BP 2011 Annual Report Download - page 129

BP Annual Report and Form 20-F 2011 127
Corporate governance
Corporate governance
financial reporting and controls and the structure of BP’s finance function.
Individual private sessions with the external and internal auditors were also
provided. During 2012 we will undertake an audit committee induction for
Andrew Shilston.
When the board visited Houston in May, audit committee members
took the opportunity to visit the computing facility and the trading floor
at the Westlake complex. During the May trip, two members of the
committee, including the chairman, also visited the Atlantis offshore
platform in the Gulf of Mexico. In July the committee visited the
company’s data centre in London to review IT service and security matters.
Earlier in the year Mr Nelson accompanied SEEAC members on a visit to
the Whiting refinery where they were briefed on the progress of the major
modernization project. These visits enable the committee to see first-
hand examples of risk management and to address questions directly to
employees on site.
2011 Audit committee activities
Gulf of Mexico
The responsibilities of the board’s monitoring committees in reviewing
the company’s response to the Gulf of Mexico incident have been
carefully delineated. Whilst the Gulf of Mexico committee has considered
the ongoing work of the Gulf Coast Restoration Organization (GCRO)
and litigation matters, and the SEEAC has reviewed the company’s
implementation of the recommendations of the Bly Report, the audit
committee’s focus has been on financial reporting and controls. The
committee has reviewed each quarter the provisions and contingencies
related to the incident and their disclosure. It has also received a report
from the group controller on the status of financial controls in the GCRO.
Financial reporting
The group’s quarterly financial reports, the BP Annual Report and
Form 20-F and the BP Summary Review were reviewed by the committee
before recommending their publication to the board. In undertaking
this review, the committee discussed with management how they had
applied critical accounting policies and judgements to these documents,
including key assumptions regarding provisions for litigation, environmental
remediation and decommissioning. The committee also reviewed the
impairment testing process and the pricing assumptions that were utilized.
In considering the robustness of the valuations the committee also
referred to analysis undertaken by the external auditors. This year, with a
number of assets held for sale, the committee was appropriately engaged
in reviewing their accounting treatments. Further details on impairment
reviews are included in the Financial statements – Note 5. The committee
also reviewed the company’s methodology underpinning its disclosures
relating to oil and gas reserves.
Monitoring business risk
As discussed elsewhere in this annual report, the board periodically
reviews the company’s group risks and allocates monitoring of their
management and/or mitigation to itself or its committees. Within the
audit committee’s area of monitoring in 2011 were liquidity management,
trading risk and corruption risk. During the year, the committee also
undertook functional reviews of information technology and services,
integrated supply and trading, business service centres and the governance
and control of major project investment. Each year the committee also
reviews risk, governance and the control environment relating to TNK-BP.
Reports on the work of the group financial risk committee – the
executive-level committee that provides assurance on the management
of BP’s financial risk – were provided during the year by the chief financial
officer.
Internal control, audit and risk management
The forward agenda for the audit committee contains standing items
on internal control – these include quarterly reports of internal audit
findings, internal control deficiencies in financial reporting, and an annual
assessment of BP’s enterprise level controls. The committee also received
a joint report from the group controller and chief information officer on
access controls and segregation of duties.
An important input into the board’s review of the company’s risk
management and internal control systems is the annual joint meeting
between the audit committee and the SEEAC. This takes place at the
start of each year to review the general auditor’s report on internal
control and risk management systems for the previous year. The general
auditor reviews his team’s findings and management’s actions to
remedy significant issues identified in that work. His report also included
information on the results of audit work undertaken by the safety and
operational risk audit team and reviews by the group’s finance control
team. As noted earlier, this joint meeting also reviews the coming year’s
forward programme of audit work.
External auditors
In 2011 the committee held two scheduled meetings with the external
auditors without management being present. These sessions provided
the opportunity for direct feedback and dialogue between the committee
and the auditors. In addition, the chair of the audit committee met privately
with the external auditors before each audit committee.
Performance of the external auditors is evaluated by the audit
committee each year. This year the committee put particular focus on
assessing audit quality against a set of agreed key performance indicators.
The company has also developed an auditor assessment tool which will
be completed on an annual basis and apply five main performance criteria
– robustness of the audit process, independence and objectivity, quality of
delivery, quality of people and service, and value-added advice.
The committee reviews the composition of the audit team annually
and meets the relevant partners when undertaking business or function
reviews. Additionally, the committee has the opportunity to assess specific
technical capabilities in the audit firm when addressing specialist topics,
such as environmental provisioning and impairment testing.
We maintain auditor independence through limiting non-audit
services to tax and audit-related work that fall within defined categories.
For a list of those categories, the process by which non-audit work is
approved when the audit committee concludes that it is in the interests
of the company to purchase non-audit work from the external auditor
(rather than another supplier), see the section Principal accountants’ fees
and services on page 136. A new lead audit partner is appointed every
five years and other senior audit staff are rotated every seven years. No
partners or senior staff from Ernst & Young who are connected with the
BP audit may transfer to the group.
Non-audit work by Ernst & Young is subject to the audit
committee’s pre-approval policy. Non-audit work undertaken by Ernst
& Young and by other accountancy firms is regularly monitored by the
committee.
Fees paid to the external auditor for the year were $55 million, of
which 20% was for non-audit work (see Financial statements – Note 16).
Non-audit fees increased from $8 million in 2010 to $11 million in 2011 due
to additional work undertaken in providing services related to corporate
finance transactions. This increase resulted from Ernst & Young’s
engagement to carry out financial due diligence in connection with actual
and proposed sales of assets in North America.
The audit committee considers both the fee structure and the audit
engagement terms and monitors progress during the year. In October the
committee reviewed with management the criteria which would trigger
tendering the audit. The criteria considered were independence, quality
of service, audit quality, cost/value for money and regulatory changes.
The committee and management believe that assessed against each
of these criteria there is no case for recommending going to tender this
year. Nonetheless, preparatory work has been undertaken to understand
the potential for other audit firms to participate in a tender should this be
indicated at a future date. The committee has recommended to the board
that the re-appointment of Ernst & Young as the company’s external
auditors be proposed to shareholders at the 2012 AGM.
Internal audit
The committee receives quarterly reports from the general auditor which
enable the committee to monitor the progress of the internal audit against
its planned schedule of audits as well as to track key findings and any
material actions that are overdue or have been rescheduled. In reviewing