The Audit Committee is authorised by the Board to review any activity within the business. It is authorised to seek any information it requires from, and require the attendance at any of its meetings of, any Director or member of management, and all employees are expected to cooperate with any request made by the Committee. The Committee is authorised by the Board to obtain, at the Company’s expense, outside legal or other independent professional advice and secure the attendance of outsiders with relevant experience and expertise if it considers this necessary.

The Chairman of the Committee reports to the subsequent meeting of the Board on the Committee’s work and the Board receives a copy of the minutes of each meeting. The papers considered by the Committee are available to any Director who is not a member, should they wish to receive them.

During 2011, the Committee considered a report prepared by the Company Secretary on the effectiveness of the Committee as assessed during the evaluation of the Board in 2010, including a review of its standard agenda items. Consequent upon this, it agreed that it would consider, on an annual basis, the Group’s pensions arrangements, both in terms of funding and investment strategies, and requested regular reports on the implementation of the programmes established to develop the Group’s revised Operating Model and to implement a single IT operating system throughout the Group.

Financial reporting

The Board is satisfied that it has met its obligation to present a balanced and understandable assessment of the Company’s position and prospects in the Directors’ report and financial statements and in periodic reports, reports to regulators and price-sensitive announcements. A summary of the Directors’ responsibilities for the financial statements and their statement concerning relevant audit information is included at the end of this corporate governance section.

Business model

The business review includes an explanation of the basis on which the Group generates value and preserves it over the long term and its strategy for delivering its objectives.

Going concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the performance and strategy section and the regional review. The financial position of the Group, its cash flows, liquidity position, facilities and borrowing position are described in the financial review. The key group risk factors include an analysis of financial risk and the Group’s approach to financial risk management and notes 21 and 24 in the notes on the accounts provide further detail on the Group’s borrowings and management of financial risks.

The Group has at the date of the report, sufficient existing financing available for its estimated requirements for the next 12 months. This, together with its proven ability to generate cash from trading activities, the performance of the Group’s Global Drive Brands, its leading market positions in a number of countries and its broad geographical spread, as well as numerous contracts with established customers and suppliers across different geographic areas and industries, provides the Directors with the confidence that the Group is well placed to manage its business risks successfully in the context of current financial conditions and the general outlook in the global economy.

After reviewing the Group’s annual budget, plans and financing arrangements, the Directors consider that the Group has adequate resources to continue operating for the foreseeable future and that it is therefore appropriate to continue to adopt the going concern basis in preparing the Annual Report.

External auditors

PricewaterhouseCoopers LLP have been the Company’s auditors since it listed on the London Stock Exchange in September 1998. The Audit Committee considers that the relationship with the auditors is working well and remains satisfied with their effectiveness. Accordingly, it has not considered it necessary to require the firm to tender for the audit work. There are no contractual obligations restricting the Company’s choice of external auditor. The external auditors are required to rotate the audit partners responsible for the Group audit at least every five years and those responsible for the subsidiary audits at least every seven years. The current lead audit partner has been in position for two years.

Auditor independence

The Audit Committee has an established policy aimed at safeguarding and supporting the independence and objectivity of the Group’s external auditors. Following the publication by the Financial Reporting Council of additional guidance in this area in 2010 in its revised Guidance on Audit Committees, the Audit Committee took the opportunity during 2011 to review and update this policy.

The basic principle of the policy is that the Group’s external auditors may be engaged to provide services only in cases where those services do not impair their independence and objectivity, and provided that the total annual fees for non-audit services do not exceed the sum of annual fees for audit and audit-related services. In particular, the external auditor may not be engaged to provide services in circumstances where the provision of such services would:

• create a mutual or conflicting interest between any Group company and the external auditor;
• place the external auditor in the position of auditing its own work;
• result in the external auditor acting as a manager or employee of any Group company; or
• place the external auditor in the position of advocate for any Group company.

Subject to the above, the external auditor is permitted to provide certain tax and other non-audit services. The Committee recognises that using the external auditors to provide such services can often bring significant benefits to the Group as a result of their detailed knowledge of its business. However, a tender process is required for permitted categories of tax and other non-audit services where the anticipated spend is above specified thresholds, unless a waiver from this requirement is agreed by the Group Finance Director and notified to the Audit Committee.

