RBS 2012 Annual Report Download - page 314

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Report of the Group Audit Committee continued
A report on the activity of the Group Audit Committee in fulfilling its
responsibilities was provided to the Board following each Committee
meeting. The key considerations of the Committee during 2012 are
explained more fully below.
Financial reporting and policy
The Group Audit Committee focused on a number of salient judgments
and reporting issues in the preparation of the 2012 accounts, and
considered:
x the directors’ going concern conclusion, including the Group’s
capital, liquidity and funding position. Further information is set out
on page 347;
x the adequacy of loan impairment provisions in Ulster Bank. The Irish
economy showed some signs of stabilisation but there remained
significant uncertainty. The Committee considered the level of
provision for loan impairment in light of these uncertainties. It
monitored external conditions closely and compared loss experience
with forecasts. Loan impairments in the Corporate and Non-core
divisions were also carefully reviewed. During 2012, the Committee
also revisited the application of IAS 39 to loan impairment rules and
concluded that the Group applies them on a neutral and consistent
basis;
x the Group’s forbearance policies. The Committee considered the
impact of forbearance on provision levels and monitored emerging
trends and reporting capabilities across the Group’s various
portfolios;
x the approach to valuation of the Group’s financial instruments
measured at fair value, including its credit market exposures and
liabilities carried at fair value;
x the adequacy of reserves held to meet the claims in the Group’s
general insurance business. The Committee considered
management’s assessment of the full cost of settling outstanding
general insurance claims including claims estimated to have been
incurred but not yet reported and for claims handling expenses. It is
comfortable that the level of provision is appropriate based on
claims experience and on statistical models;
x valuation of the Group’s defined benefit pension scheme. The
Committee considered the assumptions that had been set in valuing
the fund and the sensitivities on those assumptions;
x carrying value of the Group’s goodwill and other intangible assets;
x the background to and the judgements that had been made by
management in assessing the recoverability of the Group’s deferred
tax assets;
x adequacy of the Group’s provision held for the mis-selling of
payment protection insurance and interest rate hedging products.
The Group has established a provision which represents the
Group’s best estimate of the redress that will be payable by the
Group. The Committee challenged management’s judgements and
is satisfied that the level of provision is appropriate;
x the Group’s provisions made for outstanding litigation and regulatory
investigations and the extent to which reliable estimates could be
made for the purposes of the accounts;
x the Group’s provision for redress and other costs following the
Group’s IT incident in June 2012;
x the impact of the announcement that Santander would not complete
its planned purchase of certain UK branch-based businesses. The
Committee considered whether the assets and liabilities should
continue to be “held for sale” at 31 December 2012 and concluded
that they should no longer be held for sale and that they should be
reclassified to the relevant balance sheet captions in the
consolidated balance sheet; and
x the quality and transparency of disclosures bearing in mind
regulatory developments and expectations. The Committee received
a report on the recommendations of the Financial Stability Board’s
Enhanced Disclosure Task Force and the Group’s plans to meet the
recommendations.
Systems of internal control
Implementation of a clear and effective three lines of defence model was
a priority in 2012. The Committee received regular reports on the
approach to its implementation across the Group. Focus is now on
ensuring the model is fully operational and the Committee will exercise
close oversight of progress during 2013.
Regulatory investigations highlighted deficiencies in the control
environment in certain parts of the Group, most notably within the
Markets and International Banking divisions. Cultural weaknesses were
also identified. On behalf of the Board, the Group Audit Committee
undertook a detailed review of the divisional remediation plans and
sought independent external assurance regarding comprehensiveness
and timeliness of those plans. The Committee will closely oversee
remediation throughout 2013, receiving quarterly reports.
During the period, the Group Audit Committee reviewed progress against
plan for a number of strategic initiatives such as the Finance and Risk
Transformation Programme. It also tracked progress in relation to
mandatory and remedial projects including the Group’s Anti-Money
Laundering Programme and the progress of the Group’s US regulatory
initiatives.
The Committee received reports on the operation of the Group Policy
Framework. At its request, a policy standard was developed on the
management of model risk across the organisation. This standard sets
minimum requirements for ownership, design and use of models in the
Group. The Committee will review operation of this and other policy
standards, and the outputs of assurance activity in early 2013.