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Royal Mail - Strictly Confidential
ARC (11)3°°
26 - 34
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
AUDIT AND RISK COMMITTEE
Minutes of the meeting held at 100 Victoria Embankment London on
20" May 2011
Members of the Committee Present:
Paul Murray Non Executive Director, Chair of the Committee
David Currie Non Executive Director
Nick Horler Non Executive Director
Cath Keers Non Executive Director
Orna Ni Chionna Non Executive Director
Les Owen Non Executive Director
Apologies:
Donald Brydon
In attendance:
Moya Greene Group CEO
Matthew Lester Chief Finance Officer
Jon Millidge Company Secretary
Derek Foster Internal Audit & Risk Management Director
Shane O’Riordain Director, Group Communications for ARC 11/28 (b-t)
Mike Prince Financial Management & Control Director
Jeff Triggs General Counsel
Richard Wilson Ernst &Young
Alison Duncan Ernst &Young
Ben Marles Ernst &Young
Andrew Poole Deputy Company Secretary
Mike Young POL for item ARC11/28(t-u)
Lesley Sewell POL for item ARC11/28(t-u)
Anne Fletcher Group Compliance Director for ARC11/32
The Chairman welcomed everyone to the meeting.
ARC11/26 MINUTES
(a) The minutes of the meeting of the 10" March 2011 were
considered and approved as an accurate record of the
meetings;
(b) the Committee noted the minutes of the Risk Management
Committee held on 3° May 2011.
ARC11/27 STATUS REPORT ARC(11)25
(a) I The Committee noted the status of actions from the previous
meetings, in particular:-
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Derek Foster
ARC11/28
(a)
ACTION
Mike Prince
(b)
(c)
(d)
ACTION
Shane O’Riordain
(e)
ACTION
Jon Millidge
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AC11/19(b) IA&RM Annual Plan: At the last ARC, the
proposed assignment plan for IA&RM for 2011/12 was
approved. IA&RM was tasked with preparing an analysis of
the plan that showed the alignment to the priorities of the
business. The ARC was invited to note the progress and
action in articulating the alignment of the audit plan to
business priorities and that the final version of the document
would be available at the July ARC.
YEAREND ARC(10)26-31
Letter from BIS: Jon Millidge tabled a letter received that
morning from Department for Business Innovation & Skills
dated 19'" May 2011 addressed to the Chairman of Royal
Mail Holdings. The letter was deemed by the Committee to
be sufficient to support the Going Concern assessment and
the associated disclosure in the Annual Report & Accounts
2010/11. Mike Prince was asked to reflect the contents of the
letter in the Going Concern note to the accounts.
Draft Annual Report & Accounts: the Committee received the
latest draft of the Annual Report & Accounts. Shane
O’Riordain explained that one of the objectives this year was
to begin the process of moving the Annual Report and
Accounts closer, where possible, to the standards of a listed
PLC company. The draft had moved towards this goal, but
there was more to do in this area for next year's report;
the chapters had been arranged thematically to include
modernisation, people, customers etc. They reviewed
progress in these key areas in the last 12 months and
detailed some of the businesses main plans for the future.
Also, for the first time, a Regulation and a Transparency
report had been included. The idea was to convey a sense of
a company that was on a journey of change on many fronts
and that we were attempting to be more open. Matthew
Lester noted that there was a process in place to validate the
disclosures being made. The Directors Remuneration Report
was not in the draft presented to the Committee as it was still
being drafted. Orna Ni Chionna noted that the Remuneration
Committee would meet shortly to discuss and approve the
Director's Remuneration Report;
Cath Keers noted the strong language being used in some
respects and suggested that this could be toned down. Moya
Greene said she would review the disclosure. The Committee
further suggested that the document be passed to major
stakeholders for review as this would help balance the tone
of the document. This suggestion was agreed;
the Committee reviewed the draft of the Annual Report &
Accounts, and recommended to the Board that the
statements made be adopted. A further draft of the Report &
Accounts would be circulated to the full Board for formal
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ACTION
Mike Prince
(f)
(9)
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()
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approval.
Going Concern & Licence Condition 16 Letter: The
Committee noted a paper including the latest draft going
concern note for RMG ex POL and the draft LC16 letter that
was required to be sent to Postcomm by the end of June
2011. There was a licence requirement to confirm to
Postcomm by June each year, that Royal Mail had the
“necessary resources” (human, financial) for the next twelve
months from the date of the letter to provide the Universal
Postal Service. The draft letter confirmed that RMG did have
the necessary resources, but drew the reader to two specific
matters: the potential for Industrial Action in London and the
Going Concern status of Royal Mail;
The Committee noted both the Going Concern and LC16
draft disclosures and delegated authority to the Chief
Financial Officer to sign and send the LC16 letter, ata
suitable time before June 2011, to Postcomm.
