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Royal Mail - Strictly Confidential
ARC (10)3®°
23 - 31
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
AUDIT AND RISK COMMITTEE
Minutes of the meeting held at 100 Victoria Embankment London on
13™ May 2010
Members of the Committee Present:
Paul Murray Non Executive Director, Chair of the Committee
David Currie Non Executive Director
Richard Handover Non Executive Director
In attendance:
Donald Brydon Chairman
lan Duncan Group Finance Director
Doug Evans General Counsel
Jonathan Evans Company Secretary
Derek Foster Internal Audit & Risk Management Director
Mick Jeavons Financial Management & Control Director
Lindsay Leteve Chief Accountant
Luke March Group Compliance Director
Les Owen Non-Executive Director
Matthew Rose Director Group Treasury & Taxation
Richard Wilson Ernst &Young
Alison Duncan Ernst &Young
Ben Marles Ernst &Young
Andrew Poole Deputy Company Secretary
ARC10/23 MINUTES
(a) The minutes of the meeting of 11" March 2010 were
considered and approved as an accurate record of the
meeting;
(b) the Committee noted the minutes of the GLS Group Audit &
Risk Committee dated 5" May 2010.
ARC10/24 MATTERS ARISING ARC(10)19
(a) The Committee noted the status of actions from the previous
meetings, in particular:-
(b) ARC10/07(e) POL FS Compliance: progress to agreed
milestones was being made on the deliverables as detailed in
the January presentation. A full update would be provided for
the July meeting when the presentation would include details
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of the plan to deliver a business wide compliance and risk
framework covering all POL's business and operational risks;
ARC10/18(d) PSP: A full update report on the PSP project
will be made to the Holdings Board in June.
YEAR END MATTERS = ARC(10)20 (a-c)
2009/10 Report & Accounts: the Committee noted a draft of
the 2009-10 Royal Mail Holdings plc Annual Report &
Financial Statements for review and comment, together with
a draft of the preliminary Statement;
on 28 April 2010, the Royal Mail Holdings plc Board
delegated authority to a Board Accounts Sub-Committee
comprising the Chairman, the Group Finance Director and
the Chairman of the Audit and Risk Committee, to approve
the final Annual Report and Financial Statements on behalf of
the Board, following review by the Audit and Risk Committee;
the Committee:
« reviewed the Annual Report and Financial Statements
for 2009-10 and approved them for signing by the
Board Accounts Sub-Committee;
* agreed the content of the Letters of Representation
included in the Ernst & Young report for issue to the
auditors on behalf of the Board and delegated authority
to the Board Accounts Sub Committee to sign the
letter; and
confirmed that the Preliminary Statement was
consistent with the Annual Report and Financial
Statements;
* agreed to review the documentation and provide any
feedback to lan Duncan or the Finance team;
Going Concern: the Committee noted a paper summarising
the key developments since the Holdings Board meeting on
28 April 2010. Ernst and Young had reviewed the available
analyses in respect of Going Concern, and discussed their
initial conclusions at a Professional Standards Panel on 28
April 2010. Subject to material new information arising before
the date of signing that might require the Panel to reconsider
its conclusion, and given the proposed comprehensive
disclosure of Directors’ assumptions in Note 2 of the financial
statements, the Panel agreed that a Going Concern basis of
accounts preparation is appropriate, with no requirement for
an emphasis of matter paragraph in the audit report;
Group Finance had completed the review of forecast
compliance with loan covenants. Latest projections show that
the Loan To Value covenant on the senior debt facility may
be breached in March 2012. This represents an
improvement to the draft position presented to the Holdings
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Board in April, when the breach looked likely in September
2011. This covenant could come under threat earlier than
March 2012 if material risks crystallise, or if commercial
property values are negatively impacted. Alternatively, the
threat could be mitigated by increases in commercial property
values;
(f) further covenants may come under pressure in the event of
deterioration in forecasts, in particular the Total indebtedness
covenant on the £500m GLS loan, which is threatened by the
additional lease finance now assumed in the plan. The April
Board paper highlighted that this covenant might also be
breached during 2012, however improvement in the opening
cash position and mitigation of the assumed risks addresses
the shortfall;
(g) the Audit and Risk Committee:
i. noted the issues to be considered with respect to
Going Concern for the 2010 year end and the
progress to date;
ii. noted the draft financial analysis that currently
underpinned the projections;
iii. noted the proposed approach to prioritisation and
review of management actions;
iv. agreed the proposed Going Concern disclosure for
Note 2 of the financial statements; and
v. recommended to the Royal Mail Holdings plc Board
Accounts Sub Committee that the accounts were
correctly prepared on a Going Concern basis;
(h) I Cash Management actions in RMG: the Committee noted a
paper assessing the cash management actions being taken
to improve funding headroom in RMG. In particular Business
Units were to be issued with cash stretch targets within the
2010-11 incentive arrangements. The structure of the
scheme had been to drive towards improving forecast
headroom by c£200m over the next 24 months, £125m in the
budget year. It was hoped this would provide the required
focus on cash management and performance and, if
successful, drive forecast funding headroom to a more
appropriate level. Progress would be reported regularly to
allow any necessary actions to be taken;
(i) Accounts Disclosure: Royal Mail Group Ltd continued to face
considerable cash requirements with respect to its
investment in modernisation and funding its pension deficit at
a time when the mails market had been opened up to full
competition and there was ongoing volatility in mail volumes;
(1) on 23 March 2007, a funding package totalling £1.2bn was
completed with Government and for which State aid approval
