ARC 04/15 TO ARC 04/24
Royal Mail - Strictly Confidential
ROYAL MAIL HOLDINGS ple
(Company no, 4074919)
AUDIT AND RISK COMMITTEE
Minutes of the meeting held at 148 Old Street on 24 May 2004
Members of the Committee Present:
*Bob Wigley
*John Neill
In attendance:
Allan Leighton
Elmar Toime
Adam Crozier
Marisa Cassoni
*Jonathan Evans
Derek Foster
Frank Schinella
Andrew Wilson
*David Lindsell
*Rachel Harper
Andrew Poole
* In attendance:
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Non Executive Director, Chair of the Committee
Non Executive Director
Chairman
Executive Deputy Chairman
Chief Executive
Chief Financial Officer
Company Secretary
Internal Audit and Risk Management Director
Director, Financial Management & Control
Director, Security for ARC04/20
Ernst &Young
Ernst &Young
Notes
PRE- MEETING WITH EXTERNAL AUDITORS
The Committee met the external auditors in private before the
start of the main meeting.
MINUTES OF PREVIOUS MEETING
The minutes of the meeting of the 11 November 2003 were
considered and approved subject to typographical error on
page 7 being corrected to read SDD and not 500.
STATUS REPORT
The status of actions from the meeting held on
18 March 2004 was noted, in particular:
ARC04/05(a) a review of the terms of reference of the Audit
Committee would now be undertaken as part of the Board
effectiveness review, which was also considering the terms of
reference for all Board Committees. Bob Wigley said that this
review would clarify that Health and Safety would be the sole
responsibility of the CSR Committee going forward and the
Audit Committee would satisfy itself by reference to minutes
of that Committee;
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ARC04/05(i) Management were now attending special
meetings of the Committee for ‘limited’ or ‘no assurance’
related audit reports. At the meeting on 6 April 04 action plan
updates were presented in respect of Single Daily Delivery
(Roger Baynes), Payroll fraud (Dermot Toberty) and PAYE
(Jonathan Evans). Bob Wigley requested that Audit
recommendations (as detailed and agreed in past individual
audit reports) that were overdue for completion of agreed
action would be included for review at the next meeting of the
Committee;
ARCO03/05(j) - Adam Crozier had suggested that it would be
helpful to incorporate the views of management into future
audit reports. Derek Foster confirmed that this is being done,
and is achieved by detailed discussion and review of the
report with management and by agreement of actions arising;
ARC03/11(b) the Whistle blowing policy had been given
widespread communication across the business in March.
The taking of illegal substances on duty was already a
disciplinary offence in the Company, leading to dismissal.
Bob Wigley and John Neill requested that not withstanding
the March communication exercise, the Whistle blowing
policy be reviewed in the light of the Dispatches programme,
and relaunched. The Committee discussed the way in which
the current whistleblowing procedures worked, noting that not
many calls are received. There were also questions about
employee perception of how effectively the organisation
protected the anonymity of callers. As a result, the committee
requested that Andrew Wilson produce a note of recent calls
to the whistleblowing number, which should now be produced
at each regular audit committee meeting together with a note
on how the call had been followed up, and that management
also undertake a review to establish how the protection of
anonymity could be improved (including the possible use of
an external call agency) and bring forward proposals to the
next full audit committee meeting;
the self-assessment forms on the Committee’s effectiveness
had been completed and would be summarised by Company
Secretariat for review by the Audit Committee at the next
meeting.
YEAR END ACCOUNTS 2003/04.
Marisa Cassoni introduced a paper presenting the Group
Accounts for Royal Mail Holdings pic together with the
Preliminary Announcement for the Committee's review and
recommendation to the main Board's delegated Sub
Committee, for approval and signing. The Committee noted:
a full set of the Royal Mail Holdings Ple Group Accounts
together with a draft of the Preliminary Announcement, the
Audit and Risk Committee briefing book, which provided an
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analysis of performance against prior year and the balance
sheet together with a draft Letter of Representation
addressed to the external auditors for review and approval.
The Committee noted that comments that had previously
been raised, particularly in respect to the consistency of the
reviews at the front of the Accounts with the formal financial
statements had been satisfactorily addressed in the final
version of the accounts that were being presented for review
and approval;
John Neill said that whilst the business might be achieving
acceptable margins it needed to improve on Quality of
Service. The aim should be to achieve adequate returns on
all resources utilised in the business. Adam Crozier added
that this was a good reason for returning to profit in order that
investment can be made in the business and in its people.