Summary Briefing Book y/e 27 March 2011: the Committee
noted the summary Briefing book. Mike Prince introduced the
overview to the year end highlighting that both the Group re-
organisation and VAT implementation had not impacted the
year end. He confirmed that although there was a lot in the
detail, the main issues related to going concern and the
reduction in the pension deficit by over £3bn. The Briefing
Book also confirmed in detail the sign off and assurance
process that the ARC could rely on when reviewing the
results. It also provided a high level review of the Income
Statement and focussing on major movements in the Balance
Sheet particularly the pension deficit and other material
balances which required judgement and which were not
mechanically calculated or systems driven;
The Committee agreed that the fact that the business was
highly regulated was a key risk, and noted that this was
addressed in the Government, Regulation and Legislation
segment of the Risk Management and Control section in the
draft Report & Accounts;
the net pension liability was both the most material and
volatile item on the balance sheet and was driven by a
number of long term assumptions, small changes in which
could drive significant movements in the balance sheet. The
pension deficit at March 2011 was £4.5 bn compared to £8.0
bn in March 2010 mainly due to the change in inflation
assumption from RPi to CPi;
Les Owen enquired about the statistical validity of the Stamp
and meter revenue SITHOP/MITHOP values as disclosed in
the accounts. Mike Prince confirmed that the methodology
used to calculate the value had been applied consistently
over a number of years and was commonly used by other
Postal Operators. The Committee agreed that the approach
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being taken by the company in this respect was reasonable.
(l) Carrying Values of Investments and Goodwill: the Committee
noted a paper providing information on the carrying values of
investments and goodwill in respect of Subsidiaries, Joint
Ventures and Associates referred to in the 2010-11 Financial
Statements. In particular the Committee noted the there was
no goodwill recognised in the carrying values of Associates
or Joint Ventures at March 2011. Under IAS 27, the
investment in Royal Mail Group Ltd (RMG) held by Royal Mail
Holdings plc was held at cost (£4.2bn) and then assessed for
impairment under IAS 39. The net carrying value at March
2010 was £3.8bn. In assessing for impairment, the carrying
value of RMG at March 2011 was tested using a standard
NPV calculation of forecast cash flows for Years 1 to 5 of the
business plan plus a terminal value for Year 6 onwards,
adjusted for the net debt / cash position at the valuation date.
With the more pessimistic forecast cash flows included in the
latest Strategic Plan, the value of RMG was reduced to
£0.5bn, requiring a significant impairment of £3.3bn at the
year end.
(m) the impairment of £3.3bn of the carrying value of Royal Mail
Group Limited in Royal Mail Holdings company financial
statements had been largely brought about by the revised
business plan and alignment with the Colleague Share
valuation. The Audit and Risk Committee further noted the
impairment of £2m of goodwill relating to the Spring
associate;
(n) _ the carrying value of associates and joint ventures was
supported by their underlying assets and liabilities in
accordance with accounting standards; and
(0) Goodwill of £197m in the consolidated Financial Statements
related to the GLS acquisition and was supported by GLS’s
profits and forecast cash flows. Alison Duncan confirmed that
subject to confirmation of the WACC used, E&Y agreed with
Management's assessment of the carrying value of assets.
(p) Fines Compensation & Material Litigation: The Committee
noted the amount for accruals for fines and compensation
and provisions held for material litigation at 27" March 2011.
In particular, the Committee noted the need to identify a
specific industrial diseases provision that had arisen through
BT seeking clarification from the Court as to the liabilities
transferred to BT following the split of the old Post Office
Corporation in 1981.
(q) E&Y Report - Audit Results Report for the year end 27 March
2011: Alison Duncan introduced the Audit Results Report for
the Year ended 27 March 2011. The annual results close
process including the period 11 hard close was well executed
by the business unit and Group Finance teams with the
exception of the POL IT work with Fujitsu. Despite the
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(r)
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(t)
(u)
ACTION
Mike Young
ACTION
Mike Young
ACTION
Derek Foster
ARC11/29
(a)
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finance team restructuring during the year, there was no
impact on the quality or timeliness of the information provided
to the auditors;
E&Y had received full cooperation from the Royal Mail teams
and subject to a few outstanding matters as noted in the
report to the best of their knowledge had received all
information necessary to enable them to complete the audit.