The policy requires the submission to the Audit Committee, typically prior to the year end, of a work plan identifying the total fees for all audit-related services, tax services and other non-audit services which it is anticipated will be undertaken by the external auditor in the following year. Specific itemisation is required for tax services and other non-audit services in excess of the tender thresholds referred to above. Updated work plans must then be submitted to the Audit Committee at the mid-year and year end. In this way, the Audit Committee has full visibility of the Group spend on non-audit services throughout the year, enabling it to discharge its responsibility for keeping such fees under review and ensuring that neither their level nor their nature risk impairing the external auditor’s independence and objectivity. A breakdown of audit, audit-related and non-audit fees paid to PricewaterhouseCoopers in 2011 is provided in note 3(d) in the notes on the accounts and is summarised as follows:

Services provided by PricewaterhouseCoopers firms and associates

In 2011 non-audit fees paid to PricewaterhouseCoopers amounted to 57.6 per cent of the audit and audit-related fees paid to them (2010: 92.9 per cent).

Annual assessment

The Audit Committee assesses annually the qualification, expertise and resources, and independence of the Group’s external auditors and the effectiveness of the audit process. The Committee’s assessment is informed by an external audit satisfaction survey completed by members of senior management, which it reviews in detail. In 2011, it also had the benefit of the outcome of an assessment by the external auditors’ internal review group of the audit team, involving in-depth interviews with the Company’s senior managers. The resulting report was presented to the Committee by a member of the review team, allowing the Committee to ask further questions with regard to the quality of the audit. In addition, the Head of Internal Audit, the Company Secretary and the Committee Chair all meet with the external auditors to discuss the progress of the audit and any significant issues are included on the Audit Committee’s agenda for consideration during the year.

The Audit Committee has completed its assessment of the external auditors for the financial period under review. It has satisfied itself as to their qualification, expertise and resources and remains confident that their objectivity and independence are not in any way impaired by reason of the non-audit services which they provide to the Group. The Committee recognises that certain projects on which they are engaged will necessarily span a number of years and that once appointed they will continue to provide those services for the length of the project. A number of current projects, particularly those relating to the restructuring of the Group’s global IT function and the development of a single IT operating system, fall within this category.

The Committee has recommended to the Board, for approval by shareholders, the reappointment of PricewaterhouseCoopers as the Company’s external auditors. Resolutions will be proposed at the Annual General Meeting on 26 April 2012 to reappoint PricewaterhouseCoopers as the Company’s auditors and to authorise the Directors to agree their remuneration for the 2012 audit.

Political contributions

The Audit Committee is responsible for reviewing donations made for political purposes throughout the Group. No donation was made in 2011 to any political party registered in the UK under the Political Parties, Elections and Referendums Act 2000. Subsidiaries of the Company in Australia and Jamaica made contributions to non-EU political parties in their respective countries of incorporation totalling £209,104 (2010: £114,245).

Standards of Business Conduct

The Audit Committee is responsible for monitoring compliance with the Company’s Standards of Business Conduct, which underpin the Group’s commitment to good corporate behaviour. The Standards of Business Conduct require all staff to act with high standards of business integrity, comply with all applicable laws and regulations and ensure that business standards are never compromised for the sake of results. They were updated with effect from 1 September 2011 in order to ensure that they remain at the forefront of best business practice and to ensure alignment with the provisions of the UK Bribery Act 2010, which came into effect on 1 July 2011, and associated guidance.

Every Group company and every employee worldwide is expected to live up to the Standards of Business Conduct and guidance on them is provided across the Group, including through training and awareness programmes. All Group companies have adopted the Group Standards or local policies embodying them. They are applicable to all employees, including senior management, and to the Board Directors. Senior managers in the Group must report on annual compliance with the Standards with regard to all employees in the company or department for which they are responsible. Information on compliance with the Standards is gathered at a global level and reported to the regional audit and CSR committees and to the Audit Committee. The CSR Committee also reviews any Group reputation-related issues arising from non-compliance with the Standards.

The Standards of Business Conduct are available on www.bat.com.

Confidential reporting procedures

The Standards of Business Conduct also set out the Group’s whistleblowing policy, which enables staff, in confidence, to raise concerns about possible improprieties in financial and other matters and to do so without fear of reprisal, provided that such concerns are not raised in bad faith. The policy is supplemented by local procedures throughout the Group and at the Group’s London headquarters, which provide staff with additional guidance and enable them to report matters in a language with which they are comfortable. The Audit Committee receives quarterly reports on whistleblowing incidents. It remains satisfied that the policy and the procedures in place incorporate arrangements for the proportionate and independent investigation of matters raised and for the appropriate follow-up action.