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This report has been prepared in accordance with the requirements of paragraph C.3.3 of the Combined Code and paragraphs 5.1 and 5.2 of the Guidance on Audit Committees produced by Sir Robert Smith. The report describes the role of the Audit Committee in meeting these requirements.
Terms of reference
The Committee’s terms of reference, a copy of which can be found in the Responsibilities – Governance area on the Company’s website, are reviewed from time to time and approved by the Board. They are based on the model terms of reference set out in the Guidance Note produced by the Institute of Chartered Secretaries and Administrators and take account of the requirements of Sarbanes-Oxley and related SEC rules applicable to audit committees and the Guidance Notes set out in Sir Robert Smith’s report published in January 2003.
The terms of reference cover membership and appointment, meetings, duties and responsibilities, authority and a number of other matters. The terms of reference include a duty on the part of the Audit Committee to examine potential conflict of interests of Directors of the Company.
Membership and appointment
The Audit Committee comprises three independent Non-Executive Directors: David Richardson who was appointed to the Committee in March 2006 and became Chairman in May 2006, Richard Gillingwater and John McDonough who were appointed in December 2005 and July 2007, respectively. Leo Quinn stepped down from the Board and his membership of the Audit Committee on 3 November 2009.
The Board has determined that all three members of the Audit Committee are independent for the purposes of the Combined Code, rule 10A.3(b)(1) under the Exchange Act and section 303A of the NYSE’s Listed Company Manual. The members bring wide-ranging financial, commercial and management experience to the work of the Audit Committee.
The Chairman of the Committee, David Richardson, is a Chartered Accountant (FCA), having previously held a number of senior financial management and strategic planning positions in Whitbread plc from 1983 to 2005 (in the UK and US), becoming Group Finance Director in 2001. Prior to 1983, he held financial positions in ICL plc and worked for Touche Ross & Co. (now Deloitte LLP). In accordance with section 407 of Sarbanes-Oxley, the Board has determined that David Richardson is an ‘audit committee financial expert’ as that term is defined under the rules of the SEC, having significant, relevant and up-to-date UK and US financial and accounting knowledge and experience.
Meetings
The Audit Committee meets at least four times a year and on other occasions when circumstances require. The quorum for a meeting of the Committee is two members. The Finance Director and representatives from the independent auditors and Internal Audit attend meetings under a standing invitation. The Chairman of the Board, the Chief Executive and other Directors are able to attend meetings of the Committee under the practice that any Director may attend any meeting of a Committee of the Board, provided that they have no conflict of interest in respect of business to be discussed. It is usual practice for the Chief Executive to attend meetings of the Audit Committee. Other finance and business risk executives attend meetings and the Company Secretary is secretary to the Committee. The Committee Chairman reports regularly to the Board on its activities. Four meetings were held during the year and attendance is set out in the table in Key governance principles.
Work of the Committee
The Committee has established an ‘agenda framework’ which the Company considers vital for maintaining an appropriate focus on the objectives of the Committee. The agenda sets out all of the operational duties and responsibilities outlined in the Committee’s terms of reference and is based on four regular meetings which coincide with the interim management statements and the announcement of results. The areas covered by the ‘agenda framework’ are as follows:
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Corporate governance, including the regular review of the Committee’s terms of reference and annual evaluation, regulatory issues, review of delegated authorities and review of auditor independence. |
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Internal audit, including the review of the internal audit charter, internal audit review reports on the Group’s internal control and risk assessment processes, compliance with auditing standards and progress against its internal audit plan, functional developments and key performance measures. |
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Confidential sessions with the independent auditors and the Vice-President, Internal Audit, in the absence of Executive Directors and Company executives. |
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Financial reporting, including current accounting and financial reporting matters and review of interim management statements, half-yearly reports and annual financial reports prior to their submission to the Board for approval, which includes the consistency of judgements adopted. |
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Independent auditors, including appointment, audit plan and scope, review of audit fees, cost-effectiveness, approval of non-audit fees, reports on half-yearly and annual financial statements and the effectiveness of internal controls over financial reporting, status reports, management letters and the nature and extent of non-audit services. |
The audit plan and scope sets out details of the areas to be covered and how the audit is to be conducted. The Chairman of the Audit Committee meets periodically with the independent auditors to discuss progress on the audit and the major points to arise, and has the opportunity to assess the effectiveness of the process. The Committee is also able to assess the effectiveness of the independent auditors and the process through reports made by the independent auditors.
