Accountability and audit
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 Accounts, the Annual Review (including the Operating and Financial Review) and Summary Financial Statement, interim 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 in the Directors’ Report. The Directors’ statement that it is appropriate to continue to adopt the going concern basis in preparing the accounts is set out in the Directors’ Report.
The Board’s obligation to establish formal and transparent arrangements for considering how it should apply financial reporting and internal control principles, and for maintaining an appropriate relationship with the Company’s external auditors, PricewaterhouseCoopers LLP, is met through the Audit Committee.
The Audit Committee is chaired by Robert Lerwill and comprises five other independent Non-Executive Directors – Kenneth Clarke, Ana Maria Llopis, Rupert Pennant-Rea, Anthony Ruys and Sir Nicholas Scheele. Robert Lerwill has recent and relevant financial experience. The Chief Operating Officer, Finance Director, Head of Audit and Business Risk and a representative of the external auditors regularly attend meetings of the Committee. As a matter of best practice, the Committee meets alone with the external auditors at the end of its meetings.
The 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.
Activities of the Audit Committee in 2006
The Audit Committee met five times during 2006, including immediately before the Company’s full year results were published. It reviewed the Company’s Financial Statements, including the full and half year results.
During the course of the year, the Committee met regularly with management and with the internal and external auditors to review the effectiveness of internal controls and business risk management, and received reports from the Group’s regional audit committees. It reviewed compliance with the Standards of Business Conduct and the procedures in place within the Group for the management of its business records. It gave detailed consideration to business risks arising in the context of the Group’s treasury operations, its information technology systems and the threat to the Group’s business posed by illicit trade, and reviewed the specific controls in place within the Group to address such risks. It has satisfied itself by means of these steps that proper and satisfactory internal control systems remain in place to identify and contain business risks, and that the Company’s business, and that of its subsidiaries, is being conducted in a proper and economically sound manner.
The Audit Committee made recommendations to the Board on the reappointment, for approval by shareholders, of the Company’s external auditors and approved their fees and terms of engagement. It continued to keep under review the consistency of accounting policies applied across the Group. The Committee has established a policy on the appointment of the auditors to perform non-audit services for the Group over and above the external audit and keeps this issue under continual review. It remains confident that the objectivity and independence of the auditors are not in any way impaired by reason of this further work. Moreover, the Committee is satisfied that such work is best handled by them, either because of their knowledge of the Group or because they have been awarded it through a competitive tendering process. A breakdown of non-audit fees charged by the auditors is disclosed in note 3(d).
The Group’s whistleblowing policy and procedures enable 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. Details of this policy are set out in the Company’s Standards of Business Conduct. The policy is supplemented by local procedures in a number of markets and in 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 remains satisfied that the policy and the procedures in place incorporate arrangements for the proportionate and independent investigation of matters raised and for appropriate follow-up action.
The Board is responsible for the overall system of internal control for the Company and its subsidiaries and for reviewing the effectiveness of the system. It carries out such a review at least annually, covering all material controls including financial, operational and compliance controls and risk management systems, and reports to shareholders that it has done so.
The Company maintains a sound system of internal control with a view to safeguarding shareholders’ investment and the Company’s assets. It is designed to manage risks that may impede the achievement of the Company’s business objectives rather than to eliminate these risks and can therefore provide only reasonable, not absolute, assurance against material misstatement or loss. A description of the key risk factors that may affect the Group’s business is provided in the Operating and Financial Review of the Annual Review.
The Group uses audit committees at regional, area and end market levels to support the Audit Committee in monitoring risks and control. This framework provides a continuing process for identifying, evaluating and managing the significant risks faced by the Company and its subsidiaries. The framework is designed to capture and evaluate failings and weaknesses and, in the case of any categorised by the Board as significant, procedures are in place to ensure that appropriate remedial action is taken. It does not apply in respect of the Group’s associate undertakings. The process is regularly reviewed by the Board. The Group’s regional audit committees (which are all chaired by an Executive Director) focus on risks and the control environment within each region and are in turn supported by end market or area audit committees. The regional audit committees’ reviews include consideration of the effectiveness of the process for identifying, evaluating and managing the risks of the business and the assessments of internal control and business risks completed by operating companies. The relevant external and internal auditors regularly attend meetings of all audit committees and have private audiences with members of the audit committees at least once each year. In addition, regional and end market management, along with internal audit, supports the Board in its role of ensuring a sound control environment.
Annually, at the year end, each operating company within the Group is required to review its system of internal control, confirm whether it remains effective and report on any material issues arising in this regard. In addition, each operating company and all functions within the Group’s UK headquarters are required to review and confirm compliance with the Standards of Business Conduct and identify any material instances of non-compliance or conflicts of interest identified. The results of these reviews are reported to the relevant regional audit committee and, where appropriate, to the Board’s Audit Committee to ensure that appropriate remedial action has been, or will be, taken where necessary.
The Turnbull Guidance sets out best practice on internal control for UK listed companies to assist them in assessing the application of the Code’s principles and compliance with the Code’s provisions with regard to internal control. This Guidance was updated by the Financial Reporting Council in October 2005, and the updated Guidance applies to listed companies for financial years beginning on or after 1 January 2006. The Board, with advice from its Audit Committee, has completed its annual review of the effectiveness of the system of internal control for the period since 1 January 2006 in accordance with the updated Turnbull Guidance, and is satisfied that this system is in accordance with that Guidance and that it has been in place throughout the year under review and up to date.
Relations with shareholders
The Board maintains a dialogue with shareholders directed towards ensuring a mutual understanding of objectives. Its primary contact with shareholders is through the Chief Executive and Finance Director, but the Chairman and Chief Operating Officer also maintain contact with major shareholders in order to understand their issues and concerns. Where appropriate, major institutional shareholders are consulted on significant changes to the structure of the Directors’ remuneration. For example, in 2006, the Remuneration Committee’s proposals to introduce a new long term incentive plan were the subject of detailed consultation with a number of institutional investors.
At least twice a year, the Head of Investor Relations presents a report to the Board on the issues considered at meetings between the Company and institutional shareholders. In addition, the Board receives regular reports on developments concerning the holdings of the Company’s main institutional shareholders.
The Annual General Meeting is the principal opportunity for the Board to meet a wide range of investors and for the Chairman to explain the Company’s progress and receive questions from its owners, the shareholders. At the Annual General Meeting on 26 April 2007, the Company will again, in accordance with the Myners Report and best practice, provide for the vote on each resolution to be by poll, using its Registrar’s electronic voting system, rather than by show of hands. This provides for greater transparency and allows the votes of all shareholders to be counted, including those cast by proxy. The voting results are announced on the same day through the Regulatory News Service and on the Company’s bat.com website.