Corporate governance

Governance

The Audit Committee was in place throughout 2007 during which all its members were non-executive directors deemed to be independent in accordance with provision A.3.1 of the Combined Code.

The Committee is chaired by Michael Hartnall who is a chartered accountant and has relevant experience of serving as a finance director of a large UK listed company.

The Committee normally asks that the Chief Executive, Group Finance Director and Head of Internal Audit attend its meetings. However, during the year the Committee held individual meetings without Company executives present, with only the Head of Internal Audit present and also with only the external auditors present.

The Committee met four times in 2007.

Activities

One of the Committee’s principal duties is to review the effectiveness of the Group’s internal control processes. Robust internal controls are essential. They ensure that the information on the performance of the Company is accurate and timely, thereby assisting management and directors in the effective management of the Group. They are also essential in ensuring that the Group complies with law and regulations including those that concern external reporting. As in previous years, the Committee received a report and presentation from the Auditors summarising the findings of their review of the Group’s control environment. In addition, the Committee received reports on control matters from the Internal Audit function and, as explained on the Corporate Governance page, twice during the year it reviewed the findings from the Group’s Operational Assurance Statement process.

One of the Committee’s key responsibilities is monitoring the effectiveness of the Company’s Auditors and Internal Audit function. Each year the Committee reviews the results of an internal evaluation of the performance of the Internal Audit function that looks at its effectiveness in terms of work planning, the skills and experience available to the function, quality of reporting, implementation of audit recommendations and its independence. In addition, last year the Committee commissioned an independent third-party to provide the Committee with an external view of the effectiveness of the Internal Audit function – this being in line with best practice recommended by the Institute of Internal Auditors.

An evaluation of the effectiveness of the Auditors, KPMG Audit Plc, was completed during the year.

The Committee accepts that certain work of a non-audit nature is best undertaken by the Auditors. The Audit Committee reviews the amount and nature of non-audit work undertaken by the Auditors during the year and has agreed that, whilst it believes it is not appropriate to manage such work by limiting it to a certain percentage of audit work, such work should be controlled to ensure that it does not compromise the independence of the Auditors. Consequently, the Committee has agreed the following rules to control the quantity and the nature of the work undertaken by the Auditors:

• any non-audit work to be undertaken by the Auditors in excess of £250,000 to be authorised by both the Chairman of the Audit Committee and the Group Finance Director;
• no partner/director of the Auditor’s worldwide audit team is to be employed by the Company within two years of the conclusion of a relevant audit;
• no qualified member of the worldwide audit team at manager level or below is to be employed by the Company within two years of the conclusion of a relevant audit; and
• no partner/director of the Auditors not associated with the audit is to be employed by the Company without the approval of the Group Finance Director and the Chairman of the Audit Committee.

As part of the Committee’s annual schedule of meetings, a meeting is held at one of the Company’s operations so that members of the Committee can meet management and develop a greater understanding of various aspects of the Company. This year a meeting of the Committee was held at the Woodford site in the UK where the Regional Aircraft business and Nimrod MR4A programme were reviewed.

The Audit Committee also undertook the following during 2007:

• reviewed the effectiveness of the Group’s internal controls and the disclosures made in the Annual Report on this matter;
• reviewed the output from the Group-wide process used to identify, evaluate and mitigate risk;
• received a report from the Auditors on their review of the effectiveness of the controls across the Group;
• reviewed the financial statements in the 2006 and 2007 Annual Report and the Interim Report issued in August 2007, and received a report from the Auditors on the statements;
• reviewed and agreed the approach and scope of the audit work to be undertaken by the Auditors;
• agreed the fees to be paid to the Auditors in respect of the 2007 audit;
• received a report from the Head of Internal Audit on the work undertaken by the Internal Audit function;
• undertook an assessment of fraud risks;
• reviewed proposals concerning the Group’s periodic financial reporting obligations;
• reviewed the Group’s procedures for disclosing information to the Auditors and the statement concerning such disclosures in the Annual Report;
• reviewed the Committee’s terms of reference; and
• reviewed the effectiveness of the Company’s helpline procedures in respect of the reporting of possible accounting, financial control and other financial irregularities.

On behalf of the Audit Committee

Michael Hartnall
Audit Committee Chairman