ARC 03/36 TO ARC 03/45
POL00423143
POL00423143
Royal Mail - Strictly Confidential
RMH(04)69
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
AUDIT AND RISK COMMITTEE
Minutes of the meeting held at 148 Old Street on 11 November 2003
Members of the Committee Present:
Rosemary Thorne
John Neill
Bob Wigley
In attendance:
Allan Leighton
Elmar Toime
Adam Crozier
Marisa Cassoni
Jonathan Evans
Derek Foster
Frank Schinella
John Lappin
David Lindsell
Rachel Harper
Andrew Poole
ARC03/36
(a)
(b)
ACTION
Derek Foster
Non Executive Director, Chair of the Committee
Non Executive Director
Non Executive Director
Chairman
Executive Deputy Chairman
Chief Executive, Royal Mail Holdings plc
Chief Financial Officer
Company Secretary
Internal Audit and Risk Management Director
Director, Financial Management & Control
UK Finance Director, for minute ARC03/41
Ernst &Young
Ernst &Young
Notes
MINUTES
The minutes of the meeting of the 11 September 2003 were
considered and approved subject to the following drafting
changes being made.
ARC03/30(h): that a guest speaker would be attending a
future Board Meeting to reassure the directors that
appropriate audit trails were in place to demonstrate that
action was being taken to ensure compliance with the Health
& Safety requirements and to provide an assessment of the
procedures currently in place.
ARC03/31(d): that any issues arising in Information
Technology Security would be addressed through Prism
alliance.
The minutes of a meeting of the Corporate Risk Management
Committee held on 23 October 2003 were noted. It was
agreed that future minutes of the Corporate Risk
Management Committee would be clarified by expanding the
commentary where necessary to reflect the broader
circulation and by placing the action points after the minute.
ARC03/37
ACTION
Derek Foster
ACTION
Derek Foster
(a)
(b)
(d)
(e)
(f)
POL00423143
POL00423143
Royal Mail - Strictly Confidential
STATUS REPORT
The status of actions from the meeting held on
11 September 2003 was noted, in particular:
ARCO03/27 it was clear from the results highlighted in the
progress report on key actions to improve Safety
performance and in the report on the current position of the
Vital Few Controls that level of compliance remained an
issue. This position was unacceptable and the Company will
hold people accountable for non-compliance however it was
recognised that this would require a significant change in
cultural behaviour;
ARCO03/29(d) the Committee asked what measures could be
taken to improve the focus on Vital Few Controls and allow
for clear performance management at the highest level. It
was agreed that the number of controls would be reviewed
and that a smaller number of key measures, ideally around
10 per Unit, would be identified and approved;
that a Corporate Social Responsibility Committee had been
established under the Chairmanship of Mike Hodgkinson and
that an action plan was now in place to tackle many of the
outstanding issues;
a report would be produced for the next meeting setting out
the actions that management had taken to address these
issues and agreed that key control measures would be
presented to the Holdings Board for approval.
ARC03/37: Bob Wigley noted that some of the responses to
the Committee's questionnaire on H&S issues had not been
completed and in other cases, the responses indicated non-
compliance with regulation. The non executive members of
the Committee observed that non compliance with Audit
Committee questionnaires on a timely and comprehensive
basis was unacceptable and non- compliance with H&S
regulation could not be tolerated. Bob Wigley asked if there
were actions the committee could take to support
Management in effecting the required culture change. Elmar
Toime said he had built measuring compliance with H&S
regulation into his direct report review processes and he
would need the completion of one appraisal cycle to see
whether this effected the required changes. The Committee
asked that they be kept in touch with progress. Adam Crozier
said he and Elmar Toime would address the issue of non-
compliance with Audit Committee questionnaires so that this
was not repeated.
ARCO03/41: In relation to the issue of when the current pay
round increases would be consolidated into basic pay based
ARC03/38
ARC03/39
(a)
(b)
(c)
(d)
(a)
(b)
(c)
(d)
POL00423143
POL00423143
Royal Mail - Strictly Confidential
on achievement of agreed productivity targets, John Neill
said that he was concerned that leaving the judgment of the
achievement of targets to local management left the process
open to more risk. Bob Wigley asked how the Committee
could be sure that pay increases would not be consolidated if
targets were not genuinely achieved and also asked how we
could be sure efficiency would not fall to below target levels
again once the pay increase had been consolidated.
Management assured the Committee that this could not
happen. It was explained that to make the targets, walks had
to be reorganised, and at this point heads would be gone or
on the way out, thus ensuring targeted savings were
permanently achieved.
HALF YEAR REPORT AND EXTERNAL AUDIT REVIEW
Frank Schinella introduced a paper presenting the Interim
Report for review and for recommendation to the Board
Accounts Sub Committee to approve and sign the report. The
Committee noted: -
the Interim Report, including the Chairman’s Statement,
Financial Review, relevant Financial Statements and
applicable notes;
a summary of key accounting developments and issues,
which had arisen during the period, including the treatment of
exceptional loss, impairment and accounting implications of
the latest Pensions Plan valuation;
an analysis of performance against prior year and the
balance sheet movements from the year end;
a draft Letter of Representation addressed to the external
auditors.
After proper consideration, the Committee:-
reviewed the Interim Report for the 2003-04 half -year and
agreed that the proposed amendments since the version
presented to the Holdings Board be made to the Interim
Report;
noted the accounting issues;
agreed the content of the Letter of Representation for issue
to the auditors on behalf of the Board;
endorsed the Interim Report for approval by the Board
Accounts Sub Committee.
