Report of the Audit committee

Summary of the role of the Audit committee

The Audit committee is responsible for maintaining an appropriate relationship with the group’s external auditors and for reviewing the Company’s internal audit resources, internal financial controls and the audit process. It aids the board in seeking to ensure that the financial and non-financial information supplied to shareholders presents a balanced assessment of the Company’s position.

The Audit committee reviews the objectivity and independence of the external auditors and also considers the scope of their work and fees paid for audit and non-audit services.

The Audit committee has unrestricted access to Company documents and information, as well as to employees of the Company and the external auditors. Members of the committee may, in pursuit of their duties, take independent professional advice on any matter at the Company’s expense. The committee chairman reports the outcome of meetings to the board.

Composition of the Audit committee

The members of the Audit committee who held office during the year and at the date of this report are:

• Peter Smith (Chairman)
• Tim Clarke
• Lord Jay
• Charles Sinclair (from November 2008 until April 2009)

Membership of the Audit committee is determined by the board, on the recommendation of the Nomination committee and in consultation with the committee chairman, from amongst the independent, non-executive directors of the Company. Its terms of reference are set by the board and are modelled closely on the provisions of the Combined Code.

Appointments are for a period of three years after which they are subject to annual review, extendable by additional three-year periods so long as members continue to be independent. The Audit committee is comprised of a minimum of three independent non-executive directors at any time. Two members constitute a quorum.

The Audit committee structure requires the inclusion of one financially qualified member (as recognised by the Consultative Committee of Accountancy Bodies). Currently the committee chairman fulfils this requirement. All committee members are expected to be financially literate.

The board expects Audit committee members to have an understanding of the following areas:

• the principles of, and developments in, financial reporting including the applicable accounting standards and statements of recommended practice;
• key aspects of the Company’s operations including corporate policies and the group’s internal control environment;
• matters which may influence the presentation of accounts and key figures;
• the principles of, and developments in, company law, sector-specific laws and other relevant corporate legislation;
• the role of internal and external auditing and risk management; and
• the regulatory framework for the group’s businesses.

Meetings

The Audit committee meets at least three times each year and has an agenda linked to events in the group’s financial calendar. The committee invites the Group Finance Director, Group Financial Controller, Director of Financial Control and senior representatives of the external auditors to attend all of its meetings in full, although it reserves the right to request any of these individuals to withdraw. Other senior managers are invited to present such reports as are required for the committee to discharge its duties.

Overview of the actions taken by the Audit committee to discharge its duties

In order to fulfil its terms of reference, the Audit committee receives and reviews presentations and reports from the group’s senior management, consulting as necessary with the external auditors.

During the year, the Audit committee formally reviewed draft interim and annual reports and associated announcements. These reviews considered:

• the accounting principles, policies and practices adopted in the group’s financial statements and proposed changes to them;
• the integrity of the financial statements, including a review of important accounting issues, areas of complexity and significant financial reporting judgements;
• litigation and contingent liabilities affecting the group; and
• potential tax contingencies and the group’s compliance with statutory tax obligations.

The Audit committee is required to assist the board to fulfil its responsibilities relating to the adequacy and effectiveness of the control environment, controls over financial reporting and the group’s compliance with the Combined Code. To fulfil these duties, the committee reviewed:

• the external auditors’ management letters and audit highlights memoranda;
• internal audit reports on key audit areas and significant deficiencies in the financial control environment;
• reports on the systems of internal financial controls and risk management; and
• reports on frauds perpetrated against the group.

The Audit committee is responsible for the development, implementation and monitoring of policies and procedures on the use of the auditor for non-audit services in accordance with professional and regulatory requirements. These policies are kept under review to meet the objective of ensuring that the group benefits in a cost-effective manner from the cumulative knowledge and experience of its auditor whilst also ensuring that the auditor maintains the necessary degree of independence and objectivity. Consequently, any non-audit work to be undertaken by the auditor in excess of £300,000 is required to be authorised by the Chairman of the Audit committee and the Group Finance Director prior to commencement. Individual assignments less than £300,000 are approved by the Group Finance Director.

The Audit committee has formally reviewed the independence of its auditors. KPMG Audit Plc have provided a letter confirming that they believe they remain independent within the meaning of the regulations on this matter and their professional standards.

To fulfil its responsibility regarding the independence of the external auditors, the Audit committee reviewed:

• changes in external audit executives in the audit plan for the current year;
• a report from the external auditors describing their arrangements to identify, report and manage any conflicts of interest; and
• the extent of non-audit services provided by the external auditors.

To assess the effectiveness of the external auditors, the committee reviewed:

• the external auditors’ fulfilment of the agreed audit plan and variations from it; and
• reports highlighting the major issues that arose during the course of the audit.

To fulfil its responsibility for oversight of the external audit process, the Audit committee reviewed:

• the terms, areas of responsibility, associated duties and scope of the audit as set out in the external auditors’ engagement letter for the forthcoming year;
• the external auditors’ overall work plan for the forthcoming year;
• the external auditors’ fee proposal;
• the major issues that arose during the course of the audit and their resolution;
• key accounting and audit judgements;
• the levels of errors identified during the audit; and
• recommendations made by the external auditors in their management letters and the adequacy of management’s response.

Having satisfied itself that the external auditors remain independent, the Audit committee has recommended to the board that KPMG Audit Plc be re-appointed.

Internal audit function

The Audit committee is required to assist the board to fulfil its responsibilities relating to the adequacy of the resourcing and plans of internal audit. To fulfil these duties, the committee reviewed:

• internal audit’s terms of reference, reporting lines and access to the committee and all members of the board;
• internal audit’s plans and its achievement of the planned activity;
• the results of key audits and other significant findings, the adequacy of management’s response and the timeliness of resolution;
• statistics on staff numbers, qualifications and experience and timeliness of reporting;
• the level and nature of non-audit activity performed by internal audit; and
• changes since the last annual assessment in the nature and extent of significant financial risks and the group’s ability to respond to changes in its business and the external environment.

The group’s ‘whistleblowing’ policy contains arrangements for the Company Secretary to receive, in confidence, complaints on accounting, risk issues, internal controls, auditing issues and related matters for reporting to the Audit committee as appropriate.

The group’s anti-fraud policy has been communicated to all employees and states that all employees have a responsibility for fraud prevention and detection. Any suspicion of fraud should be reported immediately and will be investigated vigorously.

The Audit committee holds private meetings with the external auditors after each committee meeting to review key issues within their spheres of interest and responsibility.

The chairman of the Audit committee will be present at the annual general meeting to answer questions on this report, matters within the scope of the committee’s responsibilities and any significant matters brought to the committee’s attention by the external auditors.

The full terms of reference of the Audit committee are available here.

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