UK: Catch The 2009 Current: The Audit Committee Knowledge

Last Updated: 26 March 2009
Article by Deloitte Audit Group

Most Read Contributor in UK, August 2017

INTRODUCTION

The audit committee has become in recent years one of the main pillars of the corporate governance system in British public companies. With this increased importance has come increased responsibilities and the need for guidance on the duties of an audit committee. Last year, Deloitte published "Catch the current – the audit committee knowledge" with a view to meeting that need. It was designed to be a "one-stop shop" for audit committee members and received excellent feedback from readers.

At that time there were some signs of the challenging environment ahead but the current intensity of those challenges was not expected. The past twelve months have seen a number of significant events, both planned and unplanned, affecting audit committees. It was therefore timely and essential to produce "Catch the 2009 current". The new developments covered in this edition are:

  • implementation of the European Statutory Audit and Accounting Directives;
  • revision of the Combined Code and the Smith Guidance on audit committees;
  • the Financial Reporting Council's confirmation of the continued validity of the 'true and fair' view;
  • publication of the Financial Reporting Council's Audit Quality Framework;
  • the introduction of liability limitation agreements;
  • the Financial Services Authority's sanctions for failure to identify and disclose price-sensitive information;
  • the Financial Reporting Council's Update for directors of listed companies on going concern and liquidity risk;
  • publication of key questions for audit committees to consider in light of the challenges arising from current economic conditions; and
  • the results of Deloitte's latest surveys on inter alia board structure, narrative reporting and interim management statements.

Appendix 5 provides an 'At a glance' summary of what is new in this edition.

The guidance in the document reflects the current requirements under the 2008 Combined Code and the revised Smith Guidance for audit committees. References to the Companies Act are to the 2006 Companies Act. Where future changes have been formally announced these are referred to in the appropriate sections. Regular updates on developments will be available from the corporate governance section of www.deloitte.com/uk and will be covered at events in the Deloitte Academy.

The key to the success of any audit committee remains constant, namely to ask the right questions. This publication includes questions for audit committee members to ask management to provide that an appropriate level of challenge is given. 2009 will be an interesting year.

1. SETTING THE SCENE

1.1 The Origins Of The Audit Committee

Audit committees are now a common component of governance – companies have them, government departments have them, councils have them and schools may have one. The composition and function of these committees varies from organisation to organisation, but the theory remains broadly the same. The audit committee is created with the aim of enhancing confidence in the integrity of an organisation's processes and procedures relating to internal control and corporate reporting.

Up until June 2008, for UK companies listed on the main market of the London Stock Exchange, audit committee requirements featured only in the Combined Code on Corporate Governance. Code provision C.3.1 states the following:

The board should establish an audit committee of at least three, or in the case of smaller companies two independent non-executive directors.

This did not impose a mandatory requirement for companies to have an audit committee as application of the Code is on a "comply or explain" basis, but having an audit committee was the accepted "norm" among listed companies (all but one FTSE 350 companies have established audit committees).

UK implementation of the European Union's Statutory Audit Directive, in the UKLA's Listing Rules, imposes a requirement, for all companies whose securities are traded on a regulated market in the EU to have an audit committee (or equivalent body). In this regard, the "comply or explain" basis referred to above is replaced by comply or face FSA sanctions. This new requirement is discussed in further detail in section 1.4 below.

The Combined Code is supported by the Smith Guidance on audit committees. This guidance was issued by the Financial Reporting Council in July 2003 and revised in October 2008. It is designed to assist company boards in making suitable arrangements for their audit committees and to assist directors serving on audit committees in carrying out their role. Where relevant this publication refers to the Smith guidance, as it represents the most definitive guidance for audit committees in the UK.

Throughout this document reference is made to "company" and "board of directors". The principles of governance apply equally to non-corporates including government departments, public agencies, charities and other public interest entities. In particular, they also apply to AIM companies which, whilst not caught by the rules are encouraged to comply voluntarily with the provisions of the Combined Code and the principles of the Quoted Companies Alliance publication "Corporate Governance Guidance for AIM Companies".

1.2 Why Have An Audit Committee?

The true benefits of having an audit committee will depend on the effectiveness of the committee in question. An audit committee can assist the board in discharging its duties by:

  • strengthening the quality of financial reporting;
  • creating a control environment which will reduce the opportunity for fraud;
  • strengthening the independence of internal auditors from executive management;
  • providing a forum for continuous review of internal control including risk assessment;
  • improving communication among the board, management and the internal and external auditors, resulting in a more effective and efficient audit process; and
  • increasing confidence in the credibility and objectivity of financial statements and of the board.

