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Royal Mail - Strictly Confidential
ARC(09)4™
ARCO09/32 - 46
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
AUDIT AND RISK COMMITTEE
Minutes of the meeting held at 100 Victoria Embankment London on
21st October 2009
Members of the Committee Present:
Paul Murray Non Executive Director, Chair of the Committee
Andrew Carr-Locke Non Executive Director
David Currie Non Executive Director - by telephone for ARC 09/32-39
Apologies:
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
Sarah Hall Chief Accountant
Richard Wilson Ernst &Young
Alison Duncan Ernst &Young
Ben Marles Ernst &Young
Andrew Poole Deputy Company Secretary
Matthew Rose Director Group Taxation for item ARC09/40
ARC09/32 MINUTES
(a) The minutes of the meetings of the 6"" May and 13" July
2009 were considered and approved as accurate records of
the meetings;
(b) the Committee noted the minutes of the GLS Group Audit &
Risk Committee dated 13" February 2009, 27" April 2009
and 16' October 2009 and the minutes of the Corporate Risk
Management Committee held on 15" July 2009.
ARC09/33 STATUS REPORT ARC(09)24
(a) I The Committee noted the status of actions from the previous
meetings. In particular:
(b) ARC (09)17(a): the Technology organisation continued its
transformation programme. A core part of this related to
improvements in IT Governance. At previous Audit and Risk
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ARC09/34
ACTION
Doug Evans
ARCO09/35
(c)
(a)
(b)
(c)
(d)
(a)
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Committees, snapshots had been provided to gauge Royal
Mail’s progress against Price Waterhouse Coopers’ view of
accepted good practice in this area. The summary was last
produced in May 2009. It had now been superseded by
internal tracking of the Technology organisation’s progress
against strategic governance goals;
ARC(09)/20(c): a paper from Doug Evans, General Counsel
on the lessons learnt from Project Hurst, and noted further
that the actions already planned by the business would help
to deliver an improvement in controls that would reduce the
opportunity for such events to occur again.
PROJECT Q & REVIEW OF REGULATORY CONTROLS &
ASSURANCE ARC(09)25
The Committee noted a letter from the Project Q Steering
Group to the Chairman of the Audit & Risk Committee
(“ARC”) dated 7 October 2009 together with a review of
Regulatory Controls and Assurance highlighting key areas at
risk of Postal Licence non-compliance;
there was considerable focus on minimising the risk of non-
compliance with the Licence conditions through internal
control mechanisms which RM must be able to evidence
when questioned by Postcomm. The acceptable level of
internal controls could sometimes be a subjective
assessment and a source of disagreement between
Postcomm and RM. To help close the gap and recognising
that internal controls alone - even if fully deployed — could not
eliminate the risk of non-compliance, there would be further
improvements made in compliance training and in the
whistle-blowing policy and procedures where controls may
deliberately be by-passed;
the Committee noted the issues highlighted in the report and
confirmed that it would be appropriate for the Committee to
continue to review regulatory controls and compliance on an
annual basis, and that the management of regulatory risks
was a management responsibility to be undertaken in the
ordinary course of business. The Committee further agreed
that it would be appropriate to keep the Project Q Steering
Group live until such time as the Committee was satisfied
that the matter had been concluded;
a paper would be brought to the next meeting setting out the
procedures and policies relating to regulatory controls and
explaining how compliance with these policies would be
reported.
GROUP COMPLIANCE REPORT ARC(09)26
Luke March introduced the Group Compliance Report
providing an overview of compliance issues in 2008/09 and
the status of current compliance matters;
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ARCO09/36
(b)
(c)
(a)
(b)
(c)
(d)
(e)
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throughout 08/09 and so far this financial year the Group
Compliance team had been focusing on responding to
Postcomm activity in dealing with alleged anti-competitive
behaviour and service quality related investigations,
responding to complaints from external 3" parties, ensuring
regular returns were provided to timescales and responding
to significant RFI activity. Also via meetings with Postcomm
and in hosting visits by them to units, Royal Mail had aimed
to explain to, and influence, Postcomm on contentious
issues. Additionally the Compliance team had been involved
in the deployment of new complaint handling regulations, the
setting up of the new consumer body, deploying training
programmes throughout the organisation and improving
internal compliance controls (including deploying web-based
testing software);
the Committee noted the key activity during 2008/09 and so
far in 2009/10, the issues raised in the report and compliance
focus for the current year and agreed that it would be
appropriate to hold a strategic discussion with the Regulator
on future regulation.