The Government had waived its right to a dividend for a
period of five years;
Jonathan Evans reported that the Remuneration Committee
had met to consider the achievement of annual bonus
targets. The Remuneration Committee considered that an
80% award was appropriate: 60% for the achievement of
financial targets and 20% for the achievement of exit rates.
No award would be made for quality of service (20%). The
Remuneration Committee, as required, had taken input from
the DTI on the matter, who had initially considered, based on
the partial information available to them, that the Company
had failed the exit rate target. Following further deliberations
the DTI had agreed that the exit rate had been achieved:
John Neill asked about the bonus payable to Jerry Cope.
Allan Leighton confirmed that the Remuneration Committee
had handled this matter, but essentially this payment had
been made in order to honour his contract;
The Committee reviewed carefully the note disclosing the
LTIP. Whilst the proposed disclosure of the LTIP was
technically correct, the Committee were keen to ensure that
the disclosure was full having regard to the deferred element
of the LTIP scheme which would fall to be disclosed in the
subsequent year. Allan Leighton confirmed that he would
review with management the current treatment and
disclosure of Director’ remuneration and that the final
approval would be both technically correct and full. Any
change from the agreed approach would be reported back to
the Committee;
David Lindsell confirmed that the report to the Audit &Risk
Committee represented a ‘fair view’ of the business and that
whilst there was some sensitivity around specific provisions
they were in the opinion of the Auditors fairly stated;
David Lindsell reported an improvement in the financial
control environment whilst expressing some concern at the
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effect that VR might have on this area, as the Finance
function would be losing some 280 people. Marisa Cassoni
acknowledged that losing this number of people would result
in an increased risk, but explained that a strategy was in
place to mitigate the overall effect of the headcount
reduction. Frank Schinella confirmed that there was no.
practical risk of any significant issues getting through the
current financial controls undetected,
Bob Wigley said that some Audit Committees liked to see the
Management letter before approving the accounts. David
Lindsell confirmed that there were no major issues to draw to
the attention of the Audit & Risk Committee but said that
given the reporting timetable it would be impractical to
achieve a review prior to signing the accounts;
each Finance director and the Heads of Legal and Regulation
had signed off Annual Letters of Assurance. Marisa Cassoni
confirmed that there were no further issues known that would
require alterations to the letter of representation to the
auditors;
The Committee;
reviewed the Accounts and Preliminary Announcement for
2003-04,
agreed the content of the Letter of Representation for issue
to the auditors on behalf of the Board;
endorsed the Accounts and Prelimininary Announcement for
approval by the Board Sub-Committee subject to any
material changes being brought to the attention of the
members in respect to the Directors Remuneration Report;
noted the items of non-audit work carried out by Ernst
&Young,
INTERNATIONAL FINANCIAL REPORTINGS STANDARDS
IMPLEMENTATION
A paper had been circulated providing a quarterly update to
the Audit Committee on progress toward the adoption of
international Financial Reporting Standards. The Committee
noted the progress that had been made in implementing the
Standard.
INTERNAL AUDIT & RISK MANAGEMENT DEPARTMENT
PERSPECTIVE
Derek Foster introduced a paper setting out the Internal Audit
& Risk Managements Department's perspective on the risk
management and control system within the business, as it
pertained to the financial statements disclosure. The
Committee noted the paper and in particular:
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Royal Mail - Strictly Confidential
that the data contained in the report, along with the on-going
communication throughout the year (including updates of the
Corporate Risk Scorecard allow the board to discharge its
duty for timely review of the effectiveness of the risk
management and control system;
that from a statutory reporting perspective, the risk and
control system had appropriate components to satisfy
governance requirements. In particular the Financial controls
were set up to allow timely and accurate reporting of results
and the safeguarding of assets;
a requirement of the Combined Code for a proper process of
Corporate Governance for the directors to carry out timely
reviews of the effectiveness of the system and to report this
annually in the Annual Report. The specific disclosures in the
2003/04 Annual Report were summarised in the paper along
with an illustration of Royal Mail's practice to support the
statement;
that due to the pace of changes in the business the broader
business controls remained vulnerable. David Lindsell gave
assurance that the financial controls were adequate and
effective the issue now was ‘non-financial’ control resulting in
poor Quality of Service and compensation payments;
Adam Crozier confirmed that the Headcount reduction
process had been put under severe pressure with the volume
of people being processed. Lessons had been learnt and the
process was being redesigned.
