BP 2012 Annual Report Download - page 123

Corporate governance
Corporate governance
BP Annual Report and Form 20-F 2012
121
Accountants of Scotland and a director of the Financial Skills Partnership.
The board is satisfied that Brendan Nelson is the audit committee
member with recent and relevant financial experience as outlined in the
UK Corporate Governance Code. It considers that the committee as a
whole has an appropriate and experienced blend of commercial, financial
and audit expertise to assess the issues it is required to address. The
board also determined that the audit committee meets the independence
criteria provisions of Rule 10A-3 of the US Securities Exchange Act of
1934 and that Brendan Nelson may be regarded as an audit committee
financial expert as defined in Item 16A of Form 20-F.
Committee role and structure
The role and responsibilities of the audit committee are set out in the
appendix of BP’s board governance principles which is available at
bp.com/governance. This includes responsibility for reviewing the
effectiveness of the group’s financial reporting, internal control policies and
procedures for the identification, assessment and reporting of risk. The
committee also monitors the integrity of the group’s disclosure documents,
keeps the relationship with the external auditors under review (including the
policy on non-audit services) and monitors the effectiveness of the internal
audit function.
The committee met 11 times in 2012 including three joint meetings with the
SEEAC. The chairs and secretaries of the audit and SEEA committees have
worked together to ensure their respective agendas neither duplicate nor
omit coverage of key risk areas.
Each audit committee meeting is attended by the group chief financial
officer, the group controller, the general auditor (head of internal audit) and
the chief accounting officer. The lead partner of our external auditors is also
present.
The committee also holds separate private sessions during the year with the
external auditor, the general auditor and the group ethics and compliance
officer. These sessions are held without the presence of executive
management.
Committee processes
Information and advice
Information and reports for the committee are received from functional and
business managers and from external sources. Like our board and other
committees, the audit committee can access independent advice and
counsel when needed on an unrestricted basis. During 2012, external
specialist legal advice in relation to corporate reporting was provided to the
committee by Sullivan & Cromwell LLP. As part of its annual evaluation, the
committee reviews the adequacy of reliable and timely information from
management that enables it to fulfil its responsibilities.
Training and induction
The committee received technical updates from the chief accounting officer
on developments in financial reporting and accounting policy. In addition, the
external auditors provided their survey on global trends in fraud and a briefing
on regulatory developments impacting audit committees as a learning
session.
Induction programmes are provided for new members and are tailored
around their roles on the audit committee. During 2012 Andrew Shilston
attended induction sessions on tax, trading operations, accounting, financial
reporting and controls and the structure of BP’s finance function. Individual
private sessions with the external and internal auditors were also provided.
2012 committee activities
Gulf of Mexico
Whilst the Gulf of Mexico committee has considered the 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 accident and their disclosure.
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. 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 held a deep review of the impairment
testing process, methodology and the pricing assumptions that were utilized.
In considering the robustness of the valuations, the committee referred to
analysis undertaken by the external auditors. The committee also reviewed
the company’s methodology underpinning its disclosures relating to oil and
gas reserves.
Monitoring business risk
The board periodically reviews the company’s group risks and allocates
monitoring of their management and/or mitigation to itself or its committees.
The group risks allocated to the audit committee for 2012 included risks
associated with treasury and trading, digital security and compliance with
business regulations. For 2013, the board has agreed that the committee will
maintain monitoring of these same group risks.
During the year, the committee undertook functional reviews of information
technology and services, integrated supply and trading and the governance
of major project investment. It examined the recommendations from an
external review of controls in the North American gas and power trading
business and tracked the progress of their close-out over the year. The
committee also reviewed the lessons learned from the company’s
investment programme to upgrade the Whiting refinery.
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 holds an annual joint meeting at the start of each year with
the SEEAC to review the company’s risk management and internal control
systems. At this meeting, the committees review the general auditor’s
report on internal control and risk management systems for the previous
year, with the general auditor outlining his team’s findings and
management’s actions to remedy significant issues identified, including the
outcome of work undertaken by the safety and operational risk audit team
and the group’s financial control team.
A further joint meeting between the two committees was held at the end of
the year to review the refreshed description of the company’s system of
internal control which was subsequently communicated to employees in
early 2013.
External auditors
In 2012 the audit committee held two private meetings with the external
auditors without management being present. In addition, the chair of the
audit committee met privately with the external auditors before each audit
committee.
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.
During the year the committee approved the appointment of a new lead
partner from Ernst & Young to replace the current partner who reaches five
years’ service in early 2013.
Auditor objectivity and independence is safeguarded 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 on Principal
accountants’ fees and services (page 149). 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.
The audit committee annually reviews the audit fee structure and terms of
engagement. Fees paid to the external auditor for the year were $54 million,
of which 13% was for non-assurance work (see Financial statements – Note
16). Non-audit or non-audit-related assurance fees were largely unchanged
from 2011 levels, at $7 million. Non-audit or non-audit-related assurance