MembersThe audit committee’s members are Paul Heiden (chairman), Dr Catherine Bell and David Jones. The board is satisfied that Paul Heiden has recent and relevant financial experience and that all members have extensive commercial experience and are independent within the meaning of the code. The qualifications of the members of the audit committee are given in the governance section.
|
Paul Heiden, chairman
|
Appointments to the committee are made by the board, on the recommendation of the nomination committee in consultation with the audit committee chairman. Appointments are initially for a period of up to three years, extendable by no more than two additional three-year periods, so long as committee members continue to be deemed to be independent. The terms of reference of the audit committee are available to shareholders on request and are also available on the company’s website.
Attendees at meetings
The chairman, chief executive officer and chief financial officer of the group and other senior management attend committee meetings by invitation of the committee. Representatives of the group’s external auditors, the head of audit and the director of health, safety, risk and security also attend meetings by invitation. During the year ended 31 March 2010, representatives of the external and internal auditors attended all audit committee meetings, had direct access to the committee during the meetings and time was also set aside for them to have private discussions with the committee, in the absence of management.
Audit committee compliance with the code
The audit committee’s terms of reference comply with the code and were revised during the year to reflect the guidance published by the Financial Reporting Council in October 2008.
During the year ended 31 March 2010, the formal calendar of matters considered by the committee embraced, amongst other matters, the code and disclosure and transparency rules requirements to:
-
monitor the statutory audit of the annual and consolidated accounts;
-
monitor the integrity of the financial statements of the company, and any formal announcements relating to the company’s financial performance, including reviewing significant financial reporting judgements and any disclosures contained in them;
-
review the company’s internal financial controls and its internal control and risk management systems and to make recommendations to the board;
-
monitor and review the effectiveness of the company’s internal audit function;
-
make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, reappointment and if necessary removal of the external auditors and to approve the remuneration and terms of engagement of the external auditors;
-
review and monitor the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; and
- review the company’s policy on the engagement of the external auditors to supply non-audit services. In doing so, account is taken of relevant ethical guidance regarding the provision of non-audit services by the external auditors and pre-approval practices. In this context, the committee will report to the board any matters in respect of which it considers that action or improvement is needed and makes recommendations as to the steps to be taken
Audit committee activities
An overview of the work undertaken by the audit committee during the year ended 31 March 2010 is described within the following sections of this report.
The audit committee met five times during the financial year ended 31 March 2010. It has a formal policy, endorsed by the board, to keep under review the independence and objectivity of the external auditors. The audit committee determined that it was satisfied that the independence of the external auditors had been maintained, having taken into account the external auditors’ written representations and the committee’s own enquiries. These were facilitated by a private meeting with the external auditors without executive management being present. The independence policy sets out certain disclosure requirements by the external auditors to the audit committee, including restrictions on mutual hiring of personnel, rules for rotation of audit partners and procedures for the approval of non-audit services provided by the external auditors. The audit committee has monitored the application of the policy both during the year ended 31 March 2010 and up to the date of this report.
The audit committee reviewed the external auditors’ audit scope, plans and materiality levels and the resources proposed to execute the plans. Having done so, the committee approved the terms of engagement and the audit fees. The committee also reviewed the findings of the external auditors and their management letters on internal financial controls. The audit committee also assessed the qualifications, expertise and resources and independence of the external auditors and the effectiveness of the audit process. Through an embedded regular audit effectiveness review, the audit committee has continued to keep the performance of the company’s auditors and audit effectiveness under review. Mindful of the costs associated with the company’s compliance requirements, the audit committee continues to seek the most cost- effective approach to compliance and external audit generally.
The policy relating to the provision of non-audit services by the external auditors specifies the types of work from which the external auditors are excluded; for which the external auditors can be engaged without referral to the audit committee; and for which a case-by-case decision is required. The ratio of non-audit fees to audit fees was monitored by the committee throughout the year ended 31 March 2010. The audit committee is satisfied that this policy in respect of the provision of non-audit services was applied during the year ended 31 March 2010 and up to the date of this report.
Fees
As summarised above, the committee has established policies and procedures to pre-approve the engagement of the auditors to provide any audit or non-audit services and keep the nature and extent of non-audit services under review. All audit and audit related services proposed to be provided by Deloitte LLP are pre-approved by the audit committee and reviewed annually. The provision of audit related services is generally highly correlated with the role of independent auditors. Such services include assurance on non-statutory information, assurance work carried out in connection with reporting to a statutory regulator, analysis and interpretation of accounting principles, support for debt issues and similar transactions and other services that have a bearing on the group’s financial statements on which the external auditors provide their opinion.