EXTERNAL AUDIT - PROPOSALS FOR AUDIT AND FEES
ACTION
Frank Schinella
ACTION
Frank Schinella
ARC03/40
(a)
(b)
(c)
(d)
(e)
(f)
(9)
(a)
POL00423143
POL00423143
Royal Mail - Strictly Confidential
David Lindsell introduced the Auditors report to the Audit and
Risk Committee covering the results of the Half Year Review,
in particular the Committee noted:
publishing the Interim Report for the half year ended
28 September marked the halfway point in the three-year
renewal plan;
progress was being delayed by the Unions, but that
Management were taking decisive action to recover lost
ground by accelerating other initiatives and by appealing
directly to the workforce;
the real impact on return to profitability would not be seen
until the year-end as much of the workforce downsizing was
forecast to happen in the second half. Another determining
factor would include the outcome of Postcomm’s review of
Access pricing;
the funding implication of the Pension Fund deficit was now
understood and the first half reflected an increased SSAP24
pension cost. The Auditors warned against letting the focus
on the cash funding deficit (i.e.£2.5 billion) undermine the
accounting treatment;
whilst there was clearly room for judgement on the issue of
Provisions the auditors were content with the current position
and confirmed that they had seen reasonable justification for
the figures included in the Half Year Review;
the Letter of Representation to the Auditors had suggested
that it would be helpful to have a similar letter signed off by
each Divisional Finance Director, it was agreed that this
process would be adopted for the year-end and, due to the
timescales, an interim arrangement adopted for the Interim
Report;
the proposed external audit fees of £850,000 for UK based
work was presented and agreed in principle together with a
£14,000 overrun on the Interim Report, it was further agreed
that Frank Schinella would provide further detailed analysis
by hours worked by key audit crew and present his findings
to the next meeting of the Audit Committee.
INTERNAL AUDIT AND RISK MANAGEMENT QUARTERLY
REPORT
The Internal Audit & Risk Management Report for the period
September to October 2003 was received, and in particular
the following was noted;
external pressure on the control environment had continued
to increase and internally the strike action had diverted
(b)
(c)
(d)
(e)
(f)
ACTION
Derek Foster
(9)
ARC03/41
(a)
(b)
POL00423143
POL00423143
Royal Mail - Strictly Confidential
Management attention from the core activities;
the business had recognised the importance and scale of the
risks and control issues, and had taken significant steps to
address a number of specific issues. Evidence in the period
indicated that there remained a significant amount to do and
that the internal and external pressures meant that the
control environment did not protect the Organisation at
certain times;
71% of rated audits in the period showed ‘no’ or ‘limited’
assurance ratings. 35% of Vital Few Controls reviewed were
not effective at the date of review;
Internal Audit had recently carried out a review of the
Organisation’s Security and Vetting Recruitment Procedures.
No assurance could be provided over the adequacy or
deployment of the procedures for the recruitment of both
permanent and casual staff;
quarterly assessment of business continuity against industry
benchmark showed a score of 71%, which represents a
positive result;
the issue of non-compliance was a serious problem for the
business and the Committee's view was that this was
unacceptable. The need to address this issue was accepted;
the Internal Audit function was currently six people short, this
impacting ability to deliver to plan, and that action was being
taken to fill the vacancies;
a number of significant risks had been identified with the
Single Daily Delivery Programme and these were highlighted
in the report.
CONTROLS- SINGLE DAILY DELIVERY
John Lappin was welcomed to the meeting to introduce a
paper on the Financial and Operational Control framework for
Single Daily Delivery. The Committee noted;
targets had been established using a bottom up approach,
with each Delivery Office Manager (DOM) advising the level
of savings to be realised in each individual unit;
that once the Unit had fully deployed the revision, the
monitoring process commenced to assess whether the target
was being achieved and whether payment of the pay
supplement was warranted. Once the target had been
achieved for four consecutive weeks the pay enhancement
(c)
(d)
ARCO03/42
(a)
(b)
ARC03/43
ACTION
Elmar Toime
ARCO03/44
ACTION
Jonathan Evans
ARC03/45
POL00423143
POL00423143
Royal Mail - Strictly Confidential
would be consolidated into basic pensionable pay;
a Post Implementation Review would be undertaken in each
of the 1400 units and a report provided to the Management
Board on a monthly basis;
it would be necessary to carefully monitor and control
‘backfilling’ in order to prevent such occurrences from
happening.
SECURITY REPORT
The Security report for November 2003 was received, and in
particular the following was noted:
Royal Mail personnel related crime cost the business
approximately £26 million per year. In 2002/03 the Company
had prosecuted 324 People, formally cautioned 108 others,
recommended 47 cases to the Procurator Fiscal and taken
legal action in a further 43 cases. These were noted as
minimum figures, since there may also be cases where local
action is taken to deal with offenders;
there had been a significant increase in the number of
viruses observed over the last two months. The figure for
September suggested a figure of 423 individual attempts per
day.
GLS GOVERNANCE STRUCTURE
Elmar Toime introduced a paper covering the proposed GLS
Governance arrangements. The Committee noted the
contents of the Governance paper and recommended that
the document be presented to the December Holdings Board
for approval.
ANY OTHER BUSINESS
Bob Wigley asked if the Company had adequate
Whistleblowing procedures in place. Jonathan Evans agreed
to review the current process, including the communication
aspect, and confirm at a future meeting of the Audit
Committee what action had been taken.
DATE OF NEXT MEETING
The Committee noted that the date of the next scheduled
meeting of the Committee was Thursday 18 March 2004.
6
POL00423143
POL00423143
Royal Mail - Strictly Confidential
POL00423143
POL00423143
Royal Mail - Strictly Confidential