An effective audit committee will display the following characteristics:

Informed

Diligent

Probing

Independent of management

Competent

Sound judgement

Good communication

Healthy level of scepticism

A vital component in the success of the audit committee is the attitude of management. Audit committees require the support of management to provide the necessary information and resources to operate effectively and to meet their objectives in the key areas of financial reporting, internal control and the quality of the audit function. Indeed, it is essential that boards, management, internal auditors, external auditors and audit committees work together to ensure audit committees are effective and, as a result, make a real contribution to good corporate governance.

1.3 The UK Regulatory Environment

The fourth study by the City of London Corporation published in September 2008 continued to rate London first, ahead of New York, Singapore and Hong Kong as a global financial centre. The Corporation's Global Financial Centres Index evaluates the competitiveness of 59 financial centres worldwide. The results of the study show that London outperformed New York in all five areas of competitiveness: people, business environment, market access, infrastructure and general competitiveness. However, the three month rolling average of all assessments for London and New York for the past year shows that London's recovery from the credit crunch impact in August 2007 has been far slower than New York's. The report states that the recovery in confidence in London's competitiveness has been slowed by the collapse and subsequent handling of Northern Rock. It is also likely that London's perceived competitiveness over the past six months has been adversely affected by the proposed tax treatment of non-domiciled residents of the UK.

The UK regulatory system focuses on the empowerment of shareholders. Effective engagement of shareholders in the UK is facilitated by the Combined Code on Corporate Governance. The success of the Code relies on its "comply or explain" approach and shareholders with genuine legal powers to hold directors to account. Companies have the flexibility to apply the principles of the Code in a way that suits the size and complexity of their organisation. Where a decision is taken not to comply with a Code requirement a company is able to explain why it believes the approach adopted is more suitable. It is then up to investors to decide whether the explanation is reasonable and justifiable and to take action accordingly.

Enhancing shareholder engagement was a key focus of the Companies Act 2006 which received Royal Assent in November 2006, after almost nine years of consultation and debate. The new Act is a significant overhaul of UK company law. The Government's objective in undertaking this exercise was to make company law more modern and accessible and to make UK companies more competitive. The development of the Act was founded on four key themes which were:

  • to enhance shareholder engagement and a long-term investment culture;
  • to ensure better regulation and a "Think Small First" approach;
  • to make it easier to set up and run a company; and
  • to provide flexibility for the future.

The 2006 Act provides a statutory statement of directors' duties for the first time, codifying much of what has built up in common law and equitable principles over the years. Although there are seven general directors' duties the most focus has been centered on the duty to promote the success of the company. This section of the Act provides that directors must in fulfilling this duty have regard to (amongst other matters):

  • the likely consequences of any decision in the long term;
  • the interests of the company's employees;
  • the need to foster the company's business relationships with suppliers, customers and others;
  • the impact of the company's operations on the community and the environment;
  • the desirability of the company maintaining a reputation for high standards of business conduct; and
  • the need to act fairly as between members of the company.

Shareholders are given a new statutory right to bring a claim, on behalf of the company, for negligence, default, breach of duty or breach of trust. This is wider than the current position in that claims can be brought for negligence and because there is no need to show that the person against whom the claim is made has benefited from his or her actions.

The Government has been careful to build in a number of safeguards to the new system to prevent spurious and unmeritorious claims. The effects of these new provisions in practice will emerge in due course. It is hoped that the US experience of class actions will not be repeated in the UK.

1.4 The European Dimension

In June 2008, the Financial Services Authority (FSA) implemented the European Union's Statutory Audit Directive. Under Article 41.1 of the Directive, Member States must require various listed entities to have an audit committee (or equivalent body).

For periods commencing on or after 29 June 2008, the FSA rules have been amended to include a new Disclosure and Transparency Rule (DTR 7.1) on companies whose securities are traded on a regulated market in the EU to:

  1. have in place a body which:

    1. fulfils the functions set out below; and
    2. has within its composition at least one independent member and one person with competence in accounting and/or auditing (who may or may not be the same individual); and

  2. issue a statement which identifies the body and describes how that body is composed.