The Committee confirmed that it was not aware of any fraud
or suspected fraud involving management or other
employees who had a significant role in the Group and
Parent Company's internal controls over financial reporting;
Alison Duncan confirmed that subject to completion of
procedures E&Y anticipated that they would concur with the
going concern basis of preparation for the Group accounts.
The unqualified audit report would include an emphasis of
matter paragraph which would draw attention to the
fundamental uncertainties and key assumptions highlighted
by Management in the basis of preparation paragraph in the
notes to the accounts;
Mike Young and Lesley Sewell joined the meeting. Alison
Duncan explained that that the Audit process had identified
significant control weaknesses, which in Ernst & Young's
view, reflected a need for improvement by the outsource
provider Fujitsu but also a change in approach on the part of
POL in relation to the management of the Fujitsu contract.
The approach by Fujitsu in delivering audit requirements to
POL and E&Y had resulted in an unduly lengthy,
unpredictable and inefficient audit in respect of this aspect of
the IT audit. Mike Young noted that the recent re-negotiation
of the contract had offered POL significant cost savings and
huge operational benefits in terms of efficiency savings, but
accepted that POL had not been demanding SAS70 audit
evidence from the supplier. POL had established an IT Audit
& Control Board to manage contract governance going
forward. An update on this matter would be given to the
Audit& Risk Committee at the October meeting.
Les Owen noted that the Post Office Board were not aware
of this project and asked that in future that the Board be kept
fully up to date on all such projects. The POL board would be
updated on this matter at its next meeting.
Nick Horler commented that contract management in the
business was a particular risk in cases of incremental
contract renewal. Paul Murray asked that this issue be
considered for inclusion on the Group Risk register.
YEAR END RISK MANAGEMENT & CONTROL
DISCLOSURE ARC(11)32
Derek Foster introduced a paper to introduce the Risk
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ACTION
Derek Foster
(b)
(c)
(d)
(a)
(b)
(c)
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Management and Control section of the draft 2010/11 Annual
Report and Accounts, to explain context, and to summarise
main changes from prior year;
the drive to provide a more comprehensive summary of risk
management and control in Royal Mail had been driven by a)
developments in reporting and accounting generally, and
specifically where the Financial Reporting Council had set out
increased expectations for more and better disclosure in this
area, and b) the desire, in anticipation of reporting in a formal
“plc” environment, to provide disclosure that was
comprehensive and reflected best practice;
In the draft Report and Accounts for 2010/11, comments on
tisk management and control of the business had been
gathered together to give a more coherent picture of the
overall risk management and control environment. The
key differences from prior year were:
- clear articulation of overall risk environment
- specific delineation of roles of Board, ARC, and
RMC in this area
- more focussed summary of key risks, and
more detailed analysis of the main components of internal
control in the business;
the Committee reviewed and endorsed the disclosure in
respect of Risk Management and Control in the draft 2010/11
Report and Accounts.
INTERNAL AUDIT & RISK MANAGEMENT QUARTERLY
REPORT = ARC(11)33
Derek Foster introduced a report summarising the activity of
IA&RM for the period February to March 2011. The report
assisted the Committee in discharging its responsibility for
monitoring and reviewing the Group's risk management and
internal control systems. The Committee noted:-
IA&RM had completed four assignments in the period, three
of which had rated the subject either ‘not satisfactory’ or
‘some improvement required’ The two ‘not satisfactory’
reports covered Software Licence environment and Manager
Bonus Scheme while the report rated as requiring
improvement related to the Organisational restructure:
Leavers process in POL. Paul Murray asked that the report
clearly identify who was responsible for the improvement
actions on these assignments;
Orna Ni-Chionna said she was shocked by the audit findings
in respect of Managers Bonus arrangements. Moya Greene
confirmed that the clear intention was to have one bonus
scheme in future and that it would be backed up by robust
data;
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(d) the number of agreed actions overdue for completion is 21%
at March 2011. This was an improvement on the 23% (Jan
2011) as reported to the last meeting. The report provided
details of the number of issues raised (priority 1 and 2
combined) and of the trend in percentage of overdue actions.