INTERNAL AUDIT & RISK MANAGEMENT QUARTERLY
REPORT & GROUP RISK PROFILE ARC(09)27 & 28
Derek Foster introduced a report summarising the activity of
IA&RM for the period April to August 2009. The Committee
noted that twenty-three IA&RM reports had been issued in
the period, with the two most significant being:-
Overtime & Allowances for OPG's: the cost of overtime and
allowances in 2008/09 was £539m. Management had
expressed concerns in this area and requested IA&RM to
undertake a review of procedures and controls. The
Committee noted a number of actions being taken to address
the weaknesses identified in the report;
Credit Policy: credit turnover in 2008/09 was £3.8bn and bad
debt write-offs was low at circa £6m. The debt management
processes continued to be effective and kept bad debt write
offs to a low level;
Derek Foster referred to the IA&RM forward plan in the
report. He noted that the IA&RM plan for the year had
included more assignments on POL than its scale in the
Group would indicate, and that this was because of
judgement around risk levels. He highlighted the items in the
forward plan that were POL-focussed, and in particular the
Client Reconciliation work, which had been partly triggered by
concerns identified in the 08/09 year-end process;
Group Risk Profile: the Committee noted the current Group
Risk Profile including the analysis and actions being taken to
address the selected corporate risks.
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ARC09/37
ARC09/38
ACTION
All
(a)
(b)
(c)
(a)
(b)
(c)
(d)
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FINES COMPENSATION AND MATERIAL LITIGATION
ARC(09)29
Doug Evans introduced a paper providing an update on
potential fines, quality of service compensation and current
material litigation;
no regulatory accruals had been held at the end of 2008/09.
During the first half of this year an accrual of £2 million had
been made in respect of a provision raised for current
Postcomm investigations and £10 million provision raised for
Project Q resulting in at the half year an accrual of £12
million;
the Committee noted and agreed the amount for accruals for
fines and compensation and provisions held for material
litigation at October 2009.
HALF YEAR INTERIM REPORT ARC(09)30
lan Duncan introduced a paper inviting the Committee to
review the 2009-10 half year Trading Statement and to
approve the Auditors Engagement Letter;
the Committee had agreed that a Trading Statement was
appropriate for the 2008-09 half year at its meeting in
September 2008 and the same format had been used for the
2009-10 half year. The Royal Mail Holdings Board had
delegated authority to a Board Sub-Committee to approve
and publish the Trading Statement for 2009-10 following a
review by the Audit and Risk Committee;
the Trading Statement had been drafted and Ernst & Young
carried out limited audit procedures as reported separately to
the Audit & Risk Committee. The Statement focused on
trading performance i.e. revenue and operating profit (pre-
exceptionals) and was a single document organised around
two sections - an overview section followed by Financial
Highlights. The income and profit performance was
consistent with the flash results presented to the Board on
7th October. The Trading Statement was reviewed and an
update on content of the overview section provided to the
meeting. The Chairman felt the balance was not quite right in
the current draft of the Statement in that by concentrating on
operating profit performance, it failed to clearly convey the
message that the business was financially stressed. Any
further comments from members on the Trading Statement
were to be passed to lan Duncan or Sarah Hall directly, and
the Statement would be reviewed by the Board Sub-
Committee taking all comments into account, together with
the need for the Statement to reflect the position of the
business at the time of publication;
the Committee noted that from November 2009, a 36 month
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(e)
(f)
(9)
(a)
(b)
(c)
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cash forecast would be prepared by Group Finance and
reviewed by the GET each month, with a quarterly review at
the Holdings Board. This would provide a vehicle for
management regularly to monitor the future cash headroom
and covenant position, and allow any required mitigating
actions to be taken with sufficient lead time;
Assumptions for Pension Disclosure: an approximate IAS19
valuation of the pension deficit may be included in the
Trading Statement at £8.0bn (March 2009 £6.8bn). A
consistent approach had been taken with previous half year
valuations. The Committee approved the assumptions and
approach used for the pension deficit quoted in the Trading
Statement;
The Committee further:-
Going Concern: noted and approved the Going Concern
approach and requested an early view of Going Concern for
the year-end;
Engagement letters: approved the engagement letters as set
out and delegated authority to lan Duncan to sign them.
