Members
During the year and currently:
- Peter Smith (Chairman)
- Tim Clarke
- Lord Jay
Summary of responsibilities
In accordance with its terms of reference, the committee is authorised by the board to:
- monitor the integrity of the group's financial statements and any formal announcements relating to the Company’s performance, reviewing significant financial reporting judgements contained in them before their submission to the board for approval;
- oversee the relationship with the group's external auditors, including reviewing their objectivity and independence, agreeing the scope of their work and fees paid to them for audit and non-audit services;
- monitor and review the role and effectivenes of the Company's internal audit function;
- review the internal control policies and procedures for the identification, assessment, managing and monitoring of financial risks; and
- oversee the group's whistleblowing arrangements.
The full terms of reference of the Audit committee are available on the Company’s website (Terms of reference).
Governance
The Audit committee comprises a minimum of three independent non-executive directors at any time. Two members constitute a quorum. 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 committee structure requires the inclusion of one financially qualified member (as recognised by the Consultative Committee of Accountancy Bodies) with recent and relevant financial experience. Currently, the committee chairman fulfils this requirement. All committee members are expected to be financially literate and 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.
The committee invites the Group Finance Director, Group Financial Controller, Director of Financial Control and senior representatives of the external auditors to attend 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.
During the year, the committee held three meetings with the external auditors without any executive member of the board being present.
The committee has unrestricted access to Company documents and information, as well as to employees of the Company and the external auditors.
The committee may take independent professional advice on any matters covered by its terms of reference at the Company’s expense.
The committee chairman reports the outcome of meetings to the board.
The committee’s effectiveness is reviewed on an annual basis as part of the board’s performance evaluation process.
Meetings
The Audit committee met four times during the year and has an agenda linked to events in the group’s financial calendar.
Key committee activities during the year
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 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 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 UK Corporate Governance 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 fraud perpetrated against the group.
The Audit committee is responsible for the development, implementation and monitoring of policies and procedures on the use of the external auditors 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 auditors whilst also ensuring that the auditors maintain the necessary degree of independence and objectivity. Consequently, any non-audit work to be undertaken by the auditors in excess of £300,000 is required to be authorised by the chairman of the Audit committee and the Group Finance Director prior to its commencement. Individual assignments of less than £300,000 are approved by the Group Finance Director. The aggregate expenditure with the group auditors is reviewed by the Audit committee.
Typically, the committee will approve the use of the external auditors to provide: accounting advice and training; employee benefit plan audits; corporate responsibility, IT and other assurance services; due diligence in respect of acquisitions and disposals; certain specified tax services including tax compliance, tax planning and relatedi implementation advice; and certain other services when it is in the best interests of the Company to do so and they can be undertaken without jeopardising auditor independence. No individually significant non-audit assignments that would require disclosure were undertaken in the financial year.
The Company has a policy that any recruits hired directly from the external auditors must be pre-approved by the Group HR Director, and the Group Finance Director or Group Financial Controller.
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;
- reports highlighting the major issues that arose during the course of the audit;
- feedback from the businesses evaluating the performance of each assigned audit team; and
- the report form the FRC’s Audit Inspection Unit.
The Audit committee holds private meetings with the external auditors after each committee meeting to review key issues within their sphere of interest and responsibility.
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.
Although KPMG Audit Plc has been the Company’s auditor for many years, KPMG periodically changes its audit partners at a group, divisional and country level in accordance with professional and regulatory standards in order to protect independence and objectivity and provide fresh challenge to the business. Such changes are carefully planned with KPMG to ensure that the Company benefits from continuity of staffing without incurring undue risk or inefficiency. Stephen Oxley, KPMG lead audit partner, has this year completed his five-year term allowable under auditing standards. The Audit committee has reviewed the proposed change and transition to a new lead partner for 2011/12. The committee has also noted the partner rotation arrangements at divisional level.
The Audit committee is satisfied with the auditors’ effectiveness and independence and has not considered it necessary this year to conduct a tender process for the appointment of its auditors. Having carried out the review described above and having satisfied itself that the external auditors remain independent and effective, the Audit committee has recommended to the board that KPMG Audit Plc be reappointed as the Company’s external auditor for 2011/12.
The total fees paid to KPMG Audit Plc for the year ended 17 September 2011 were £8.5m of which £3.3m related to non-audit work.
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 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 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.
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