The minimum functions of the audit committee (or equivalent body) are to:

  1. monitor the financial reporting process;
  2. monitor the effectiveness of the issuer's internal control, internal audit (where applicable) and risk management systems;
  3. monitor the statutory audit of the annual and consolidated accounts; and
  4. review and monitor the independence of the statutory auditor and in particular the provision of additional services to the issuer.

The rules state that an issuer must base any proposal to appoint a statutory auditor on a recommendation made by the audit committee.

The FSA has concluded that compliance with provisions A.1.2, C.3.1, C.3.2 and C.3.3 of the Combined Code will result in compliance with the new DTR 7.1. This means that entities already complying in full with the Code requirements will not need to do anything further to comply with DTR 7.1.

DTR 7.2 requires all UK registered issuers to include a corporate governance statement in their directors' report referring to:

  • the corporate governance code that the company has decided to apply or is subject to under the law of the Member State in which it is incorporated;
  • an explanation as to whether, and to what extent, the company complies with that code. To the extent that a company departs from the code, the company should explain from which parts of the code it departs and the reasons for doing so;
  • a description of the main features of the company's internal control and risk management systems in relation to the financial reporting process;
  • major shareholdings and related matters already required by the Takeover Directive; and
  • a description of the composition and operation of the company's administrative, management and supervisory bodies and their committees.

DTR 7.2 makes it clear where there is overlap with the existing Combined Code provisions and states that companies complying in full with the relevant provisions of the Code will not need to do anything further to satisfy the requirements of DTR 7.2.

A company may elect that, instead of including its corporate governance statement in its directors' report, the information be set out:

  • in a separate report published together with and in the same manner as its annual report; or
  • by means of a reference in its directors' report to where such document is publicly available on the company's website.

2. ESTABLISHMENT OF AN AUDIT COMMITTEE

2.1 Terms Of Reference

The terms of reference of an audit committee should record clearly and concisely the authority, responsibilities, specific duties and resources available to the audit committee. Clearly, the specific duties will vary from company to company.

Combined Code Provisions C.3.2 And C.3.3

The main role and responsibilities of the audit committee should be set out in written terms of reference and should include terms:

  • to monitor the integrity of the financial statements of the company, and any formal announcements relating to the company's financial performance, reviewing significant financial reporting judgements contained in them;
  • to review the company's internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors, or by the board itself, to review the company's internal control and risk management systems;
  • to monitor and review the effectiveness of the company's internal audit function;
  • to make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor;
  • to review and monitor the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; and
  • to develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit service by the external audit firm; and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken.

The terms of reference of the audit committee, including its role and the authority delegated to it by the board, should be made available. A separate section of the annual report should describe the work of the committee in discharging those responsibilities.

The Smith Guidance comments that "the terms of reference should be tailored to the particular circumstances of the company" (section 3.2). As explained in Section 1.4 DTR 7.1 introduces new rules regarding the establishment of an audit committee body (or equivalent body). The FSA is clear that compliance with provisions C.3.2 and C.3.3 of the Combined Code will result in compliance with the requirements of DTR 7.1.3.

Where the provision above says that the terms of reference "should be made available" this may be satisfied by making them available on request or by including the information on a website that is maintained by or on behalf of the company. It would be unusual to include them in the annual report itself. The external and internal auditors should also be given copies of the terms of reference.

The Deloitte publication "Write from the start" surveyed narrative reporting in the annual reports of 100 listed companies. The study found that 58% of companies included in the survey referred the reader to the company website for the terms of reference of the audit committee. Only 4% included this information with the annual report and none of the companies that did so came from the top 350 companies. More surprisingly, over a quarter of companies in the sample (29%) gave no information on the terms of the reference of the audit committee.

The terms of reference should be reviewed periodically to assess their continuing relevance in light of the requirements and priorities of the board. Any changes should be approved by the board. The audit committee should use the responsibilities outlined in the terms of reference to develop a responsibility checklist and meeting agendas that are designed to ensure that the provisions of the terms of reference are constantly in the forefront of audit committee members' minds and are executed in an appropriate and timely manner. (See section 4 below for further discussion of meeting agendas.)

Illustration 1 provides specimen terms of reference. These terms of reference are provided for illustrative purposes only and in practice the terms of reference will need to be carefully tailored to reflect a company's particular circumstances.

Illustration 1

Specimen Terms Of Reference For An Audit Committee

Constitution

  1. The board hereby resolves to establish a committee of the board to be known as the Audit [and Risk] Committee.

Membership

  1. The committee shall be appointed by the board. All members of the committee shall be independent non-executive directors of the company. The committee shall consist of not less than three members. A quorum shall be two members.
  2. The chairman of the committee shall be appointed by the board from amongst the independent non-executive directors.