Andrew Carr-Locke noted that E&Y had earlier confirmed that
they understood that the Regulatory Accounts had been
produced on a basis agreed with the Regulator. E&Y
confirmed that it sometimes proved difficult to get
documented confirmation from the Regulator on format or
methodology changes to the audited Regulatory Financial
Information.
E&Y REPORT ON INTERIM REPORT ARC(09)31
Results of P6 Audit: E&Y noted that the Trading Statement
was not compliant with IAS 34 and that E&Y were not
required to perform a review under ISRE 2410. However at
the request of management, E&Y had accelerated certain
elements of the 2009-10 year end audit work. This was
designed to provide some level of comfort to management
and the Audit & Risk Committee on the Statement and was
broadly similar to the procedures E&Y would have performed
on specific balances for a half year review. This work
however did not represent either a half year review or a full
audit. The Committee noted the E&Y findings of the review
as detailed in the report;
2009-10 Audit approach: Alison Duncan outlined the
approach proposed for the year ended 28 March 2010 noting
that the most significant area of audit focus in 2009-10 would
be the ongoing transformation of the business post Project
Rose. During the audit E&Y would also focus on progress
made in areas that required additional audit effort in 2008-09
such as the POL control environment and SAP IT Controls;
E&Y Fees: the audit fee for the UK statutory and regulated
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ARC09/40
ACTION
(d)
(e)
(a)
(b)
(c)
(d)
(e)
(f)
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audit had been agreed at £1,395,000 representing a
reduction of 7.5% on 2008-09 base fees. The fee would
include £60,000 of E&Y time to cover the Fujitsu controls
previously billed as out of scope, together with the additional
time spent on POL;
the GLS audit fees had been separately negotiated by E&Y
and GLS management. These fees had been presented to
and agreed by the GLS Audit & Risk Committee. The fees
approved by GLS were €1,083,000 for 2009-10;
the Committee noted and approved the E&Y Audit fees for
2009-10.
VAT AND TAX ISSUES UPDATE — ARC(09)32
The Committee noted a paper to further update the
Committee on the progress made by the Group as regards
VAT and tax issues following the Internal Audit Review of
early 2008 and update given at the March 2009 meeting. The
paper also included the actions proposed and sought the
Committee’s support for such actions where appropriate;
it had been identified in late 2007/early 2008 that the Royal
Mail Group had a number of systems, procedures and
personnel weaknesses in the VAT accounting and return
process. This had led to a significant financial settlement of
over £30m with HM Revenue & Customs in connection with
the tax years from 2004/5 to 2007/8 as well as assurances
given that a significant review of the key VAT compliance
processes and controls would be undertaken. This VAT
Compliance Improvement Project had been initiated as a
result;
in January 2009 a new Group Taxation Director and Head of
VAT joined and in June 2009 the Group Taxation Director
became a direct report of the Group Finance Director,
reflecting the increased visibility of the Department and
importance of the Group’s tax issues;
the Committee noted the significant improvements and that
progress continued to be made on VAT issues. A wider
proposal on Group Tax resources (including staff) had
recently been submitted to the Group Finance Director for
approval, which included the identification of systems
improvements and necessary staff arrangements, as well as
a formal Strategy and Policy paper;
a range of IT improvements would be executed over time to
provide better functionality and information within accounting
systems for tax reporting purposes within the UK business;
there would be a range of legislative developments that
would continue to affect the tax position of the Group and the
need for ongoing focus on controls, systems and procedures
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lan Duncan
ACTION (g)
lan Duncan
ARCO9/41
(a)
(b)
(c)
ACTION
Alex Smith
ARCO09/42
(a)
(b)
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and that an update on these matters would be provided by
March 2010;
the Committee requested that GLS be asked to provide an
update on tax matters in GLS.
