Summary of the Role of the Audit Committee
The Audit Committee is appointed by the Board from the non-executive directors of Legal & General Group Plc. It is a Committee of the Board established pursuant to Article 113 of the Articles of Association.
The Audit Committee’s terms of reference include all matters indicated by the Combined Code, except the oversight of compliance risks, (including adherence to the Financial Services and Markets Act 2000), which is the direct responsibility of the Board. (The Group Risk & Compliance Committee, which reports to the Group Board and whose minutes are copied to the Audit Committee, supervises the Group’s Risk Framework and therefore considers all risks including compliance risk.) The terms of reference are considered annually by the Audit Committee and are then referred to the Board for approval.
The primary objective of the Audit Committee is to assist the Board of Directors in fulfiling its responsibilities relating to:
- external financial reporting and associated announcements;
- the independence of the Group’s external auditor;
- the resourcing, plans and overall effectiveness of the internal audit department;
- the adequacy and effectiveness of the control environment; and
- the Group’s compliance with the Combined Code on Corporate Governance.
The Audit Committee Chairman reports the outcome of meetings to the Board, and the Board receives the minutes of all Committee meetings.
The Audit Committee has unrestricted access to Company documents and information, as well as to employees of the Company and the external auditor.
Composition of the Audit Committee
The members of the Audit Committee are:
| Date of appointment | |
|---|---|
| Henry Staunton | 26 July 2004 and appointed Chairman on 27 April 2005 |
| Frances Heaton | 14 November 2001 |
| Barrie Morgans | 5 March 1998 and resigned on 18 May 2006 |
| James Strachan | 21 January 2004 |
Membership of the Committee is reviewed by the Chairman of the Committee, Henry Staunton, and the Group Chairman, who is not a member of the Audit Committee, at regular intervals.
Where necessary, they will recommend new appointments to the Nominations Committee for onward recommendation to the Board. Appointments are for a period of three years and are extendible by no more than two additional three year periods. The Committee is normally comprised of four independent non-executive directors, with a minimum of three members at any time. Three 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 Audit Committee Chairman fulfils this requirement.
All Audit Committee members are expected to be financially literate and to have relevant corporate finance experience.
The Group provides an induction programme for new Audit Committee members and ongoing training to enable all of the Committee members to carry out their duties. The induction programme covers the role of the Audit Committee, its terms of reference and expected time commitment by members; and an overview of the Group’s business, including the main business and financial dynamics and risks. New Committee members also meet some of the Group’s staff. ongoing training includes attendance at formal conferences, internal Company seminars and briefings by external advisers.
The Board expects the Audit Committee members to have an understanding of the following areas:
- the principles of, contents of, and developments in financial reporting including the applicable accounting standards and statements of recommended practice;
- key aspects of the Company’s operations and risk control framework including corporate policies, company financing, products and systems of internal control;
- matters that influence or distort 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;
- the regulatory framework for the Group’s businesses;
- environmental and social responsibility best practices; and
- current issues pertaining to the above areas.
Meetings
The Audit Committee is required to meet four times per year and has an agenda linked to events in the Group’s financial calendar. The agenda is predominantly cyclical and is therefore approved by the Audit Committee Chairman on behalf of his fellow members; each Audit Committee member has the right to require reports on matters of interest in addition to the cyclical items.
The Audit Committee invites the Group Chief Executive, Group Director (Finance), Group Financial Controller, Group Chief Internal Auditor, Group Actuary and senior representatives of the external auditor to attend all of its meetings in full, although it reserves the right to request any of these individuals to withdraw. Other senior management 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 challenges presentations or reports from the Group’s senior management, consulting as necessary with senior representatives of the external auditor and the independent actuaries.
The Audit Committee is required to assist the Board to fulfil its responsibilities relating to external financial reporting and associated announcements. The Committee reviewed the interim and annual financial statements, together with the associated Stock Exchange announcements, having received information on:
- the accounting principles, policies and practices adopted in the Group’s accounts;
- changes proposed to those principles, policies and practices;
- significant accounting issues;
- current actuarial issues;
- the level of insurance provisions and reserves;
- 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 and the Group’s compliance with the Combined Code. To fulfil these duties, the Committee reviewed:
- the report entitled ‘Directors’ view on Internal Controls’ submitted to the Audit Committee by the Group Risk & Compliance Committee which sets out the framework of risk management, control monitoring, and any control issues that have arisen;
- the minutes of the Group Risk & Compliance Committee meetings during 2006;
- the annual Internal Control Report for 2005 presented by the external auditor;
- Internal Audit reports on key audit areas and significant control environment deficiencies; and
- reports on frauds perpetrated against the Group and current fraud trends.
