Audit Committee Report.

THE COMMITTEE

All members of the Committee are independent non-executive directors and a finding of the Board’s externally facilitated evaluation was that the Committee members have the knowledge and skills to effectively fulfil their responsibilities.

Members

 

Henry Staunton

Committee member since 1 May 2004, Chair since 27 April 2005

Mike Fairey

Committee member since 1 May 2011

Nick Prettejohn

Committee member since 15 March 2011

Julia Wilson

Committee member since 9 November 2011

“The Committee is primarily responsible for overseeing the Group’s internal control and risk management framework, financial reporting and the work undertaken by, and the relationship with, the Group’s external auditors.”
HENRY STAUNTON
CHAIRMAN OF THE AUDIT COMMITTEE

Other attendees at Committee meetings include: the Group Chairman, Group Chief Executive, Group Chief Financial Officer, Group Chief Risk Officer, Group Financial Controller, Group Chief Internal Auditor, UK Actuary and representatives of the external auditor, PricewaterhouseCoopers LLP.

The Committee met five times during 2012. The Committee’s terms of reference are reviewed annually and the current terms of reference, reviewed in November 2012 are available on our website.

THE COMMITTEE’S ROLE

During 2012, the Committee focused on:

Internal control and risk management framework

The Committee considers control environment issues, root causes and management’s responses and follow up activities and is assisted by the work of both internal audit and the external auditor. During 2012, the Committee considered and sought assurance on the controls around the financial management processes for the With Profits fund, the technology infrastructure for strategic asset data within the Group’s asset management business and the processes for assumption setting for the Legal & General America business. It also considered the asset exposures of international subsidiaries and how these are being managed. In particular, the Committee has been assisted by the evolution of an internal audit performance scorecard and control theme reporting. With the implementation of the RDR from 1 January 2013, the Committee has been focused during 2012 on the governance structure and controls in place for the RDR implementation programme. The Committee has received regular reports from the programme sponsor on key programme risks.

In conjunction with the Group Risk Committee, the Committee assists the Board in ensuring the Group operates within a framework of prudent and effective controls that allows risk to be identified, assessed and managed. Implementation and maintenance of the internal control systems are the responsibility of the executive directors and senior management. Where failings or weaknesses have been identified, actions have been taken to remedy these. The Group’s control policies and procedures, which are in accordance with Turnbull Guidance, have been in place during 2012 and up to the date this report was approved. The Group’s system of internal control is designed to manage rather than eliminate risk and can only provide reasonable and not absolute assurance against material loss. The internal control and risk management systems cover the Company’s financial reporting process and the Group’s process for preparation of consolidated financial statements. For 2012, the Board was able to conclude, with reasonable assurance, that appropriate internal control and risk management systems were maintained throughout the year.

Financial reporting

In conjunction with the external auditors, the Committee considers and approves significant assumptions and areas of accounting judgement for the Group’s consolidated accounts and for subsidiary accounts. During 2012, the Committee has focused on mortality and longevity assumptions, annuity valuation interest rate which is used to discount actuarial liabilities, the methodology for calculation of default reserves in light of market conditions and changes in credit ratings of assets within the portfolio, reinvestment and disinvestment rate assumptions for the setting of the level of reserve for the annuities business, guarantees and options provided within international products, US deferred acquisition costs policy and the assumed return on Group capital and financing assets. The Committee reviews compliance with International Financial Reporting Standards within the Group and considered management’s assessment when determining the basis for preparation of the financial statements. The Committee evaluated the consistency of the 2011 preliminary results announcement and 2011 Directors’ Report, and the 2012 half year results announcement with the financial statements. In light of the current focus on corporates’ UK tax contributions, this year the Committee reviewed the Company’s tax policy in the context of the Group’s corporate social responsibility and shareholder stewardship objectives and the Company’s approach to tax disclosure.

Internal audit

The Committee received quarterly reports from the Group Chief Internal Auditor on internal audits undertaken, the detailed findings on areas assessed as high risk and where the Committee determined it required further information and assurance, detailed discussions with the management of those areas took place on management’s responses to the internal audit actions. The Committee reviewed and approved the annual internal audit plan for 2012-2013 and reviewed both the level and quality of resources available to the Group Chief Internal Auditor, the allocation of resources between traditional internal audit cycle work and project work and the risk based approach underlying the internal audit annual plan. The Committee held two private meetings with the Group Chief Internal Auditor in the absence of management during 2012.

External auditor

Each year, the Committee reviews the external auditor’s audit plan to ensure it aligns with the Committee’s view of the significant risk areas of financial misstatement.

The Committee judges the external auditor on the quality of their audit findings, management’s response and stakeholder feedback. We conducted a review of their performance and effectiveness by way of a structured questionnaire which was distributed to Committee members, attendees and divisional Finance Directors. A number of the criteria for judging the effectiveness of the external auditors are set out below:

  • Provision of timely and accurate industry specific and technical knowledge.
  • Maintaining a professional and open dialogue with the Committee chairman and members at all times.
  • Delivery of an efficient audit and the ability to meet objectives within the agreed timeframes.
  • Provision of high quality and consistent advice at all times.

Having reviewed and discussed the feedback, the Committee continues to believe that PricewaterhouseCoopers is the appropriate audit firm for the Group taking into account their performance during 2012, the audit needs of the Group and our principal business areas, the regulatory landscape and our footprint. PricewaterhouseCoopers has been our statutory auditor for a number of years and the Committee is cognisant of the new requirement of the UK Corporate Governance Code in relation to the tendering of the external audit contract every ten years. The Group audit was last tendered in full in 2006 with a partial tender process undertaken in 2009. In accordance with the new requirements of the Code, the Audit Committee recognises the need to carry out a review of the audit service provider within ten years from the date of the last tender and accordingly following the appointment of a new Chief Financial Officer, the Committee intends to carry out a review at an appropriate time between now and the 2017 year-end audit. There are no contractual obligations to the external auditor which restrict the Committee’s choice of statutory auditor.

In 2012, the Group spent £3m on non-audit services provided by PricewaterhouseCoopers. Further details can be found in Note 32 to the Group Consolidated Financial Statements.

Analysis of current and prior year spend on audit, other assurance and non-assurance services:

(XLS:) Analysis of current and prior year spend on audit, other assurance and non-assurance services

 

2012

2011

2010

2009

Audit and Related

4.6

4.5

4.1

4.5

Other Assurance

1.8

0.9

0.0

0.1

Non Assurance

1.1

1.0

1.1

1.0

Total

7.5

6.4

5.2

5.6

A significant proportion of the Other Assurance fees in 2011 and 2012 relate to quality assurance work undertaken by the external auditor on the RDR implementation programme and Solvency ll regulatory assurance. The external auditor was selected to undertake this work following a competitive tender process and was selected because of their expertise and experience. Separate teams from PwC undertake audit and non-audit work in order to ensure independence and objectivity of the audit team and this control is monitored internally.

The Group’s policy requires that all services with an anticipated cost in excess of a specified amount are subject to a full competitive tender involving at least two other alternate parties in addition to the external auditor. If the external auditor is selected following the tender process, the Committee is responsible for approving the external auditor’s fees on the engagement. For services with an anticipated cost below the specified amount, the Group Chief Financial Officer has authority to approve the engagement. The external auditor and management report regularly to the Committee on the nature and fees relating to non-audit services provided under this authority.

The external auditor is required to rotate the audit engagement partner every five years. The current audit partner commenced his engagement in 2008 and therefore stepped down as the audit engagement partner following the 2012 audit.