Non-audit services are allowed under the procurement of an audit and non-audit services policy, where they do not affect the independence of the external auditors, but do require the pre-approval of the audit committee prior to the engagement. Specific approval may be delegated to a designated member of the audit committee, with such approvals to be reported at the next audit committee meeting. In granting such approval, the designated member of the audit committee is required to consider the cumulative proportion of fees paid for such work compared with the statutory audit fees. In the financial year ended 31 March 2010, all such services were approved by the audit committee.
The company also maintains a list of prohibited services that cannot be provided by the group’s auditors as they are considered by statute or in the group’s opinion to be incompatible with the role of the independent auditors.
The fees paid or payable to the auditors in the year ended 31 March 2010 and the preceding year were as follows:
| Year ended 31 March |
2010
£m
|
2009
£m
|
|
Statutory audit of the financial statements
|
0.4
|
0.4
|
|
Other fees to the auditors:
|
|
|
|
Local statutory audits for subsidiaries
|
0.4
|
0.3
|
|
Other audit related
|
–
|
0.1
|
|
Regulatory reporting
|
0.2
|
0.4
|
|
Due diligence and transaction support
|
5.5
|
1.2
|
|
|
6.5
|
2.4
|
Note:
Included in the above statutory audit fee for the period ended 31 March 2010 is £35,000 in relation to the company, (period ended 31 March 2009: £50,000).
The committee is always mindful of the ratio of audit and non-audit fees and best practice in deciding any appointments for advisory work. For the year ended 31 March 2010, the substantial majority of non-audit related fees relate to the services provided by Deloitte LLP (‘Deloitte’) in its advisory capacity in relation to the provision of due diligence services to the company to support the potential disposal of certain non-regulated businesses. In deciding to appoint Deloitte to assist with the process, the committee was cognisant of the impact that doing so would have on the ratio of audit to non-audit fees. Nevertheless, given Deloitte’s knowledge of the complex group structure and the inter-company accounting, it concluded on balance that it was appropriate to authorise Deloitte’s appointment, as in doing so it provided the most effective and efficient way of obtaining the advisory services required, thereby promoting shareholders’ interests. It therefore recommended Deloitte’s appointment to the board, which was unanimously endorsed.
Having undertaken a review of the nature of the particular circumstances surrounding Deloitte’s selection to assist with the potential disposal of certain non-regulated businesses during 2009/10 and the amount of non-audit related work, the audit committee has satisfied itself that the services undertaken during the financial year ended 31 March 2010 did not prejudice the auditors’ independence.
Evaluation of the external auditors
In appropriate circumstances the audit committee is empowered to dismiss the external auditors and appoint another suitably qualified auditor in its place. The reappointment of the external auditors is submitted for annual approval by the shareholders at the annual general meeting.
To assess the effectiveness of the external auditors, the audit committee reviewed:
- the auditors’ independence and objectivity;
- fulfilment of the 2009/10 audit plan;
- the robustness and perceptiveness of the auditors in its handling of key accounting and audit judgements; and
- the content of the external auditors’ reporting on internal controls.
As part of the decision to recommend the reappointment of Deloitte LLP at the forthcoming annual general meeting, the audit committee took into account the tenure of the auditors and considered whether there should be a tender process for the 2010/11 audit. There are no contractual obligations restricting the company’s choice of external auditors.
Having assessed these factors and the significant restructure that the company has experienced during the 2009/10 financial year, the audit committee recommended to the board that a resolution proposing the reappointment of Deloitte LLP as external auditors be put to shareholders at the 2010 annual general meeting.
Other activities
The audit committee met prior to the board meetings at which the annual and half-yearly financial reports were approved. The committee reviewed significant accounting policies, financial reporting issues and judgements and, in conducting this review, considered reports from management, the external auditors and internal audit.
At all of its meetings, the committee reviewed and considered reports from the head of audit and, at three of its meetings, the director of health, safety, risk and security. Those reports included the status of the company’s risk management systems, findings from the internal audit function concerning internal controls and reports on the status of the correction of any weaknesses in internal controls identified by the internal or external auditors.
The audit committee also reviewed and approved the remit, organisation, plans and resources of the company’s internal audit function and carried out a review of the effectiveness of that function.
Disclosure policy
The committee’s objective is to ensure that arrangements are in place for the proportionate and independent investigation of matters raised in confidence and for appropriate follow-up action. Accordingly, the audit committee reviews, at least annually, the arrangements by which employees may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. Historically, a confidential voicemail box was provided for employees to report any concerns anonymously. During 2009/10, the disclosure arrangements were enhanced with the appointment of an independent service provider, whom employees can contact at any time.