BP 2015 Annual Report Download - page 74

Accounting judgements and estimates (continued)
Key issues/judgements in financial reporting Audit committee review
Gulf of Mexico oil spill Judgement was applied during the year around the significant
uncertainties over provisions and contingencies relating to the
incident.
The committee regularly discussed BP’s provisioning for and
the disclosure of contingent liabilities relating to the Gulf of
Mexico oil spill with management and the external auditors,
including as part of the review of BP’s stock exchange
announcement at each quarter end. The committee examined
the provisions booked as a result of the agreements in
principle signed in July. In instances where a reliable estimate
could not be made of the provision required, the committee
considered management’s conclusions and monitored
developments while considering the impact on the financial
statements and other disclosures.
Pensions and other
post-retirement
benefits
Accounting for pensions and other post-retirement benefits
involves judgement about uncertain events, including
discount rates, inflation and life expectancy.
The committee examined the assumptions used by
management as part of its annual reporting process.
Taxation Computation of the group’s tax expense and liability,
provisioning for potential tax liabilities and the level of deferred
tax asset recognition in relation to accumulated tax losses are
underpinned by management judgement.
The committee reviewed the judgements exercised on tax
provisioning as part of its annual review of key provisions.
Risk reviews
The group risks allocated to the audit committee for monitoring in 2015
included those associated with trading activities, compliance with applicable
laws and regulations and security threats against BP’s digital infrastructure.
The committee held in-depth reviews of these group risks over the year. It
also examined the group’s information technology risks, its governance of
the tax function and the use of financial models including their associated
controls framework. The committee further considered the financial group
(or principal) risks identified for 2016 and the group’s process to assess,
mitigate and monitor them. BP’s principal risks are listed on page 53. For
2016, the board has agreed that the committee will monitor cybersecurity,
trading activities and compliance with applicable laws and regulations.
Other reviews
During the year the committee reviewed succession and development of
the group’s finance function, including an overview of the demographics
and key capability challenges for finance staff. The group’s Downstream
segment was reviewed to examine the financial performance and strategic
priorities of the individual fuels, lubricants and petrochemicals businesses,
including key areas of financial risk management.
Internal control and risk management
The committee reviewed the group’s system of internal control and risk
management throughout the year, holding a joint meeting with the SEEAC
to discuss key audit findings and management’s actions. The committee
reviewed the scope, activity and effectiveness of the group audit function
and met privately with the head of group audit and his leadership team
during the year.
During the year the committee examined the requirements of the revised
UK Corporate Governance Code in relation to the assessment and
reporting of longer-term viability, risk management and internal control. The
committee looked at key elements of BP’s risk management process,
including the reporting and categorisation of risk across the group, and
jointly with the SEEAC examined what might constitute a significant failing
or weakness in the system of internal control. The two committees also
reviewed the modelling undertaken to stress test different financial and
operational events and considered the appropriate period for which the
company was viable.
See our statements on risk management and internal control on page 93
and on longer-term viability on page 94.
The committee received quarterly reports on the findings of group audit,
on significant allegations and investigations and on key ethics and
compliance issues; a joint meeting was held with the SEEAC to discuss
the annual report certifying compliance with the BP code of conduct. The
two committees also met to discuss future programmes for the group
audit and ethics and compliance functions. The committee held a private
meeting with the group ethics and compliance officer during the year.
BP Annual Report and Form 20-F 201570
External audit
The external auditors set out their audit strategy, identifying key risks to be
considered during the year – including longer-term oil and gas prices, the
group’s cost outlook, the capital framework in a lower oil price
environment, discount rate assumptions, considerations around
impairments, estimation of oil and gas reserves and resources,
decommissioning, valuation of exploration assets, accounting for BP’s
investment in the Rosneft subsidiary Taas, deferred taxation, estimation of
the group’s pension obligations, the recovery of receivables and
management of change.
The committee received updates during the year on the audit process,
including how the auditors had independently considered the group’s
assumptions on these issues.
The audit committee reviews the fee structure, resourcing and terms of
engagement for the external auditor annually. Fees paid to the external
auditor for the year were $51 million (2014 $53 million), of which 6% was
for non-assurance work (see Financial statements – Note 35). Non-audit or
non-audit related assurance fees were $3 million (2014 $5 million). The
$2-million reduction in non-audit fees relates primarily to decreases in tax
advisory and other assurance services. Non-audit or non-audit related
assurance services consisted of tax compliance services, tax advisory
services, other assurance services and services relating to corporate
finance transactions. The audit committee is satisfied that this level of fee
is appropriate in respect of the audit services provided and that an effective
audit can be conducted for this fee.
Audit/non-audit service three-year comparison ($m)
2013 2014 2015
0
10
20
30
40
50
Audit and audit-related assurance services Non-audit and other assurance services
Services relating to BP pension plans
1 1 1
47 47 47
55 3
The effectiveness of the audit process was evaluated through two surveys
– one completed by committee members only and the second by those BP
personnel impacted by the audit. The surveys used a set of criteria to
measure the auditors’ performance against the quality commitment set
out in their annual audit plan. This included the robustness of the audit
process, independence and objectivity, quality of delivery, quality of people
and service and value added advice.