Audit Committee

The Audit Committee was chaired by Gerard Connell, who has current and relevant financial experience. The other members of the Committee were Martin Angle and Dinah Nichols. During the year the Committee met on five occasions and all members were present at each meeting with the exception of Martin Angle who was absent on one occasion. In discharging its Terms of Reference the Committee receives reports and meets regularly in particular to:

• monitor the integrity of the financial statements of the Group, including a review of significant reporting judgements, prior to approval by the Board;
  
• keep under review the effectiveness of the Group’s internal controls, including all material financial, operational and compliance controls and risk management systems;
  
• monitor and annually review the effectiveness of the Group’s internal audit function and approve the annual internal audit plan;
  
• review the findings of the internal audit function and review and monitor management’s responsiveness to such findings;
  
• oversee the relationship with the external auditors including their appointment; remuneration; re appointment; removal; the monitoring of their independence and objectivity particularly having regard to the supply of any non-audit services by the auditors; and
  
• receive internal control reports from the external auditors and meet with them in the absence of management at least once a year to discuss their remit and any issues arising from the audit.

In addition the Committee periodically reviews the arrangements for, and the effectiveness of, the Group’s ‘whistleblowing’ policies (details of which are set out on page 33 of the Business Review in the 2010 Annual Report).

The Committee pays particular attention to the independence and objectivity of the auditors having regard to the Auditing Practices Board’s Ethical Standards. Periodically a review of the provision of external audit services is undertaken in accordance with guidance issued by the Committee. The last review was undertaken in 2006 when the current auditors were appointed following the carrying out of a detailed competitive tender process. The Committee also has an established policy for the engagement of the auditors for non-audit work by the Group. This involves the Group Director of Finance setting out in a report to the Committee reasons for appointing the auditors for any material work and obtaining the approval of the Committee. Such appointment will only be granted if the Committee is satisfied that the auditors’ independence and objectivity are safeguarded. This is achieved by reviewing the appointment with the auditors as considered appropriate and receiving from the auditors at the year-end a letter setting out how the auditors believe their independence and objectivity have been maintained. The Company’s current auditors ensure that the senior partner responsible for the external audit of the Group remains responsible for such audit for no more than five years and that there is an independent partner who is involved in planning the audit and in the reviewing of the final accounts of the Company including assessing any critical matters which may be identified in the audit. The Auditing Practices Board Ethical Standards recognise that fee arrangements (both their nature and size) may give rise to a self interest threat regarding auditor independence. Where such circumstances arise there is a need to put in place appropriate safeguards. The auditors have confirmed to the Committee that they have complied with all relevant guidance and have implemented appropriate safeguards including:

• all non-audit related services, where necessary, being performed by personnel independent of the audit engagement team;
  
• no work being undertaken that would require the auditors to act in a capacity as an advocate; and
  
• no aspect of the audit engagement partner’s performance being assessed on the level of non-audit fees charged to the Company.

Taking account of the above the Committee acknowledges that on occasion it is necessary to appoint the auditors to perform non-audit work in view of their specialist knowledge of such matters as the financial modelling of Private Finance Initiative (PFI) projects. There is a limited number of other professional services firms with appropriate PFI project knowledge and they are often engaged by other parties to the projects. They would therefore be unable to act for the Company due to conflicts of interest. This has been a particular issue for the Committee and the Company over the last year because it has been considered appropriate to engage the auditors on a number of waste PFIs for the reasons stated above. In addition as reported last year, the auditors provided non-audit financial advice in connection with the Greater Manchester waste PFI which reached financial close in April 2009. The fees due for successful completion of circa £1.2 million are included in Note 7 to the financial statements on page 74 of the 2010 Annual Report. The auditors are also being considered for other non-audit work during 2010/11.

The Committee has been keeping the balance between audit and non-audit work under close review and continues to ensure that it is satisfied the auditors’ independence and objectivity are safeguarded before granting permission for non-audit work to be undertaken.

The Executive Directors, South West Water and Viridor Finance Directors, the Group Financial Controller, the Group Internal Auditor and the external auditors attend meetings of the Committee by invitation. Provision is made for both the external and internal auditors to have the right of direct access to the Committee, and in particular the Committee Chairman, without the presence of any Executive Director or other Senior Management.

More details of the work of the Remuneration Committee are set out in the Annual Report.