had been received in April 2009. The £900m senior debt
facility expires in March 2014. It had been assumed that
another facility would be negotiated to be available by this
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time. The remaining £300m subordinated loan was fully
drawn in March 2009 and would not be repaid until the later
of the unconditional release of the monies held in escrow for
the Pension Trustee or 19 March 2016;
in making an assessment on Royal Mail Group Ltd’s ability to
continue as a going concern, the Directors had assumed the
successful execution of the modernisation plan, which was
reflected in detailed plans and supported by financial
forecasts, assumed that an affordable payment profile would
be agreed with the Royal Mail Pension Plan Trustee and
considered the ongoing volatility in the mails market, along
with the risk of greater market decline than forecast, which
creates uncertainties around the financial projections and,
consequently, the funding and headroom requirements of
Royal Mail Group Ltd;
on the basis of careful consideration of the cash flow
projections and the above considerations the Directors have
concluded that it was appropriate that the financial
statements be prepared on a going concern basis;
Alison Duncan noted that she had met with the Trustee
during the audit and felt that the Trustee clearly understood
the headroom issues. E&Y confirmed that the directors
assumptions were reasonable given the stated intention of
the Trustee and the flexibility in relation to GLS disposal and
transformation spend, and on that basis were comfortable
with the proposed disclosure. Paul Murray also confirmed, on
behalf of the Committee, that he too was content with the
disclosures which he thought were both appropriate and
adequate;
a short paper would be produced for the Board accounts Sub
Committee providing assurance that the statement included
in the Annual report & Accounts on Internal controls was
appropriate;
the Committee noted the Directors Remuneration Report and
the KPIs included in incentive schemes. As the future of the
LTIP was currently under review by the Remuneration
Committee, the Committee agreed that it would be useful for
the two committee chairmen to discuss future options for
KPls;
the Committee noted the Royal Mail Holdings plc Briefing
book providing an analysis of performance against prior year
and the balance sheet movements year-on-year. The
analysis was provided to facilitate a greater understanding of
the disclosures made in the financial statements.
E&Y REPORT ARC(10)21
Alison Duncan and Ben Marles introduced the E&Y Audit
update and Independence report dated 13" May 2010;
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the annual results close process, including the period 11 hard
close, was well executed by the business units and Group
finance teams;
a summary of control observations were set out in the report
together with recommendations of a housekeeping nature
that would be discussed with management and reported in
the management letter;
subject to on-going discussions with the Board and on-going
review up until the signing of the accounts, E&Y were
satisfied that there were no material uncertainties that could
cast doubt on RMG’s ability to continue as a going concern.
E&Y further confirmed that on the basis of the audit work
undertaken to date E&Y had not identified anything that
would lead them to believe that they would not be able to
issue an unqualified audit report. However some matters
were still outstanding and until E&Y had completed their
procedures, it was possible that further matters requiring
amendment might arise;
E&Y noted that in April 2010 the IASB had issued an
exposure draft of proposed changes to the pensions
accounting standard, IAS19. The draft was open to public
comment until September 2010, with final amendments to be
made in mid 2011. The proposed changes if fully
implemented as suggested in the draft could have a material
impact on the income statement charge;
the Committee confirmed, in response to a question from
Alison Duncan, that there were no instances of fraud to
report and noted the report from E&Y.
INTERNAL AUDIT & RISK MANAGEMENT QUARTERLY
REPORT AND GROUP RISK PROFILE ARC(10)22 AND
22(a)
Derek Foster introduced the Quarterly report for February to
March 2010. The Committee noted in particular that sixteen
IA&RM reports had been issued in the period with the most
significant report being the Review of Financial Services
Compliance. The report outlined the key findings and the
actions being taken to address the issues identified in the
report;
in August 2008, Post Office Limited had engaged the
consulting firm Deloitte to review its arrangements for
ensuring compliance with Financial Services Authority (FSA)
and HM Revenue & Customs (HMRC) regulations in relation
to the sale of its Financial Services products. Deloitte’s report
noted that compliance was consistently and significantly
below expected levels, and had identified a number of areas
for improvement relating to the overall control environment
and allocation of regulatory responsibilities. In
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February/March 2009 the Bank of Ireland also undertook a
review of the effectiveness of processes and controls by
which POL manages the training, competency and
development of people in selling Financial Services products
and concluded that there were significant issues that required
remedial action;
the POL Compliance Team developed a Financial Services
Delivery Plan (FSDP) for 2009/10 to address issues raised in
these reports and in late 2009 POL established a Network
Financial Services Compliance Programme (“the Compliance
Programme”) to provide greater impetus;
the Committee noted the quarterly IA&RM report and in
particular the work currently in hand in relation to POL
compliance. For future Quarterly reports, Derek Foster was
asked to show, alongside the summary of assignment ratings
on reports for the year, an equivalent summary for prior years
to help provide a comparison;
Group tisk profile: the Committee noted the Group Risk
profile dated May 2010;
Paul Murray said that in order to improve oversight of the risk
management process a member of the Committee would on
a rolling basis attend the Corporate Risk Management
Committee and that he would attend the next meeting.