Attendance At Meetings

  1. The finance director, head of internal audit and a representative of the external auditors shall attend meetings at the invitation of the committee.
  2. The chairman of the board, the CEO and other board members shall attend if invited by the committee.
  3. There should be at least one meeting a year, or part thereof, where the external and internal auditors attend without management present.
  4. The company secretary shall be secretary of the committee.

Frequency Of Meetings

  1. Meetings shall be held not less than [three] times a year, and where appropriate should coincide with key dates in the company's financial reporting cycle.
  2. External auditors or internal auditors may request a meeting if they consider that one is necessary.

Authority

  1. The committee is authorised by the board to:

    1. investigate any activity within its terms of reference;
    2. seek any information that it requires from any employee of the company and all employees are directed to co-operate with any request made by the committee; and
    3. obtain outside legal or independent professional advice and such advisors may attend meetings as necessary.

Responsibilities

  1. The responsibilities of the committee shall be:

    1. to consider the appointment of the external auditor and assess independence of the external auditor, ensuring that key audit personnel are rotated at appropriate intervals;
    2. to recommend the audit fee to the board and pre-approve any fees in respect of non-audit services provided by the external auditor and to ensure that the provision of non-audit services does not impair the external auditors' independence or objectivity;
    3. to discuss with the external auditor, before the audit commences, the nature and scope of the audit and to review the auditors' quality control procedures and steps taken by the auditor to respond to changes in regulatory and other requirements;
    4. to oversee the process for selecting the external auditor and make appropriate recommendations through the board to the shareholders to consider at the AGM;
    5. to consider the need to include the risk of the possible withdrawal of the external auditor from the market in their risk evaluation and planning;
    6. to review the external auditor's management letter and management's response;
    7. to review the internal audit programme and ensure that the internal audit function is adequately resourced and has appropriate standing within the company;
    8. to consider management's response to any major external or internal audit recommendations;
    9. to approve the appointment or dismissal of the head of internal audit;
    10. to review the company's procedures for handling allegations from whistleblowers;
    11. to review management's and the internal auditor's reports on the effectiveness of systems for internal financial control, financial reporting and risk management; and
    12. to review, and challenge where necessary, the actions and judgements of management, in relation to the interim management statements, half-yearly reports and annual financial statements before submission to the board, paying particular attention to:

      • critical accounting policies and practices, and any changes in them;
      • decisions requiring a major element of judgement;
      • the extent to which the financial statements are affected by any unusual transactions in the year and how they are disclosed;
      • the clarity of disclosures;
      • significant adjustments resulting from the audit;
      • the going concern assumption;
      • compliance with accounting standards;
      • compliance with stock exchange and other legal requirements;
      • reviewing the company's statement on internal control systems prior to endorsement by the board and to review the policies and processes for identifying and assessing business risks and the management of those risks by the company; and
      • to consider other topics, as defined by the board.

Reporting Procedures

  1. The secretary shall circulate the minutes of meetings of the committee to all members of the board, and the chairman of the committee or, as a minimum, another member of the committee, shall attend the board meeting at which the annual financial statements are approved.
  2. The committee members shall conduct an annual review of their work and these terms of reference and make recommendations to the board.
  3. The committee's duties and activities during the year shall be disclosed in the annual financial statements.
  4. The chairman shall attend the AGM and shall answer questions, through the chairman of the board, on the audit committee's activities and their responsibilities.

2.2 Membership Of An Audit Committee

Code provision C.3.1 states the following:

The board should establish an audit committee of at least three, or in the case of smaller companies two independent non-executive directors. In smaller companies the company chairman may be a member of, but not chair, the committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as chairman. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience.

Section 2.3 below covers issues of independence and section 2.5 below covers the determination of the audit committee financial expert.

The Smith Guidance repeats the Code provision above and provides the following further guidance (sections 2.4 and 2.5 of the Smith Guidance):

Appointments to the audit committee should be made by the board on the recommendation of the nomination committee (where there is one), in consultation with the audit committee chairman.

Appointments should be for a period of up to three years, extendable by no more than two additional three-year periods, so long as members continue to be independent.

The Deloitte 2008 survey of board structure and non-executive directors' fees used information available in the annual reports and accounts of the companies in the FTSE 350 as of 30 June 2008, excluding 43 investment trusts. This survey provides the following data on audit committee membership.

