A mandatory governance code for law firms?

Convergent evolution between the professions encourages management teams in one profession to keep an eye on what is happening in other professions. Current developments provide a good example of this.

The Financial Reporting Council is the UK’s independent regulator responsible for promoting confidence in corporate governance and reporting.

The Audit Firm Governance Code was published in January 2010 by the ICAEW and FRC and is intended to assist in promoting continuing confidence and choice in the market for the audit of listed companies.

The primary purpose of the Code is to provide a formal benchmark of good governance practice against which firms which audit listed companies can report for the benefit of shareholders in such companies. The Code is also expected to be helpful to other stakeholders including:

• directors, particularly audit committee members;
• regulators with responsibility for confidence in audit quality;
• partners and employees of audit firms.

The Code was drafted to serve the interests of shareholders in listed companies to whom auditors address their reports. It is also intended to:

• enhance the stature of firms as examples of best practice governance;
• enrich firms’ transparency reports;
• encourage changes in governance which improve the way that firms are run;
• strengthen the regulatory regime by achieving transparent and effective governance without disproportionate regulation.

The Code’s structure is similar to that of the UK Governance Code for listed companies. The Code comprises 20 principles and 31 provisions. One of the key features of the Code is the appointment of independent non-executive directors to provide effective governance.

It is intended that the Code should apply to financial years commencing on or after 1 June 2010 and that monitoring by the FRC of its implementation commences no later than 4 years after its publication.

Some of the more interesting provisions of the code are for example:

• the management of a firm should be accountable to the firm’s owners and no individual should have unfettered powers of decision;
• a firm should have effective management which has responsibility and clear authority for running the firm.

While the code is directed at audit firms, and already a number of firms below the Big 4 have indicated their willingness to adopt the code as evidence of good practice, it does not apply to law firms, which are regulated by the Law Society. However, it is conceivable that some of this code or something similar could be applied to law firms too. Why not? Often what happens in the world of accountancy, in terms of business structure, follows in the law. Under the Legal Services Act, outside ownership, private equity investment and listings will all become possible in due course. Most law firms are LLPs, as are audit firms, and whilst they do not provide regulated audits to listed companies, they do nevertheless undertake other “public interest type work” for listed companies. In the case of the larger law firms they are also sufficiently large to fall under the auspices of the FRRP, a part of the FRC which reviews the accounts of public and large private companies.

Perhaps it is only a matter of time before some form of benchmark for good governance is also applied to law firms undertaking “public interest type work” for listed companies.