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The Audit Committee comprises John Matthews (Chairman), John Rennocks and Ian Grice. Both John Matthews and John Rennocks are chartered accountants who have recent and relevant financial experience, as required by the Code.

The meetings of the Committee are normally attended by the Executive Directors and the external auditor. In addition, the Chairman of the Committee meets privately with the external auditor at least twice each year. The Secretary to the Committee is Nigel Lingwood.

Role of the Committee

The main roles and responsibilities of the Committee are set out in written terms of reference which are available on the Company's website (www.diplomaplc.com).

They are as follows:

• to monitor the integrity of the financial statements of the Group and any formal announcements relating to the Group's financial performance, reviewing significant financial judgements contained therein;
• to review the Group's internal controls systems and risk management procedures;
• to make recommendations to the Board, for it to put to shareholders for approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the 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;
• to develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant guidance regarding the provision of non-audit services by the external auditor;
• 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; and
• to consider annually whether there is a need for a formal internal audit function and make recommendation to the Board.

In addition, the Audit Committee has an important role to play through its responsibility for, and oversight of, the auditor relationship and auditor independence. The Committee reviewed the audit engagement in 2008 and following an audit tender process, recommended to the Board the appointment of Deloitte LLP as auditor to the Company and Group.

The Committee has also established a set of guidelines covering the type of non-audit work that can be assigned to the external auditor. These relate to further assurance services – where the auditor's detailed knowledge of the Group's affairs means that they may be best placed to carry out such work. This extends to, but is not restricted to, shareholder and other circulars, regulatory reports, and on occasions, work in connection with disposals. Work in connection with acquisitions, including due diligence reviews, is generally not provided by the auditor, but is placed with other firms.

Taxation services are generally not provided by the auditor; a separate firm is retained to provide tax advice, including any assistance with tax compliance matters generally, except in Canada and Denmark, where the auditor provides some assistance on the tax computations.

In other circumstances, proposed assignments are put out to tender and decisions to award work taken on the basis of demonstrable competence and cost effectiveness.

The Committee receives an annual report which provides details of any assignments and related fees carried out by the auditor in addition to their normal audit work, and these are reviewed against the above guidelines.

The Committee has also formally reviewed and approved the arrangements by which Company employees may, in confidence, raise concerns about possible irregularities in financial reporting or other matters (so called "whistleblowing" procedures).

Activities During the Year

The Audit Committee assists the Board in assuring the integrity of the financial statements and related disclosures. During the current year, the Committee carried out the following work:

at its meetings in May and November, the Committee reviewed the Interim Report and the Annual Report & Accounts respectively. On both occasions, the Committee received reports from the Group Finance Director and from the external auditor identifying any accounting or judgemental issues requiring its attention;

in September the Committee met with the external auditor to discuss their audit plan process;

in January and August the Committee met to approve formal Interim Management Statements which were released to the market, in accordance with the Disclosure and Transparency Rules; and

the Committee met on two further occasions during the year to review Trading Updates which the Company issued to the market.

During the meetings, the Committee reviewed the information included in the Annual Report & Accounts to ensure that the information provided a fair review of the Group's business. It also reviewed the external audit management letter and the procedures designed to ensure that the external auditor was aware of all "relevant audit information", as required by the Companies Act 2006.

The Committee also assessed the effectiveness of the external audit process and the report on the external auditor's own quality control procedures. This assessment covers all aspects of the audit service provided by the Company's external auditor.

Risk Management and Internal Control

The Committee is responsible for reviewing the effectiveness of the Group's system of internal control. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board has established a clear organisational structure with defined authority levels. The day to day running of the Group's business is delegated to the Executive Directors of the Company. The Executive Directors visit each operating unit on a regular basis and meet with both operational and finance management and staff.

Key financial and operational measures are reported on a weekly and/or monthly basis and are measured against both budget and interim forecasts which have been approved and reviewed by the Board. On an annual basis, each business unit is required to prepare a risk assessment process on the key strategic, operational, financial and accounting risks to identify, evaluate and manage the significant risks to the Group's business. They include common definitions of risk and ensure, as far as practicable, that the policies and procedures established by the Board are appropriate to manage the perceived risks to the Group. These assessments are supplemented by a detailed evaluation of the key financial controls of the business units which are critically reviewed by the Group's internal auditor. The Committee will annually review the results of these assessments and identify the key strategic and operating risks of the Group. During the year, the risk assessment process revealed no significant risks of which the Board was not previously aware.

The risks and uncertainties which are currently judged to have the largest potential impact on the Group's long term performance are set out in the 2011 Annual Report.

The Committee has reviewed the effectiveness of the Group's risk management and internal control systems. Taking into account the processes that have been designed and implemented for 2011, the Board, with the advice of the Committee, has reviewed the effectiveness of the risk management and internal control systems for the period from 1 October 2010 to the date of this report and is satisfied that the Group has in place effective risk management and internal control systems.

Internal Audit

The Group's finance department includes a full time internal auditor and a full programme of internal audit visits has been completed during the year. The scope of work carried out by internal audit generally focuses on the internal financial controls and risk management procedures operating within each business. Written reports are prepared on the results of each visit which sets out weaknesses identified during the work, together with recommendations to improve the control environment. These reports are reviewed and discussed with the Executive Directors.

At the conclusion of the year, the internal auditor reports to the Committee on the results of the audit work carried out in the year and agrees an audit plan for the following financial year. There were no significant weaknesses identified during these audits, but a number of recommendations were made to improve internal review processes and risk management procedures, particularly in businesses where the opportunity to segregate duties was limited.

The Committee continues to keep under review the need for a fully independent internal audit function in the Group. The Committee remains satisfied that the Group's system of internal control is appropriate for a group of the size and nature of Diploma PLC and the Committee's current view is that a separate formal independent internal audit function is not necessary.