RBS 2008 Annual Report Download - page 159

RBS Group Annual Report and Accounts 2008158
Corporate governance continued
2008 saw considerable economic uncertainty and unprecedented
upheaval in financial markets worldwide. These conditions severely
affected the Group and it has recorded significant asset write-downs in
its 2008 financial statements. In these circumstances, particular
attention of the Audit Committee was focused on a number of salient
judgments involved in the preparation of the accounts:
•valuation methodologies and assumptions for financial instruments
carried at fair value including the Group’s credit market exposures;
•impairment losses in the Group’s portfolio of loans and advances;
and
•impairment of goodwill and other intangibles.
In its consideration of each of these issues, the aims of the Audit
Committee have been to:
•understand and challenge the valuation and other accounting
judgments made by management;
•review the conclusions of the external auditors and, where
applicable, other experts and to understand how they came to their
conclusions; and
•satisfy itself that the disclosures in the financial statements about
these estimates and valuations are transparent and appropriate.
An issue of key interest to the Audit Committee, given the current
economic environment, was management's going concern assessment.
In particular, the Committee's attention was directed to understanding
the way in which management had satisfied itself that the Group has
access to sufficient funding and capital over the next 12 months. The
Committee reviewed and challenged the assumptions underlying
management's analysis and discussed with the external auditors its
review of management's analysis and conclusions.
As far as it can determine, the Committee received all the information
and material it required to allow it to meet its obligations in respect of
the 2008 financial statements.
The Committee reviews the work of the Group’s risk management and
internal audit functions regularly. Four additional sessions of the
Committee were held in 2008 that focused solely on risk issues; these
sessions included contributions from independent advisors.
The Audit Committee undertakes an annual evaluation to assess the
independence and objectivity of the external auditors and the
effectiveness of the audit process, taking into consideration relevant
professional and regulatory requirements. The outcomes of this
evaluation are considered by the Board together with the Audit
Committee’s recommendation on the re-appointment of the external
auditor. In 2009 and subsequently, the annual evaluation will be carried
out immediately following completion of the annual accounts and audit.
The Audit Committee is responsible for making recommendations to the
Board, for it to submit the Audit Committee’s recommendations to
shareholders for their approval at the Annual General Meeting in relation
to the appointment, reappointment and removal of the external auditors.
The Board has endorsed the Audit Committee’s recommendation that
shareholders be requested to approve the reappointment of Deloitte
LLP as external auditors at the Annual General Meeting in April 2009.
The Audit Committee also fixes the remuneration of the external auditors
as authorised by shareholders at the Annual General Meeting.
The Audit Committee approves the terms of engagement of the external
auditors.
It is intended that there will be an external review of the effectiveness of
Group Internal Audit every three to five years, in line with best practice,
with internal reviews continuing in the intervening years. In 2007, KPMG
conducted a review of the effectiveness of Group Internal Audit and
concluded that the function operated effectively and the Board agreed
with these findings. In 2008, the Audit Committee conducted an internal
review of Group Internal Audit that involved participants throughout the
Group as well as the external auditors. The Audit Committee concluded
that the function operated effectively and the Board agreed with the
Audit Committee’s findings.
It is also intended that there will be an external review of the
effectiveness of the Audit Committee every three to five years, with
internal reviews by the Board continuing in the intervening years.
PricewaterhouseCoopers conducted an external review of the
effectiveness of the Audit Committee in 2005. An internal review of the
Audit Committee’s performance was undertaken in 2008 and a separate
report on the outcome was considered and discussed by the Board.
Since 2005, divisional audit committees have been responsible for
reviewing each division’s business. During 2008, the divisional audit
committee structure was revised to take account of the acquisition of
ABN AMRO, the significant international growth of the Group’s
businesses and best practice requirements. The divisional audit
committees report to the Audit Committee and the Audit Committee is
satisfied that these committees continue to discharge their terms of
reference.
Archie Hunter
Chairman of the Audit Committee
25 February 2009