Assessing the performance of the audit committee - EY

1 Assessing the performance of the audit committeeA checklistJanuary 20141EY: Assessing the performance of the audit committee IntroductionThe Financial Reporting Council s (FRC) Guidance on audit committees (revised in September 2012) provides guidance to UK listed companies on the composition, role and responsibilities of the audit committee . The Guidance aims to help boards of companies with a Premium listing of equity shares to implement the relevant provisions of section 3 of the UK Corporate Governance 2012 Guidance updates the previous Guidance issued in December 2010. The changes to the 2012 Guidance arise primarily as a result of the revisions to the UK Corporate Governance Code in September 2012.

2 The revised Code and Guidance are effective for financial years beginning on or after 1 October have produced this checklist to help audit committees review their current activities against the Guidance and identify practices which could be improved. Company boards may also find this checklist useful as part of their review of the effectiveness of their audit , this checklist does not attempt to assess the most important features of the relationship between the audit committee and the board, executive management, and internal and external auditors, namely: A frank, open working relationship A high level of mutual respect A willingness to share information freely A readiness to listen to each other s views and discuss issues openly1 Whilst the general principle of the Code is one of comply or explain , it should be noted that the Financial Conduct Authority s (FCA) Disclosure and Transparency Rules (DTR) on audit committees which implement parts of the audit Directive and the Fourth & Seventh EU Company Law Directives are mandatory minimum requirements, , there is no comply or explain element to these requirements.

3 These DTR requirements are as follows: DTR An issuer must have a body which is responsible for performing the functions set out in DTR At least one member of that body must be independent and at least one member must have competence in accounting and/or auditing. DTR The requirements for independence and competence in accounting and/or auditing may be satisfied by the same member or by different members of the relevant body. DTR An issuer must ensure that, as a minimum, the relevant body must: 1. Monitor the financial reporting process. 2. Monitor the effectiveness of the issuer's internal control, internal audit where applicable, and risk management systems.

4 3. Monitor the statutory audit of the annual and consolidated accounts. 4. Review and monitor the independence of the statutory auditor, and in particular the provision of additional services to the issuer. DTR An issuer must base any proposal to appoint a statutory auditor on a recommendation made by the relevant body. DTR The issuer must make a statement available to the public disclosing which body carries out the functions required by DTR and how it is composed. However, there is a significant overlap between these mandatory requirements and the UK Corporate Governance Code provisions. Thus, in the FCA's view, compliance with provisions , , and of the UK Corporate Governance Code will result in compliance with DTR to DTR More guidance is provided in the appendix to Schedule B of the UK Corporate Governance this checklist.

5 Questions marked are requirements of the UK Corporate Governance Code (Section C3 audit committee and Auditors) and reference to the provisions of the Code are changes arising as a result of the 2012 update have been marked to help audit committees clearly distinguish these and better plan their efforts and activities in these is space provided at the end of each section to document a qualitative assessment, supported by observations, and an action plan as a result of this : Assessing the performance of the audit committee Establishment and terms of referenceYesNoN/ADoes the audit committee have at least three (or in the case of smaller companies two) independent non-executive directors?

6 : In smaller companies the company chairman may be a member of, but not chair, the audit committee provided he or she was considered to be independent at the time of appointment as company chairman. A smaller company is one that is below the FTSE 350 throughout the year immediately prior to the reporting year. Are the main role and responsibilities of the audit committee set out in written terms of reference ? the written terms of reference of the audit committee include: To monitor the integrity of the financial statements and any formal announcements relating to the company s financial performance , reviewing significant financial reporting judgements contained in them.

7 To review internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors or by the board itself, the company s internal control and risk management systems. To monitor and review the effectiveness of the company s internal audit function. To make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment of the external auditor and to approve the remuneration and terms of engagement of the external auditor. To review and monitor the external auditor s independence and objectivity and the effectiveness of the audit process, taking into consideration UK professional and regulatory requirements.

8 To develop and implement a policy on the engagement of the external auditor to supply non- audit services, taking into account relevant ethical guidance regarding the provision of non- audit services by the external audit firm. To report to the board identifying any matters in respect of which it considers action or improvement is needed, and making recommendations regarding steps to be taken. To report to the board on how it has discharged its responsibilities. Establishment and terms of reference of the audit Committee3EY: Assessing the performance of the audit committee Membership and appointmentYesNoN/AAre appointments to the audit committee made by the board on the recommendation of the nomination committee (where there is one), in consultation with the audit committee chairman?

9 Are appointments made for a period of up to three years?Note: Appointments can be extended by no more than two additional three-year periods, so long as members continue to be the board satisfied itself that at least one member of the audit committee has recent and relevant financial experience? of the audit committeeYesNoN/ADoes the audit committee chairman, in consultation with the company secretary, decide the frequency and timing of meetings of the audit committee ?Note: It is recommended that there should be no fewer than three meetings during the year, held to coincide with key dates within the financial reporting and audit the audit committee free to decide if non-members (for example, the external audit lead partner, the finance director etc.)

10 Should attend a particular meeting or for a particular agenda item?Is sufficient time allowed to enable the audit committee to undertake a full discussion?Is sufficient time allowed between audit committee meetings and board meetings to allow any work arising from the audit committee meeting to be carried out and reported to the board as appropriate?Does the audit committee meet at least annually with external and internal auditors, without the presence of management, to discuss matters relating to its remit and any issues arising from the audit ?Do the audit committee chairman and other members of the committee (if relevant) keep in touch on a continuing basis with key people involved in the company s governance?