Steve Lucas was appointed Audit Committee Chairman in May 2012 after David Williams' retirement from the Board on 16 May 2012. Steve, who is a Chartered Accountant, was Finance Director at National Grid plc from 2002 to 2010. It is a requirement of the UK Corporate Governance Code that at least one Committee member has recent and relevant financial experience. Steve Lucas therefore meets this requirement.
The Chief Financial Officer, the Group Internal Audit Manager, the General Manager Finance, the Deputy Company Secretary and representatives of the External Auditors are invited to attend each meeting of the Committee and participated in all of the meetings during 2012. The Chairman of the Board also attends meetings of the Committee by invitation and was present at all of the meetings in 2012. The external auditors have unrestricted access to the Committee Chairman.
In 2012, the Audit Committee met on five occasions. Meetings are scheduled to allow sufficient time to enable full discussion of key topics.
The Committee reviewed its terms of reference during the year. These are in line with best practice. The Audit Committee terms of reference can be accessed via the corporate website. The Board approved the terms of reference in December 2012.
The Committee fully discharged its responsibilities during the year. The following describes the Audit Committee’s main responsibilities and the work conducted in discharging these responsibilities:
Financial statements and formal announcements
Monitoring the integrity of the financial statements and formal announcements relating to the Group’s financial performance.
- The Committee met with the external auditors as part of the full-year and half-year accounts approval process.
- During this exercise the Committee considered the key audit risks identified as being significant to the 2012 accounts and the most appropriate treatment and disclosure of any new or judgemental matters identified during the audit and half-yearly review as well as any recommendations or observations made by the external auditors.
Reporting, policies and disclosures
Reviewing the significant financial reporting issues and accounting policies and disclosures in the financial reports.
- The Group prepares financial statements under International Financial Reporting Standards (IFRS). The adoption of new and revised Standards and Interpretations during 2012 and their impact on the financial statements are described in the accounting policies.
- The Audit Committee approved the scope of the work to be undertaken by the external auditors for half-year and year-end statutory audits and reviewed and discussed the external auditors’ final audit reports.
Internal controls and risk management
Reviewing the adequacy and effectiveness of the Group’s internal control procedures and risk management systems.
- The Audit Committee reviewed the effectiveness of the Group’s internal control procedures and risk management systems through the work of the internal audit team and external auditors and through regular reporting by the business unit and corporate teams to the Board.
Internal audit requirements
Considering how the Group’s internal audit requirements shall be satisfied and making recommendations to the Board.
- The Group Internal Audit Manager has direct access and responsibility to the Audit Committee. His main responsibilities include: evaluating and supporting the development of the Group’s overall control environment; operating efficiency and risk identification and management at operating, regional and corporate levels. In fulfilling his role, the Group Internal Audit Manager has direct access to the Committee without reference to Executive Management. During 2012, the Group Internal Audit Manager met with the Audit Committee Chairman without the presence of management to discuss the planning of Audit Committee meetings and to brief him on the results of the audits completed. The Group Internal Audit Manager also supported the development of Audit Committee meeting agendas with the Chairman with input from the Chief Financial Officer and General Manager Finance.
- The Committee approved the programme of 2012 internal audit work aimed at addressing both financial and overall risk management objectives identified within the Group. Thirty-seven internal audit reviews were undertaken during the year, covering a range of financial and business processes in the Group’s main business units in London, Dublin and Cape Town, and the main operational locations in Ghana, Uganda and Kenya. Detailed results from these reviews were reported to management and in summary to the Audit Committee during the year. Recommendations made as a result of the work of Internal Audit are tracked for timely implementation and reported to the Audit Committee periodically. No significant weaknesses were identified as a result of risk management and internal controls reviews undertaken by Internal Audit during 2012. The Group also undertook regular audits of non-operated joint ventures under the supervision of business unit management and the Group Internal Audit Manager.
- In addition, the Committee oversees the work of the independent reserves auditors ERCE and the arrangements in place for managing Information Technology risk relating to the Group’s critical information systems.
Making recommendations to the Board on the appointment or re-appointment of the Group’s external auditors and overseeing the Board’s relationship with the external auditors and, where appropriate, the selection of new external auditors.
- The UK Corporate Governance Code states that the Audit Committee should have primary responsibility for making a recommendation on the appointment, re-appointment or removal of the external auditors. On the basis of the review of external audit effectiveness, the Committee recommended to the Board that it recommends to shareholders the re-appointment of the auditors at the 2013 AGM.
- The external auditor is required to rotate the audit partner responsible for the Group audit every five years. 2012 is the first year of the current lead audit partner’s tenure. The audit contract was last put out to tender in 2004. The Audit Committee acknowledges the new provision in the 2012 edition of the UK Corporate Governance Code in respect of audit tendering and the suggested transitional arrangements thereto. The new Code applies to the Company from 1 January 2013 and will be reported against in its 2013 Annual Report.
- The Group’s external auditors are Deloitte LLP and the Audit Committee assessed the qualification, expertise and resources, and independence of the external auditors and the effectiveness of the audit process. This covered all aspects of the audit service provided by Deloitte LLP, including obtaining a report on the audit firm’s own internal quality control procedures and consideration of the audit firms’ annual transparency reports in line with the UK Corporate Governance Code. The Audit Committee also approved the external audit terms of engagement and remuneration. During the 2012 audit process, the Audit Committee Chairman met with Deloitte’s audit engagement partner without the presence of management.
- As a result of these reviews, the Audit Committee considered the external audit process to be operating effectively.
- The Committee closely monitors the level of audit and non-audit services they provide to the Group. Non-audit services are normally limited to assignments that are closely related to the annual audit or where the work is of such a nature that a detailed understanding of the Group is necessary. A policy for the engagement of the external auditors to supply non-audit services is in place to formalise these arrangements which requires Audit Committee approval for certain categories of work. This policy has been reviewed and updated in line with updated Audit Practice Board Ethical Standards and FRC Guidance to Audit Committees, and is available on the corporate website.
- A breakdown of the fees paid to the external auditors in respect of audit and non-audit work is included in note 3 to the financial statements. In addition to processes put in place to ensure segregation of audit and non-audit roles, Deloitte LLP is required, as part of the assurance process in relation to the audit, to confirm to the Committee that they have both the appropriate independence and the objectivity to allow them to continue to serve the members of the Company. This confirmation was given and no matters of concern were identified by the Committee.
Ensuring that an effective whistle-blowing procedure is in place.
- In line with best practice and to ensure Tullow works to the highest ethical standards, an independent whistle-blowing procedure has been in operation during the year to allow staff to confidentially raise any concerns about business practices. This procedure complements the established internal reporting process. The whistle-blowing policy is included in the revised Code of Business Conduct which is available on the corporate website. The Committee considers the whistle-blowing procedures to be appropriate for the size and scale of the Group.
Review of effectiveness of the Audit Committee
- During the year, the Audit Committee completed a review of the effectiveness of external audit, Internal Audit and of the Audit Committee itself. This was conducted through a series of questionnaires. Internal Audit coordinated the review. The Committee was considered to be operating effectively and in accordance with the guidance recommended by the Smith Committee included in the UK Corporate Governance Code.
- In addition to the questionnaire-based review of effectiveness, the Audit Committee also assessed the qualification, expertise and resources, and independence of the external auditors and the effectiveness of the audit process.