INTERNAL AUDIT AND RISK MANAGEMENT QUARTERLY
REPORT
Derek Foster introduced the Internal Audit and Risk
Management report for the period March 2004 to May
2004.The Committee noted the contents of the report and:
the level and pace of business transformation had continued
and increased in the period. The number and scope of
changes in the space of these few years was greater than at
any time in Royal Mail's past, and arguably is greater than
changes in comparable postal companies or UK business
generally, this inevitably puts strain on the control
environment;
IARM had completed 27 audit assignments in the period. Of
the 13 assignments for which ratings were issued, two
assignments, (Managing Headcount reduction and Safety
management) were rated as ‘no assurance’. Two further
assignments, Transport Review and the use of agency staff
were also noted due to the significance of the issues
identified. These reports (other than the Safety Management
report) would be considered further at the special meeting of
the Audit & Risk Committee scheduled for July;
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Royal Mail - Strictly Confidential
John Neill asked what was being done to ensure that health
and safety issues were being addressed. Elmar Toime
confirmed that the CSR Committee had now reviewed the
framework for managing Safety issues in the business and a
detailed action plan was being implemented under the
Committee's supervision.
Bob Wigley noted that the Secretariats review of Board
Committee terms of reference would clarify that the CSR
Committee would have total responsibility for Health & Safety
issues;
the Committee discussed the Company's relationship with the
H&SE and how the business might engage with the
Executive to deliver improvements in identifying Safety
issues. Further consideration would be given to this matter.
PROTECTING ROYAL MAIL ASSETS
Andrew Wilson, Director of Security, attended for this item.
The Committee noted that Royal Mail was inherently
vulnerable as a business to attacks on its assets, whether
through fraud or other events. This is due to the scale of the
business, nature of the core handling process and liquidity of
assets. The Committee noted;
the key activity of the business in protecting Royal Mail's
assets and pipeline, including increased focus on fraud
investigations, protection of information and the level of
prosecutions. Separate discussions had taken place and
action plans had been developed to address the issues
highlighted recently in the Dispatches programme,
The Company had made 299 prosecutions last year. John
Neill asked if the policy on prosecutions was clear and what
level of resources would be required to improve the
prosecution rate. Andrew Wilson did not feel that an increase
in resource was necessary or likely to be effective. Andrew
Wilson mentioned that the Company had identified a problem
in recruiting people in cities where criminal activity was at
higher levels. In addition security was not always treated as
high priority matter for all managers. John Neill asked
whether custom and practice could restrict investigations.
Andrew Wilson confirmed that he had not encountered active
obstruction however there was a cultural issue to address;
John Neill said that the impression was that there were no
restrictions on Andrew Wilson being able to pursue
investigations, on the other hand there seemed to be an
impression that the culture did not embrace security issues
as it might. There was still a need to deal with the issue of
non-compliance across the business. There was a clear need
to consider a programme of re-education in order that people
were comfortable reporting security issues and this issue
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Royal Mail - Strictly Confidential
would be considered further at a future Board meeting.
The Whistle blowing policy would be reviewed and
relaunched with a confidential helpline number.
REVIEW OF EXTERNAL AUDITOR PERFORMANCE/FEES
A paper was tabled setting out the Budgeted Audit fee for the
year ended 28 March 2004. The Committee noted:
the total audit hours were budgeted at 7,328 hours with a
gross audit cost before any discount of £1,345,000. The
agreed fees of £864,000 provided a recovery rate of some
64%. The reduction in hours vs. last year was almost
absorbed by increases to rates which was driven by
increases in absolute rates and changes in the mix of staff;
John Neill asked how audit costs could be reduced. The
business should review the process to consider those
elements the business could perform for itself. Derek Foster
confirmed that this work was in hand.
ANY OTHER BUSINESS
Bob Wigley said that he had recently met both the POL
compliance officer and BO! Compliance Officer who seemed
well qualified and to have an adequate plan to install
necessary controls and ensure compliance with relevant
legislation. They would produce a note covering activity for
each Audit Committee meeting. Derek Foster would consider
if it would be helpful for the Auditors to meet the Compliance
teams.
DATE OF NEXT MEETING
The Committee noted that the date of the next scheduled
meeting of the Committee was Monday 7 September 2004
and that a special meeting would be convened to consider
the regulatory accounts and receive and review
Management's proposals to deal with audit reports with
‘limited’ or ‘no-assurance’.