Corporate 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, a requirement that 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.
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.
During 2007 the Group continued with its programme of internal
audit reviews at most of its businesses using an experienced
resource from within the Group finance department. The Audit
Committee keeps under review the need for an 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. In view of the small size of the Group, the Board considers it valuable to retain JL Rennocks as a member of the Audit Committee. The Committee was Chaired by Lord Stewartby until his retirement from the Board on 10 January 2007; JW Matthews was appointed Chairman of the Committee on 24 January 2007. 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; and
- 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 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.
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.
The Committee normally meets at least four times a year and met
four times during the year under review. The external auditors and
the Executive Directors generally attend Audit Committee meetings.
In addition, the Committee periodically meets the external auditors
without management 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 Announcement/Report and the Preliminary Announcement/Annual Report respectively. On both occasions, the Committee receives reports from the Group Finance Director and from the external auditors identifying any accounting or judgmental issues requiring its attention;
- the external auditors present their audit plan at the September meeting; and
- the Committee meets to approve a formal Trading Update which’s Annual General Meeting in January.
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).
As noted above, one of the primary responsibilities of the Audit Committee is to make recommendations to the Board in relation to the appointment, reappointment and removal of the external auditors. A number of factors are taken into account by the Committee in assessing whether to recommend the external auditors for reappointment. These include:
- the quality of reports provided to the Audit Committee and the Board and the quality of advice given;
- the level of understanding demonstrated of the Group’s businesses and its sectors; and
- the objectivity of the external auditors’ views on the controls around the Group and their ability to co-ordinate a global audit, working to tight reporting deadlines.
- 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 acquisitions and disposals.
- Taxation services – where the auditors’ knowledge of the Group’s affairs often provides significant dvantages which other parties would not have.
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 reports providing details of assignments and related fees carried out by the auditors in addition to their normal audit work, and these are reviewed against the above guidelines. During the year under review, £0.3m (2006: £0.2m) in aggregate was paid to the auditors for their normal audit work. There were no fees (2006: £0.1m) paid to the auditors in 2007 in connection with any other work.