1A&RM ANNUAL PLAN ARC(10)23
The Committee noted a paper setting out details of the
Internal Audit & Risk Management Departmental Plan for
2010/11;
the plan recognised the continued critical importance of the
Letters business to Royal Mail overall. The Plan for the last
few years had had a significant focus on the Letters
business, due to its scale in the Group, and this focus
continued in the 2010/11 plan. As well as Business
Transformation assignments noted in Appendix B, business
as usual process reviews included manpower planning,
procurement contract management, revenue protection, and
aviation security;
a significant allocation of activity to POL recognised the
importance of continued risks facing this business,
including FSA compliance, agents remuneration, the
Horizon payment system, and cash logistics security;
Group activity included the assurance work around the
People System Programme, which was a critical change
programme for payroll processing and people management,
and also reviews of specific Licence Conditions;
GLS: as in 2009/10, GLS Group Internal Audit compiled a
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proposed audit plan for the year, and this had been approved
at the May GLS Audit & Risk Committee (attended by the
Royal Mail Group Finance Director and the I[A&RM Director).
The plan contains 96 depot audits (2009/10 actual: 75) and
21 head office audits (2009/10 actual: 16). In addition, GLS
will continue its programme of national quality, international
quality, and security audits. [A&RM would continue to report
progress against this plan on a quarterly basis to the Group
ARC. GLS would be invited to attend the September ARC
meeting to provide an update on Internal Controls.
the Committee approved the Plan for 2010/11;
Donald Brydon agreed to consider what steps the Board
needed to take to understand how the assessment of risk
played into the strategic planning process;
Paul Murray referred to the Bribery Act 2010 which reformed
the criminal law to provide a new, modern and
comprehensive scheme of Bribery offences that would
enable courts to respond more effectively to bribery at home
and abroad. Doug Evans reminded the Committee of the
various activities underway in the business, such as improved
whistle blowing that would provide some assurance, however
the Committee acknowledged that from a Group perspective
there were areas where control improvements could be made
and asked for a full update at the next meeting.
GROUP COMPLIANCE UPDATE ARC(10)24-26
Group Annual Compliance Report: the Committee noted the
Group Compliance Report providing an overview of
compliance activity in 2009/10;
Licence Compliance - Risk Identification and Assurance: the
key changes proposed by Royal Mail in the response to the
report in relation to risk identification and assurance were:
increased focus on training and awareness, particularly in
Operations; a review of accountability for each Licence
condition and any necessary improvement required in being
able to demonstrate compliance; improved ‘bottom-up’ risk
identification and increased means for reporting and
assessing incidents or concerns raised. Annex 4 to the
paper provided the full list of remediation measures resulting
from Project Q;
the Committee noted the issues raised in this paper and
noted the proposed framework being deployed across the
business;
Improving Whistleblowing post Project Q: the Committee
noted a paper recommending an external provider of a
Whistleblowing helpline as part of the response to
Postcomm’s Minded to Decision document (The Report) on
its investigation into Quality of Service Performance
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Measurement (Project Q). The paper also recommended a
broader review of the policy and procedures for reporting
incidents and the governance arrangements in place for
management and board oversight of helplines;
subject to the necessary purchasing processes and policies,
it was recommended that InTouch be selected to provide the
external whistleblowing helpline which would replace the
current Employee Disclosure (Whistleblowing) Policy
operated by IA&RM. A review would be undertaken and a
paper presented to the GET of existing helplines to assess
their efficacy and a re-launch be undertaken to promote
awareness of the portfolio of helplines available. Revised
policy and procedures would be established on escalation of
reported incidents of ‘wrong doing’ to ensure incidents were
reported to the appropriate level in a timely manner and
quarterly summary reports would be prepared for the GET
and Audit & Risk Committee;
the Committee supported the proposals as outlined in the
paper to improve the Whistleblowing arrangements
throughout the Group;
the Committee thanked Luke March for his report noting that
this would be his last meeting as he was leaving the
business. A successor had been appointed.
ANY OTHER BUSINESS
Paul Murray reported that he would be undertaking a formal
review of the effectiveness of the Committee during the
summer aided by external advisers. This would then be
followed by a review of audit processes.
DATE OF NEXT MEETING
8" July 2010 at 2pm.
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