Strictly Confidential
POLARC45 (2")
15/18 — 15/26
POST OFFICE LIMITED
(Company no. 2154540)
(the Company)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE COMMITTEE
held at 14:00 on 20 May 2015
at Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ
Present:
Alasdair Marnoch Chairman of the Committee
Neil McCausland Senior Independent Director
Tim Franklin Non-Executive Director
in attendance:
Alice Perkins Chairman
Paula Vennells Chief Executive Officer (CEO)
Alisdair Cameron Chief Financial Officer (CFO)
Jane MacLeod General Counsel (GC)
Alwen Lyons Company Secretary
Steve Miller Risk Business Partner
Gary Hooton Audit Manager, Finance
Sarah Hall Financial Controller
Angus Grant Ernst & Young
Steve Lyon Ernst & Young
POLARG INTRODUCTION
15/18
(a) A quorum being present, the Chairman of the Committee opened the
meeting and welcomed those present.
POLARC MINUTES FROM 25 MARCH 2015 COMMITTEE MEETING
45/19
(a) The minutes of the meeting held on 25 March 2015 were approved as
presented and the Chairman of the Committee was authorised to sign
them as a true record.
The Committee noted the action list dated 25 March 2015.
POLARG MATTERS ARISING
15/20
(a) Jane MacLeod updated the Committee on the appointment of the Head of
Risk and Audit who would join the Business in July on a part time basis
before taking up the role full time in September.
POLARG PRESENTATION OF DRAFT ANNUAL REPORT AND FINANCIAL
15/21 STATEMENTS FOR THE YEAR ENDED 30TH MARCH 2014
(a) Sarah Hall introduced the Post Office Limited Annual Report and
Financial Statements for 2014-2015 financial year, and the supporting
briefing book.
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(e)
(hy
ACTION:
CFO/GC
ACTION:
CFO
Irrelevant
The main exceptional items and provisions were reported as Government
Grants received of £170m (which had all been utilised in the year),
Transformation restructuring costs (including == Subpostmaster
compensation) of £214m. The assets in the pension plan had performed
well but the Committee were reminded that a pension revaluation was
due for completion in 2015-2016.
Irrelevant
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The Committee discussed the requirement in the Corporate Governance
Code for the inclusion of a Fair Balanced and Understandable (“FBU")
statement. Angus Grant (EY) advised the Committee that FBU was still
evolving and that analysis of FBU had not been factored into the external
audit. He explained the FBU requirement to provide more
explanation/analysis of how the Business was progressing, and what it
was doing to move forward. Providing information and trends over a three
year period and positive evidence of how a business’ strategy affects the
financial performance. It was agreed that the Business should work
towards adopting the FBU requirement in future years.
The Committee discussed the UK Corporate Governance Code and the
additional requirements necessary to comply or explain. The CEO
suggested that the Executive consider the effect and costs of complying
with FBU and the UK Corporate Governance Code and return to the
Committee for a further debate in the autumn.
The Committee discussed the Crown Profit and Loss. The CFO explained
that he had decided not to make the agreed adjustment to the Crown
profitability for the costs of the financial services specialists. As a result,
the loss for the year was £12m and the run-rate at year end £5m. The
business expected to get to break-even by year-end. As the adjustment
had already been communicated to our people and the unions, the
internal run-rate breakeven would be about six months earlier. The
Committee asked that this be clarified on the STIP paper and the CFO to
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ACTION:
CFO
ACTION:
CFO
ACTION:
CEO / CFO
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provide a narrative to explain the reconciliation of the Crown P&L.
The Committee asked to see the year on year movement for sub-
postmaster debt and the money received from sub-postmasters to
understand if there had been any effect from Sparrow. The Committee
discussed the reference to Sparrow in the front half of the report and
asked the CEO to consider whether more detail was required to convey
the time and effort the business has spent on Sparrow.
The Chairman asked if Royal Mail Group (RMG) Limited had been
appraised of the information in the Report and Sarah Hall reported that
the relevant parts of the report had been shared with RMG.
The Committee thanked Sarah Hall and the CFO for an excellent briefing
book.