Number of committee members

 

Q1

Median

Q3

Average

FTSE 100

3

4

5

4

FTSE 250

3

3

4

4

[Q1 is the lower quartile, the median is the mid point of the sample and Q3 is the upper quartile]

If an audit committee is to be effective, its members must have a strong understanding of the company's business processes and procedures and its industry sector. At the same time, the members of the audit committee should have a broad business background and bring with them a variety of skills. Each member of the audit committee needs to:

  • understand the social, political, ethical, economic and legal framework within which the company operates;
  • be aware of the company's organisational structure and policies;
  • understand the operations of the company, its planning, control and production methods;
  • have a sufficient understanding of accounting and financial matters to understand the issues before the audit committee; and
  • be objective in spirit and judgement, willing to ask the right questions, obtain the necessary facts and act accordingly.

In this context, audit committee members need to have access to the necessary resources to enable them to discharge their responsibilities effectively. The Smith Guidance makes the following comments on resources (sections 2.11 to 2.14 of the Smith Guidance).

The audit committee should be provided with sufficient resources to undertake its duties.

The audit committee should have access to the services of the company secretariat on all audit committee matters including: assisting the chairman in planning the audit committee's work, drawing up meeting agendas, maintenance of minutes, drafting of material about its activities for the annual report, collection and distribution of information and provision of any necessary practical support.

The company secretary should ensure that the audit committee receives information and papers in a timely manner to enable full and proper consideration to be given to the issues.

The board should make funds available to the audit committee to enable it to take independent legal, accounting or other advice when the audit committee reasonably believes it necessary to do so.

Further to its recent review of the Combined Code in 2007, the Financial Reporting Council has amended the Code to allow the chairman of a smaller listed company to be a member of the audit committee where he or she was considered independent on appointment. As shown above, Code provision C.3.1 has been amended to allow the chairman of listed companies outside the FTSE 350 to be a member of the audit committee. The chairman of the company is not allowed to chair the audit committee and cannot be counted as an independent member of the committee.

2.3 Issues Of Independence

Code provision A.3.1 sets out criteria to determine whether a non-executive director is independent.

"The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director:

  • has been an employee of the company or group within the last five years;
  • has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;
  • has received or receives additional remuneration from the company apart from a director's fee, participates in the company's share option or a performance-related pay scheme, or is a member of the company's pension scheme;
  • has close family ties with any of the company's advisers, directors or senior employees;
  • holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;
  • represents a significant shareholder; or
  • has served on the board for more than nine years from the date of their first election."

The Deloitte 2008 survey, "At the helm", used a tailored questionnaire to gather data from 84 companies representing around 16% of the FTSE All Share companies excluding investment trusts. This broke down into 26 FTSE 100 companies, 36 FTSE 250 companies and 22 FTSE SmallCap companies.

"At the helm" revealed that 77% of FTSE 100 and 56% of FTSE 250 companies comply with the Combined Code requirement that at least 50% of the board (excluding the chairman) should comprise of independent non-executive directors. In 23% of companies (16% last year) the audit committee includes a director who is not independent as defined by the Combined Code.

2.4 Induction And Training

Induction and training are vital components in the establishment of an effective audit committee. The Smith Guidance makes the following recommendations (sections 2.17 to 2.19 of the Smith Guidance).

The company should provide an induction programme for new audit committee members. This should cover the role of the audit committee, including its terms of reference and expected time commitment by members; and an overview of the company's business, identifying the main business and financial dynamics and risks. It could also include meeting some of the company staff.

Training should also be provided to members of the audit committee on an ongoing and timely basis and should include an understanding of the principles of and developments in financial reporting and related company law. In appropriate cases, it may also include, for example, understanding financial statements, applicable accounting standards and recommended practice; the regulatory framework for the company's business; the role of internal and external auditing and risk management.

The induction programme and ongoing training may take various forms, including attendance at formal courses and conferences, internal company talks and seminars, and briefings by external advisers.

The Deloitte "At the helm" 2008 Survey identified that, overall, there continues to be an increase in the number of companies operating induction programmes for directors joining the board and providing regular updates on an on-going basis to ensure skills and knowledge are refreshed. 71% of participants in the Survey stated that they provide formal training on appointment and 70% of companies have on-going training programmes in place for directors. A quarter of the companies who do not have some form of process in place plan to introduce a formal training and development process in the future.

