 firm Senior Partner (Senior Partner) and approved by the PIB.

Doubly independent ANE:

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.

AOB members:

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 1 July 2024) are::

Caroline Gardner, ANE, Chair of the AOB
Suzanne Baxter, ANE and PIB member
Victoria Raffe, ANE and PIB member
Andrew Hammond, Partner and Head of Audit
Kenny Wilson, Partner and SB member

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.

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 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.

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.

Secretary

The Secretary to the AOB is Lucy Jones, a member of the Board Secretariat. In the absence of the Secretary, another member of the Board Secretariat of the UK firm may act as Secretary of the AOB.

The Secretary will ensure that the AOB receives information and papers in a timely manner to enable full and proper consideration to be given to matters, and will be responsible for maintaining accurate records of meetings.

Duties and responsibilities of the AOB

The duties and responsibilities of the AOB are primarily set out in the FRC’s objectives, outcomes and principles for operational separation and the Audit Firm Governance Code (2022).

FRC’s objectives, outcomes and principles for operational separation (the ‘principles’):

The primary duties and responsibilities of the AOB include:

Providing independent oversight of the Audit practice with a focus on 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
Promoting a culture supportive of the public interest alongside management of the Audit practice

Recommendations or objections to management

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 UK firm’s Management Board (MB) for consideration, being the executive body with responsibility for approving the audit strategy in the context of the firm as a whole. The MB 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 2).

In determining whether recommendations or objections should be made to the MB 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.

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 MB directly.

Head of Audit consultation

The AOB shall also be consulted by the Senior Partner 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 UK 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 2).

Audit Firm Governance Code (the Code):

ANEs will fulfil the responsibilities of INEs under the Code in so far as these relate to the audit practice, this includes the following:

ANEs should focus their attention on the audit practice in accordance with the principles and provide independent oversight of audit quality plans, audit strategy and remuneration in the audit practice
ANEs should provide constructive challenge and specialist advice with a focus on the public interest. They should assess and promote the public interest in the UK firm operations and activities as they relate to the purpose of the Code, forming their own views on where the public interest lies
ANEs have a duty of care to the UK firm and (together with the INEs) should command the respect of the UK firm’s partners and collectively enhance public confidence by virtue of their independence, number, stature, diverse skill sets, backgrounds, experience and expertise
ANEs should have access to the same information as is available to UK firm management (wherever possible and so far as the law allows) and have a right of access to relevant information and people
ANEs should have an open dialogue with the regulator

Further details relating to ANE responsibilities under the Code are set out in Annex 1.

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.

Sub-committees of the AOB

The AOB is assisted in the discharge of its duties by the Audit Partner Remuneration and Admissions Committee (APRAC), a sub-committee composed of three ANEs who will meet at least twice a year.

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.

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 2. The AOB shall consult with the PIB in respect of any such disagreement before invoking such procedure.

^{09 August 2024 - approved by the Public Interest Body

09 August 2024 - adopted by the members of the Body}

Annex 1

Additional duties and responsibilities of ANEs set out in the Audit Firm Governance Code 2022

ANEs should be involved in the UK firm’s review of the effectiveness of systems for the promotion and embedding of an appropriate culture in relation to the audit practice
ANEs should be involved in reviewing people management policies and procedures (including remuneration and incentive structures, recruitment and promotion processes, training and development activities, and diversity and inclusion) to ensure that the public interest is protected and should monitor the UK firm’s success at attracting and managing talent, particularly in the audit practice
ANEs should use a range of data and engagement mechanisms to understand the views of colleagues throughout the UK firm and to communicate about their own roles and the purpose of the Code
ANEs should be involved in the UK firm’s assessment of the principal risks facing it, including those that would threaten its business model, future performance, solvency or liquidity. This should reference specifically the sustainability of the audit practice in the UK
INEs and ANEs should maintain open dialogue, consult on matters of public interest and share information with one another to the extent this is relevant for the AOB’s oversight of the audit practice and/or the effective discharge of the INEs’ responsibilities at the UK firm-wide level
ANEs should alert the regulator as soon as possible to their concerns where they:
- believe the UK firm is acting contrary to the public interest; or
- believe the UK firm is endangering the objectives of the Code; or
- initiate the procedure for dealing with a fundamental disagreement.

Annex 2

Procedure for Dealing with any Fundamental Disagreement (relevant extract from Members’ Agreement dated 1 January 2021) - Schedule 6 - paragraphs 25 and 26

The Non-Executives have the right to report to the Members a fundamental disagreement (“Fundamental Disagreement”) between them and:
1. the Senior Partner; or
2. the Management Board; or
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.
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.
The Non-Executives must raise the Fundamental Disagreement with the person or board with whom they fundamentally disagree.
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.
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.
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.
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.
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.
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.

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:

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
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 UK 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.