AUDIT RESULTS REPORT
Copies of the report produced by Ernst and Young, setting out the
external auditor's preliminary conclusions on the financial position and
results of operations for the Post Office for the financial year ended 29
March 2015 had been circulated to ail those present at the meeting.
Angus Grant confirmed the independence of the external auditor and
commented on the approach to the audit and its scope.
The significant audit and accounting issues set out in the report were
discussed in detail, together with the key internal control findings. Steve
Lyon advised that the approach by the Business was in line with the plan
submitted to the Committee fast year. It was noted that there were no
unadjusted misstatements reported although a late error was identified
and is explained in (i) below.
Steve Lyon explained that the Business had a significant number of
revenue streams and reassured the Committee that more testing had
been undertaken in areas where manual processes were prevalent and
that he was satisfied that revenue was recorded correctly. However not all
controls were clear and systematic and documentation to test that controls
were in place would help improve the controls. The Chairman asked the
CFO to consider how this could be implemented.
The classification of Exceptional items was discussed and nothing was
identified which required adjustment. Angus Grant gave comfort that the
restructuring costs had been correctly attributed but suggested that a
paper setting out guidelines for exceptional items would help the Business
with future classification. Tho CFO agreed to provide a policy setting out
the approach to classification of exceptional items moving forward.
Steve Lyon acknowledged the improvement in the IT controls which were
significantly better since the separation from RMG. The audit found no
issues with data migration and control. User accesses for people leaving
the business had shown that 15 people had retained log in capability and
1 person had logged back on to the system. The CEO suggested that she
would pick this up at the next Risk & Compliance Committee. The
Committee noted that leavers had been an action from the last audit
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ACTION:
CFO
ACTION:
Mark Davies
(s)
0)
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report and asked the CFO to check the other actions to ensure they have
been discharged.
The Committee asked EY if the Business was making progress with the
controls it had in place and how it compared with other organisations. EY
were asked to include a benchmark on controls in their management
letter. Angus Grant recognised the work completed to implement the new
finance system but stressed the need to review the controls which were
now in place by mapping the processes, especially those with manual
interventions.
Angus Grant reported that one audit adjustment had been found relating
to exceptional items and capex where a goods received notes had not
been processed. The consequence was that exceptional items and
impairment were understated by £2.5m. The CFO explained that no
adjustment was proposed as this does not materially affect the reader's
understanding of the accounts and EY supported that decision.
Angus Grant supported the Executive decision not to include a provision
for Sparrow in the Report as the probability of a contingent liability was
remote.
The Committee discussed future audits and the effect of POMS. It was
recognised that POMS would require a separate audit and the CFO was
asked discuss with EY.
REPORT AND ACCOUNT FRONT HALF
The Committee discussed the front half of the report and were pleased
with the progress to date. The Chairman asked that the report be
reviewed alongside that for last year, to ensure consistency where
appropriate. The Committee believed the tone of the report could be
strengthened to highlight the challenging environment in which the
Business was operating during the year.
Tim Franklin, Chairman of POAC, asked the Executive to ensure that
members of POAC had been given sight of, and were happy with, their
biography details.
Having taken all issues discussed into account, the Committee
1, Agreed to review the Annual Report and Financial Statements and
provide individual comments by email to Sarah Hall;
2. Agreed to recommend to the Post Office Board
¢ That the Annual Report and Financial Statements should be
approved;
« That they should not make the statement that the Annual
Report and Financial Statements were ‘fair, balancod and
understandable’; and
¢ That authority should be delegated for reviewing final
amendments and completing the Annual Report and Financial
Statements on behalf of Post Office Limited to a Sub-
Committee, the quorum for which should be comprised of any
three of Alice Perkins, Paula Vennells, Alisdair Cameron and
Alasdair Marnoch.
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3. Noted that the Chairman of the Audit Risk and Compliance Sub-
Committee would be asked to provide a verbal update of this
meeting to the Board.
left the meetin
rrelevant
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EXTERNAL AUDITORS FEEDBACK
(a) The Executive left the meeting and the members of the Committee
received verbal feedback on the audit process and the Executive.
CLOSE
There be no further business the meeting was close’
. I A Anel Kplatbor 201.
Neil McCausland “~~
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