2.5 Determination Of The Audit Committee Financial Expert

Guidance on what constitutes "recent and relevant financial experience" is provided in section 2.16 of the Smith Guidance.

It is desirable that the committee member whom the board considers to have recent and relevant financial experience should have a professional qualification from one of the professional accountancy bodies. The need for a degree of financial literacy among the other members will vary according to the nature of the company, but experience of corporate financial matters will normally be required. The availability of appropriate financial expertise will be particularly important where the company's activities involve specialised financial activities.

Almost all audit committees within the "At the helm" survey include a member that has recent and relevant financial experience with 98% of companies confirming this in the annual report compared to 97% in 2007.

This is now part of the new Disclosure and Transparency Rules. DTR 7.1.1 states that: "At least one member of that body must be independent and at least one member must have competence in accounting and/or auditing."

Audit committees may wish to document their consideration of this topic and consider whether further training might be useful (see sections 2.4 and 2.7).

2.6 Fees

The Smith Guidance (section 2.15) states the following:

In addition to the remuneration paid to all non-executive directors, each company should consider the further remuneration that should be paid to members of the audit committee to recompense them for the additional responsibilities of membership. Consideration should be given to the time members are required to give to audit committee business, the skills they bring to bear and the onerous duties they take on, as well as the value of their work to the company. The level of remuneration paid to the members of the audit committee should take into account the level of fees paid to other members of the board. The chairman's responsibilities and time demands will generally be heavier than the other members of the audit committee and this should be reflected in his or her remuneration.

Deloitte's 2008 board structure and non-executive directors' fees survey revealed that many companies disclose separate committee chairman fees, particularly for the audit and remuneration committees. Fees for nomination committee membership are much less common, reflecting the fact that these tend to meet only when there is a vacancy for the board.

Some companies differentiate among committees and where this is the case the fees for chairing the audit committee will typically be higher than for other committees. Currently 79 companies (60% of FTSE 100 and 27% of FTSE 250 companies disclosing the structure) pay a higher fee for chairing the audit committee. This has not changed significantly from 2007.

The following table shows the range of fees disclosed and the number of companies disclosing separate fees.

 

Audit committee member

Remco member

Audit committee chairman

Remco chairman

FTSE 100

Q3

£12,500

£10,000

£22,500

£16,500

Median

£8,500

£5,000

£15,000

£12,000

Q1

£5,000

£5,000

£10,000

£10,000

FTSE 250

       

Q3

£7,000

£6,500

£10,000

£10,000

Median

£4,000

£5,000

£7,500

£7,000

Q1

£2,500

£2,500

£5,000

£5,000

No. of companies (2007 in brackets

FTSE 100

34 (33)

33 (32)

79 (77)

76 (73)

FTSE 250

26 (22)

24 (22)

130 (125)

127 (125)

Source: Deloitte 2008 survey of board structure

2.7 Performance Evaluation

The Smith Guidance recommends two forms of performance evaluation for the audit committee. The first is a self-evaluation exercise of the effectiveness of the audit committee and the second is a review by the board of the effectiveness of the audit committee. The Guidance recommends that both of these evaluation exercises should be performed on an annual basis (sections 3.3 and 3.4 of the Smith Guidance).

The requirement for the board to review the effectiveness of the audit committee stems from Code principle A.6.

The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

These evaluations are usually performed using a questionnaire, interviews or, in some cases, an external assessor.

A good example of disclosure of this evaluation in the annual report is as follows:

"Board Effectiveness

The effectiveness of the board is vital to the success of the group. The company undertakes a rigorous evaluation each year in order to assess how well the board, its committees, the directors and the chairman are performing. The process is led by the chairman and supported by the group company secretary. All directors complete a questionnaire evaluating the board and committees' processes, their effectiveness and where improvements may be considered. The process also includes a peer review in which directors assess their fellow directors' performance against set criteria, including the skills that they bring to the company and the contribution they make. This process is complemented by separate meetings between each director and the chairman where feedback is discussed.

In 2007, following the process introduced in 2006, the directors completed a comprehensive questionnaire which was returned to an independent third-party who had helped with the preparation of the questions, and who then collated comments, drew the conclusions and presented the findings to the board." [Aviva plc Annual Report and Accounts 2007]

Appendix 4 to this document includes a self-assessment checklist. It would be reasonable to assume that the board would ask similar questions when evaluating the performance of the audit committee.

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Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.