BOARD AND GOVERNANCE

Financial Reporting

It is a requirement of the Code that the Board should present a balanced and understandable assessment of the Company’s position and prospects. This requirement extends to interim and other price sensitive public reports and to reports to regulators, as well as to information required to be presented by statutory requirements.

In this context, reference should be made to the Statement of Directors' Responsibilities in the 2008 Annual Report , which includes a statement regarding the Group’s status as a going concern, and to the Reports of the Auditors in the 2008 Annual Report, which includes a statement by the auditors about their reporting responsibilities.

Internal Control

The Board acknowledges that it is responsible for the Group’s system of internal control and for reviewing its effectiveness. Such a system 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. Throughout the year, the Group has been in full compliance with the Combined Code provisions on internal control.

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. Each operating unit is required to prepare an annual self assessment report on internal control and these are reviewed by the Board.

During the year the Board has carried out a review of the effectiveness of the Group’s systems of internal control. This review included a risk assessment process on the key financial, operational and compliance risks to identify, evaluate and manage significant risks to the Group’s business. The assessments have been effected at both Group and individual company level. They included 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. 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 Business Review in the 2008 Annual Report.

In January 2009, the company appointed a full time internal auditor as a member of the Group’s finance department. Since this appointment, a programme of internal audit visits has been completed at most of the Group’s businesses. The remaining businesses will be visited during the forthcoming financial year. The Audit Committee keeps under review the need for a fully independent internal audit function in the Group. The Audit Committee believes that the Group’s system of internal control is appropriate for a group of the size and nature of Diploma PLC and the Audit Committee’s current view is that a separate independent internal audit function is not necessary.

Audit Committee and Auditors

The Board has established an Audit Committee comprising the three non-Executive Directors. The Committee is chaired by JW Matthews. The Company Secretary is the Secretary to the Committee.

The main roles and responsibilities of the Committee are set out in written terms of reference, which were reviewed and updated during 2005 and which generally encompass those set out in the Code, which 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 financial controls and its internal controls and risk management systems;
• 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 auditors and to approve the terms of engagement of the external auditors;
• to review and monitor the external auditors’ 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 nonaudit services by external auditors; 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.
• to annually consider 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 recognises that auditor independence is an essential part of the audit framework and the assurance it provides.

In 2008, the Committee reviewed the audit engagement and, following an audit tender process, recommended to the Board the appointment of Deloitte LLP as auditors to the Company and Group.

The Committee normally meets at least five times a year. The external auditors and the Executive Directors generally attend Audit Committee meetings. In addition, the Committee periodically meets the external auditors without the Executive Directors present.

The Audit Committee’s responsibilities are discharged in the following manner:

• at its meetings in May and November, the focus falls on a review of the Interim Report and the Annual Report and Accounts respectively. On both occasions, the Committee receives reports from the Group Finance Director and from the external auditors identifying any accounting or judgemental issues requiring its attention;
• the external auditors present their audit plan at the September meeting; and
• the Committee meets to approve formal Interim Management Statements which are released to the market in January and August, in accordance with the Disclosure and Transparency Rules.

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).

On an annual basis, the Committee also assesses annually the effectiveness of the external audit process. This assessment covers all aspects of the audit service provided by the Company’s external auditors. The Committee also reviews annually a report on the external auditors’ own quality control procedures.

The Committee has also established a set of guidelines covering the type of non-audit work that can be assigned to auditors. These relate to further assurance services – where the auditors’ 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 auditors, but is put out to tender to other firms.

Taxation services are generally not provided by the auditors; a separate firm is retained to provide tax advice, including any assistance with tax compliance matters generally, except in Canada, where the auditors provide 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 auditors in addition to their normal audit work, and these are reviewed against the above guidelines.