In addition to the items considered by the Committee under the ‘agenda framework’ during 2009, other important issues considered included the combination of the UK Annual Report and the Form 20-F into a single document, an update on the progress of Sarbanes-Oxley compliance and a review of new UK requirements in relation to annual certification of the adequacy of the Company’s accounting systems for accurate UK tax reporting. The independent auditors were appointed in 2001 and during 2009 a comprehensive review of their independence was undertaken. Following the review, the Committee concluded that notwithstanding their length of tenure, the independence criteria under the relevant standards continued to be met and accordingly concluded that it was not necessary to tender for the audit work. Accordingly, the Committee unanimously recommended to the Board that a resolution for the reappointment of Deloitte LLP as the Company’s independent auditors be proposed to shareholders at the AGM in June 2010. At the year-end the independent auditors formally confirmed that their independence and objectivity had been maintained. In addition, they are required to rotate the audit partner responsible for the Group audit every 5 years and other key audit partners every 5 to 7 years as appropriate. The audit partner responsible for the Group audit will change as part of the rotation process in 2010.
The Committee also undertook regular reviews of the internal control systems and the statement to be made in the Directors’ Report in respect of internal controls, the Group risk profile, Group tax reports, updates on compliance with the Combined Code and approval of the combined Annual Report and Form 20-F. The Committee received reports on the Company’s efforts in countering potential fraud in the Group. The Internal Audit function is actively engaged in assessing the adequacy and effectiveness of the Group’s system of internal control and risk management processes. Each quarter, the Committee receives a summary of reviews of the businesses’ risk management processes and any significant related financial exposures are highlighted. The risk assessment process and risk mitigation plans are an important part of the development of business strategies. Business risks are considered at the quarterly reviews with the businesses, where all of the major strategic, operational, compliance and financial risks are discussed.
In determining its policy on the extent of non-audit services provided by the independent auditors, the Committee has taken account of the rules of the SEC which regulate and, in certain circumstances, prohibit the provision of, certain types of non-audit services by the independent auditors. Non-audit services require the approval of the Chairman of the Audit Committee. During the year, certain projects requiring tax services were awarded to the firm of the independent auditors. In those cases where the work was awarded to the independent auditors, it was concluded that the firm of the independent auditors was best placed to supply such tax services in a cost-effective manner due to the experience and qualifications of the individuals providing such services, the independent auditors’ knowledge of the Company and its tax affairs and that the best interests of the Company were served by engaging the firm of the independent auditors. The previous adoption of certain other rules by the Committee, including those relating to audit partner rotation, relevant ethical guidance regarding the provision of non-audit services by the independent auditors (in particular that the independent auditors should not audit their own firm’s work, make management decisions for the Company, create a mutuality of interest nor be put in the position of advocate for the Company), when taken together provide adequate protection of auditor independence. All fees proposed by the independent auditors must be reported to and approved by the Audit Committee or, between meetings, the Chairman of the Audit Committee. Details of fees payable to the firm of the independent auditors can be found in note 17 to the Group’s consolidated financial statements.
The Company’s practice, in accordance with UK company law and the Combined Code, in relation to the appointment and termination of the independent auditors, involves a recommendation from the Audit Committee to the Board, which will then make a recommendation to shareholders in general meeting. This differs from the procedure in the US, where the independent auditors are accountable to the Audit Committee which has the authority to appoint or dismiss the independent auditors without reference to shareholders.
With the approval of the Board, the Committee has established guidelines for the recruitment of employees or former employees of the independent auditors. The Group will not engage, on a part-time or full-time basis, any person who is or was an employee of the Company’s independent auditors, where that person has worked on the Group’s audit either as a principal or partner at any time during a period of not less than three years prior to the proposed date of joining the Group. Certain less stringent conditions apply to other employees or former employees of the independent auditors.
A ‘whistleblowing’ procedure has been established for the confidential and anonymous submission by employees of concerns regarding accounting, internal controls or auditing matters, in accordance with the requirements of section 301 of Sarbanes-Oxley. Should a call be received on the dedicated telephone lines or email sent to the dedicated address, the Company Secretary or the General Counsel would immediately report to appropriate management all concerns raised. A course of action is agreed and a report is prepared for review at the next meeting of the Audit Committee, including details of actions taken to deal with the matters raised where the significance of the event warrants such an action. The Chairman of the Committee will report, if appropriate, whistleblowing claims to the Committee and the Board. The Company’s Code of Conduct and Ethics includes the whistleblowing procedure. Calls to the designated telephone numbers and emails are received from time to time, as well as direct contacts made with management, but no whistleblowing issues material to the Company were dealt with by the Committee during 2009.
Shareholders are given the opportunity at the AGM to ask the Chairman of the Committee questions on this report and any other related matter.
David Richardson
Chairman, Audit Committee
26 February 2010
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