Revised French Corporate Governance Code Emphasizes Independent Audit Committees

A revised French corporate governance code places the independent audit committee at the heart of effective governance and provides for the appointment of employee-shareholder directors. In accordance with French law, the code also offers companies the choice between a unitary board of directors, such as in the US, and a two-tier supervisory board-executive board structure, as used in Germany and the Netherlands. The code does not favor either formula, leaving it up to each corporation to decide on the basis of its own specific constraints.

The code provides that at least one-half of the board members must be independent. A director is independent when he or she has no relationship of any kind whatsoever with the company, its group or the management of either that is such as to color his or her judgment. Thus, an independent director is to be understood not only as a non executive director, that is one not performing management duties, but also as one devoid of any particular bonds of interest with them.

The board should appoint an audit committee composed of members competent in finance and accounting; two-thirds of whom are independent. The committee must be permitted to hire experts as needed. The annual report should include a statement on the audit committee's activity during the financial year.

The main tasks of the audit committee are to review the financial accounts and ensure the relevance and consistency of accounting methods used in drawing up the company’s financial statements. The committee should also monitor the process for the preparation of financial information; and also monitor the effectiveness of the internal control and risk management systems.

The review of accounts by the audit committee should be accompanied by a presentation from the outside independent auditors stressing the essential points not only of the results, but also of the accounting methods chosen; and a presentation from the chief financial officer describing the company’s risk exposures and its material off-balance-sheet commitments.

The code provides that the audit committee will steer the procedure for selection of the outside auditors and submit the outcome of that selection to the board of directors. The audit committee must also monitor the rules ensuring the independence of the outside audit firm. The committee will also conduct regular interviews with the outside auditors without the presence of company management.

The code essentially charges the audit committee with ensuring the independence of the company’s outside auditor. The committee must review with the auditors the risks weighing on their independence and the protective measures taken in order to attenuate those risks. In particular, the committee must ensure that the amount of the fees paid by the company and its group, or the share of such fees in the turnover of the firms and audit networks, are not likely to impair auditor independence.

The statutory auditing assignment should be exclusive of any other assignment not related to statutory audit. Thus, the selected audit firm should give up, for itself and the audit network to which it belongs, any consulting activity, such as legal, tax, or IT, performed for the company. However, subject to prior approval from the audit committee, services that are accessory or directly complementary to auditing may be performed, such as acquisition audits, but exclusive of valuation or advisory services.

As regards internal audit and risk review, the committee should review the material risks and off balance-sheet commitments, interview the person in charge of internal audit, issue an opinion regarding that department's organization, and be informed of its work program. It should receive internal audit reports or a regular summary of those reports.

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