REVENUE PROTECTION UPDATE ARC(09)33
The Committee noted a paper providing an overview of the
programme of work conducted across the Revenue
Protection and Mails Verification (RP&MV) structure within
the Letters Operation. The programme commenced in the
Autumn of 2008, with recommendations endorsed by the
Letters Executive Committee during November 2008. In
January 2009 the strand of activities undertaken by the
programme including project resource was transferred to
John Manson, Head of Cost Efficiency, Revenue Protection
and Traffic;
the 2008 Revenue Protection and Mails Verification structure
comprised circa 200 people employed on Mails Verification
and circa 700 on Revenue Protection including managers,
administration staff and OPG’s. The potential estimated
revenue leakage for 2007/08, before taking into consideration
revenue systems or manual controls, had been estimated at
£366m with controls recovering £109m resulting in a net
estimated £257m revenue leakage. The RP&MV structure
covered circa c£160m of the estimated net leakage;
the Committee noted the progress to date to address the
issues identified. However the Committee was unsure
whether the actions currently being taken were sufficient to
address the issue. Management were asked to provide
assurance that this was being fully and effectively addressed.
2009/10 ACCOUNTING STANDARDS UPDATE ARC(09)34
The Committee received a paper providing a summary of the
new and revised International Financial Reporting Standards
(IFRSs) that become effective for Royal Mail during 2009-10,
and explaining the impact of the standards on the Royal Mail
Holdings plc Group accounts;
the new or revised International Accounting Standards all
have an effective date for adoption of (accounting periods
beginning on or after) 1 January 2009. The effective date for
Royal Mail therefore becomes 30 March 2009, being the first
day of the financial reporting year 2009-10. The adoption of
the new and revised IFRSs would not impact significantly on
the Royal Mail Holdings plc Group accounts. The standards
would result primarily in additional disclosures, apart from the
requirement to capitalise borrowing costs, which would
require a reclassification of interest costs in the income
statement when the costs relate to the construction or
development of a major asset;
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ARC09/43
ACTION
lan Duncan
ARCO09/44
ARC09/45
ARCO09/46
(c)
(a)
(b)
(a)
(b)
(a)
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the Committee noted the new and revised IFRSs and their
impact on the 2009-10 Royal Mail Holdings plc Group
accounts; and the proposed actions relating to the
implementation of these standards in Royal Mail in 2009-10.
POL FINANCIAL SERVICES COMPLIANCE REPORT
ARC(09)35
The Committee noted the POL Compliance report dated
October 2009. The report provided an update on current
compliance risks and issues arising from POL's financial
services activities and to report performance of relevant
performance indicators from audit and mystery shopping
activity;
Donald Brydon said the current level of compliance achieved
by POL was unacceptable and asked what the plan of action
was to address the situation. The Committee agreed that this
compliance activity required urgent attention to raise the level
of compliance in the business. The Committee requested that
a senior member of POL attend the next meeting to explain
the actions being taken, and to assure the Committee of their
adequacy.
DIRECTORS EXPENSES ARC(09)36
The Committee noted schedules (copied to Committee
members only) providing a summarised total of Directors’
expenses and individual directors’ expenses incurred during
2008-2009. A summary was included with the schedule,
highlighting details of individual internal hospitality received;
the Committee noted the Directors Expenses for 2008-09.
ANY OTHER BUSINESS
The Chairman said that he was reviewing the schedule of
business for the Audit & Risk Committee and would look at
the possibility of holding a further meeting of the Committee
in January 2010.
DATE OF NEXT MEETING
To be agreed.
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