The Audit Committee Chairman reports back to the Committee on the Group Risk & Compliance Committee meetings which he attends.
During the year the Audit Committee undertook a formal review of its own effectiveness and is satisfied that it had been operating as an effective Audit Committee meeting all applicable legal and regulatory requirements. These reviews are undertaken annually.
External Audit
The Audit Committee is responsible for the development, implementation and monitoring of the Group’s policy on external audit. The policy assigns oversight responsibility for monitoring the independence, objectivity and compliance with ethical and regulatory requirements to the Audit Committee, and day-to-day responsibility to the Group Director (Finance). The policy states that the external auditor is jointly responsible to the Board and the Audit Committee and that the Audit Committee is the primary contact.
The Group’s policy on external audit sets out the categories of non-audit services which the external auditor will and will not be allowed to provide to the Group. The policy requires pre-confirmation by the Audit Committee of any non-audit work subject to de minimis levels.
To fulfil its responsibility regarding the independence of the external auditors, the Audit Committee reviewed:
- the changes in key external audit staff in the plan for the current year presented by the external auditor;
- the arrangements for day-to-day management of the audit relationship;
- a report identifying the number of external audit staff now employed by the Group and their positions within the Group;
- a report from the external auditor describing their arrangements to identify, report and manage any conflicts of interest; and
- the overall extent of non-audit services provided by the external auditor, in addition to their case-by-case approval of the provision of non-audit services by the external auditor.
To assess the effectiveness of the external auditor, the Audit Committee reviewed:
- the fulfilment of the agreed audit plan and variations from the plan undertaken by the external auditor;
- the robustness and perceptiveness of the external auditor in handling the key accounting and audit judgements; and
- the content of the Internal Control Report presented by the external auditor.
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 engagement letter for the forthcoming year from the external auditor;
- the overall work plan for the forthcoming year presented by the external auditor;
- the fee proposal presented by the external auditor;
- the major issues that arose during the course of the audit and their resolution;
- the key accounting and audit judgements;
- the levels of errors identified during the audit; and
- the recommendations made by the external auditor in the management letter, entitled ‘The Internal Control Report’, and the adequacy of management’s response.
During 2006, the Audit Committee supervised the tender for the position of external auditor and, on the basis of the tender submissions and as a consequence of its satisfaction with the results of the activities outlined above, the Audit Committee has recommended to the Board that PricewaterhouseCoopers LLP is reappointed as external auditor.
Internal Audit Function
The Audit Committee is committed to supporting Internal Audit and maintaining its ongoing relationship with the department to enable Internal Audit to assist the Committee to fulfil its statutory responsibilities in relation to the adequacy and effectiveness of the control environment and the Group’s compliance with the Combined Code.
The Audit Committee is also required to assist the Board to fulfil its responsibilities relating to the adequacy of the resourcing, plans and overall effectiveness of the Internal Audit department.
To fulfil all of these responsibilities, the Committee reviewed:
- Internal Audit’s plans for 2006 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; and
- the level and nature of non-audit activity performed by Internal Audit.
The Group’s Public Interest Disclosure Policy (the ‘Whistleblowing’ Policy) sets out arrangements for employees, contractors and third parties to raise concerns or complaints regarding accounting, risk issues, internal controls, auditing issues and related matters with relevant line management or senior Group managers. These are escalated to the Group Chief Internal Auditor (GCIA) in confidence, for reporting to the Audit Committee as appropriate.
The Audit Committee holds private meetings with the external auditors and with the GCIA after Committee meetings to review key issues within their spheres of interest and responsibility as considered necessary.
The GCIA reports functionally to the Committee and administratively to the Group Director (Finance). The GCIA has a private meeting with the Audit Committee Chairman at least four times during the course of the year and has regular monthly meetings with the Group Chief Executive and the Group Director (Finance) where key risk and control issues are discussed.
The Chairman of the Audit Committee will be present at the AGM to answer questions, through the Chairman of the Board, on the report on the Audit Committee’s activities, matters within the scope of the Audit Committee’s responsibilities and any significant matters brought to the Audit Committee’s attention by the external auditor.
The Corporate Governance pages of the Legal & General website provide supplementary information including the terms of reference for the Audit Committee and the Group’s policy on external audit.