Details of the number of issues completed and overdue in the
ACTION rolling year April 2010 - March 2011 were also shown,
Derek Foster including the breakdown of overdue actions by priority. Paul
Murray asked for a trend analysis of overdue actions be
included in future reports and that those accountable for
actions be identified in the report;
(e) — GLS audit function had completed its plan for the year. Since
December 2010, the function had completed 48 depot audits,
2 of which were rated as “Unsatisfactory”. For the full year,
108 depot audits were completed (09/10: 75), of which 5
were rated “Unsatisfactory” (09/10: 4), 33 were rated
“Requires Improvement” (09/10: 29) and 70 were rated
“Satisfactory” (09/10: 42). In addition 17 Head Office audits
were completed in 2010/11 (09/10: 16), with none rated
‘Unsatisfactory’ (09/10: one rated ‘Unsatisfactory’);
(f) the business operated as rolling 12 month control self
assessment process to provide assurance that critical
controls designed to mitigate significant business risks were
ACTION working correctly. Derek Foster agreed to include tests of a
Derek Foster sample of specific controls covered by the self-assessment
exercise in the annual audit plan;
(g) I The Audit & Risk Committee noted the report.
ARC11/31 GROUP RISK PROFILE ARC(11)34
(a) Derek Foster introduced a paper presenting the new,
updated Group Risk Profile, to set the review of the profile in
the context of risk management activities and responsibilities
(including Board responsibilities) more generally, to highlight
the enhancements to the risk management process we have
introduced since the last ARC, and to note action required of
the Committee;
(b) the overall responsibility for risk management in Royal Mail
rests with the Board, which will provide high level direction on
the appropriate balance between risk and regard to be struck
in the strategic plan, set the “tone” for managing risk, and
ensure the most significant risks facing the organisation are
properly managed. In particular, the Board strategy session
scheduled for June will consider the overall level of risk in the
strategic plan and the plans for management of specific
critical risks. Within that overall framework, ARC has specific
responsibilities, including monitoring the effectiveness of risk
management processes and the control environment,
reviewing the work of IA&RM, and reviewing the Group Risk
Profile;
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ACTION
Paul Murray
ARC11/32
(c)
(d)
(e)
(f)
(a)
(b)
(c)
(d)
(e)
(f)
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the Committee approved the updated Terms of Reference for
the Risk Management Committee, Appendix A to the paper,
including membership;
the review of the Group Risk profile by the Audit & Risk
Committee represented a sub-set of the overall Board
responsibility for the setting and monitoring of the level of risk
in the organisation. Therefore this review by the Committee
was about the assessment and management of risks that
had been identified;
the Committee considered and endorsed the overall profile,
and discussed the rating for the Transformation Benefit risk.
Cath Keers suggested that the business should consider if
this risk be given higher profile in the Group Risk Profile;
the Committee expressed the view that the Board overall
needed to give higher and specific attention to the subject of
risk analysis and management. The Committee felt that risk
analysis should be more closely integrated into the board
process and that more time should be allowed to discuss the
risks to the business in a more systematic manner. Paul
Murray would discuss this with the Chairman.
GROUP ANNUAL COMPLIANCE REPORT ARC(11)35
Anne Fletcher introduced the report providing an overview of
compliance activity in 2010/2011. It had been another busy
year with significant RFI activity, challenges around Q of S
(resulting from volcanic ash, severe weather and the impact
of the transformation activity), restructure activity and
significant training deployment;
Postcomm had closed their investigation into E-2-E Q of S
measurement (Q) and concluded that Royal Mail was in
breach of parts of condition 4.8 and that it would not return to
a compliant position until the assurances made by Royal Mail
had been fully deployed. The assurances had now been fully
deployed;
the Compliance Director confirmed that she was satisfied - on
a risk basis - with the adequacy of independent assurance
provided on procedures and controls relied upon to ensure
compliance, including assurance activity within business
units/functions and audits undertaken by the Group Internal
Audit function;
the Committee noted that the Company would have its Anti-
Bribery policy in place by the 1° July 2011; and that
2010/2011 had been another challenging year and it
remained essential to ensure continued focus and
professionalism in all regulatory relationships;
the Committee noted the key activity during 2010/2011 and
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(a)
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the focus of activity for 2011/2012 and the revised
compliance framework, the assessment of compliance risk
and the reporting and information provision set out in the
paper.
ANY OTHER BUSINESS
Paul Murray reported that the timing of Audit & Risk
Committee meetings was being reviewed with the intention
that future meetings would be more closely aligned to the
Board meeting dates.
DATE OF NEXT MEETING
7 July 2011.
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