Audit committee report
In this section we set out the role of the Audit Committee, its membership and the matters it considered during the year.
Role of the Committee
The Board has delegated to the Committee responsibility for overseeing the financial reporting and internal control of the Group and for maintaining an appropriate relationship with the Company's auditors. The main role of the Committee is to encourage and safeguard the highest standards of integrity, financial reporting, risk management and internal control. In doing this the principal responsibilities of the Committee include:
- Reviewing the form and content and monitoring the integrity of the Company's and the Group's financial statements;
- Reviewing and monitoring the arrangements for ensuring the objectivity and effectiveness of the external and internal audit functions;
- Recommending to the Board the appointment, re-appointment or removal of the external auditors;
- Reviewing the adequacy and effectiveness of the Company's internal controls and risk management systems; and
- Reviewing and monitoring the Company's ethical standards and procedures for ensuring compliance with regulatory and financial reporting requirements and the Group's relationship with the relevant regulatory authorities.
The Committee reviewed its terms of reference in February 2007 and proposed certain amendments to clarify its role in respect of the Group's UK subsidiaries that are regulated by the Financial Services Authority. The revised terms of reference were approved by the Board and are available on www.schroders.com or from the Company Secretary at the registered office.
The Composition of the Committee
The members of the Committee are:
Kevin Parry (Chairman)
Luc Bertrand
Andrew Beeson
Merlyn Lowther
There were no changes to the composition of the Committee during the year. All of the members are independent non-executive Directors. For the purposes of the Combined Code, Kevin Parry, a former partner in the accountancy firm KPMG LLP, is considered by the Board to have recent and relevant financial experience.
Report on the Committee's activities in 2007
Meetings and attendance The Committee met four times in 2007 and there was full attendance for all meetings.
To assist the Committee in fulfilling its role, a number of senior executives are invited to attend Committee meetings. These include the Chief Financial Officer, the Heads of Group Compliance, Group Risk, Group Internal Audit and the Group General Counsel. Each of these provided reports on their areas of responsibility to each Committee meeting. The Group's external auditors, PricewaterhouseCoopers, are also represented at each meeting and presented reports on their activities.
During the year the Committee met separately on two occasions with the Group's external auditors and with the Head of Group Internal Audit without executive management present. This provides an opportunity for the external and internal auditors to raise matters of concern in confidence. No issues of significance were raised in 2007.
The Committee has a formal programme of issues which it covers during the year. This programme is formulated by the Committee Chairman and the Company Secretary and is designed to ensure that all matters that fall within the Committee's remit are reviewed at the appropriate time.
Principal issues considered during 2007 were:
- The annual financial statement for 2006 and interim financial statement for 2007;
- The external audit plan for 2007;
- Group Internal Audit's plans for 2007 and 2008 and its quarterly reports on its activities and the control environment;
- The Group's risk management process, including key risks facing the Group;
- The Group's overall governance and risk framework;
- The appropriateness of the accounting policies used in drawing up the Group's accounts;
- The Group's Internal Capital Adequacy Assessment Process as required under the Capital Requirements Directive;
- The external auditors' year-end report, interim report and management letter;
- The performance, independence and objectivity of the external auditors, including a review of non-audit fees;
- The performance of Group Internal Audit; and
- The arrangements for employees to raise concerns about possible improprieties relating to the Company's operations.
Other issues As well as the agreed schedule of issues the Committee also received reports and presentations on various subjects connected principally to the control environment within the Group. These included presentations on the management of major IT projects, the implications for the Group of the Marketing in Financial Instruments Directive and the provision of information to the external auditors. The Committee also reviewed the scope and level of cover provided by the Group's Directors' and Officers' liability insurance and the appropriateness of cover provided by other insurances, the governance of the Group's pension arrangements and the governance of outsourced activities. Each of these reports was discussed fully by the Committee.
Non-audit services and auditor independence The Group has adopted a policy covering the provision of non-audit services to the Group by the external auditors. This policy was adopted by the Committee in 2004 to enhance further the governance of the provision of such services and provide a clear and transparent framework to ensure the objectivity and independence of the external auditors. Under the policy the provision of any service that might lead to a conflict of interests is not permitted unless other possible providers are themselves conflicted. In such exceptional cases the Audit Committee must approve each service and approval will only be given where the Committee is satisfied that appropriate measures are in place to manage or mitigate any potential conflict of interest. During 2007 there were no instances where PricewaterhouseCoopers were engaged to provide services which might lead to a conflict of interests.
The policy also has strict rules in relation to the approval of contracts for non-audit services which do not present a possible conflict of interest. All contracts for non-audit services must be notified to the Head of Finance Operations and contracts valued in excess of £5,000 require prior approval. The Group's external auditors are also required to provide a report to the Audit Committee every six months detailing all non-audit services, including the level of fees charged, and to have their own internal processes to ensure that the firm, its partners and its staff are independent of the Group. They must also provide confirmation of their independence annually. PricewaterhouseCoopers has provided such confirmation in respect of 2007.
The policy was reviewed by the Committee in 2007 and the Committee was satisfied that the policy remained appropriate and was being adhered to. In 2007 the value of non-audit services provided by PricewaterhouseCoopers to Group companies was £1.1 million. The range of non-audit services provided by PricewaterhouseCoopers in 2007 included tax advice, AAF report on internal controls and regulatory opinions on client money and assets for regulated subsidiaries.
To support the principles of independence, the auditors have a policy governing the length of time a partner can work on the Schroders' audit. In accordance with this policy PricewaterhouseCoopers changed the senior audit partner in 2006. The Committee is satisfied that the external auditors remain independent.
The Committee considered the re-appointment of PricewaterhouseCoopers as auditors, taking into account the results of the auditor assessment process, the quality of work undertaken and the level of audit fees. The Committee concluded that it was appropriate to recommend the re-appointment of the auditors and that this recommendation be put to shareholders at the Annual General Meeting.
Committee evaluation
The annual evaluation of the Committee's effectiveness was undertaken as part of the overall Board evaluation process. The specific findings relating to the Audit Committee were discussed with the Committee Chairman. The Chairman subsequently met with the other members of the Committee and the Chief Financial Officer to review the Committee's role and responsibilities and the discharge of those responsibilities in the light of current best practice.
Support to the Committee
The Committee received information and support from management during the year to enable it to carry out its duties and responsibilities effectively. The programme of business-related presentations was integrated into the briefing sessions organised for the whole Board during the year. Reference to these briefings are included in the corporate governance report.
The Committee has access to external independent advice at the Company's expense, normally through the Board Secretary.