Attendance, key areas of focus, responsibilities, activities

Responsibilities of the Committee

The principal role of the Committee is to assist the Board in fulfilling its oversight responsibilities in relation to financial reporting, financial controls and audit, risk and internal controls.

All members of the Committee are independent non-executive Directors. Biographical details and the experience of Committee members are set out in chapter Board of Directors. The Board has determined that, by virtue of their previous experience gained in other organisations, members collectively have competence relevant to the sector in which the Group operates. In addition, the Board considers that Rhian Davies, a chartered accountant, has the recent and relevant financial experience required to chair the Committee.

At the invitation of the Chairman of the Committee, the Chairman, Group Chief Executive, Chief Financial Officer and Bruno Schroder attended most meetings. Other regular attendees who advised the Committee were the Group Financial Controller, the heads of Compliance, Risk and Internal Audit and the General Counsel. Other members of senior management were also invited to attend as appropriate. The Chairman of the WMARC who is an independent non-executive Director of Schroder & Co. Limited, attended one meeting and provided a report to each Committee meeting on matters related to the Wealth Management business. Representatives from the Group’s auditor, PwC, attended all of the Committee’s scheduled meetings.

During 2016, two private meetings were held with PwC without management present. Private meetings were also held with the Chief Financial Officer and the heads of the Compliance, Risk and Internal Audit functions. These meetings provided an opportunity for any matters to be raised confidentially.

Following the publication of the 2016 UK Corporate Governance Code and revised FRC Guidance for Audit Committees, the Board approved amendments to the Committee’s terms of reference. The changes largely formalised the Committee’s oversight of the Group’s internal and external audit arrangements. The terms of reference are available on our website.

The Committee’s primary activities are the oversight of:

Financial reporting, financial controls and audit

Risk and internal controls

  • The content and integrity of financial and Pillar 3 reporting
  • The appropriateness of accounting judgements
  • The effectiveness of the financial control framework
  • The effectiveness of the external auditor
  • Independence of the external auditor
  • Recommending to the Board the appointment of the external auditor
  • The Group’s risk and control framework, including the Group’s whistleblowing procedures and the Money Laundering Reporting Officer’s reports
  • The Group’s ICAAP, ILAAP, risk appetite and recovery and resolution planning
  • The Group’s regulatory processes and procedures and its relationships with regulators
  • The Group’s Internal Audit function
  • Emerging and thematic risks which may have a material impact on the Group’s operations in the future

Key areas of focus during the year

The table below summarises the key issues that the Committee considered at each of its meetings during 2016.

Meeting date

Financial reporting, financial controls and audit

Risk and internal controls

*

See glossary.

February

  • Annual Report and Accounts including financial judgements
  • Viability statement
  • Pillar 3* disclosures
  • Key risks and risk management
  • Internal audit control framework review
  • Risk and control framework review

May

  • External audit tender plan
  • External audit plan
  • ICAAP
  • Money Laundering Reporting Officer’s annual report
  • Client take on
  • Business continuity
  • Oversight of outsource providers

July

  • Half-year results
  • External audit tender
  • Key risks
  • Risk control assessments
  • ILAAP
  • Infrastructure finance business
  • Fund liquidity

September

  • Reappointment of external auditor for 2017
  • Tax strategy
  • Conduct
  • MiFID II
  • Group recovery plan and resolution pack

November

  • Financial controls
  • Accounting policies
  • External auditor effectiveness review and independence
  • External audit tender
  • Information security and the management of technology change
  • Oversight of outsource providers
  • Key risks review
  • Insurance
  • 2017 Internal Audit and Compliance monitoring plans

Financial reporting, financial controls and audit

The Committee reviews the half-year and annual results and the Annual Report and Accounts, before recommending them to the Board for approval.

The Committee assesses whether suitable accounting policies have been adopted and whether management has made appropriate estimates and judgements, including those in respect of financial assets, goodwill and intangible assets, provisions and contingent liabilities, the UK DB pension scheme funding level and the determination of entities that are consolidated into the Group where these are subject to material judgement. As a result of new guidance issued by the European Securities and Markets Authority on Alternative Performance Measures (APMs) further information on each of the Group’s APMs has been provided in the glossary (see (PDF:) page 174). The Committee agrees that these APMs help better describe how business performance is assessed by management and overseen by the Board. Other changes made to the presentation of the Annual Report and Accounts are described on (PDF:) page 151 and were also discussed by the Committee.

The Group’s financial control environment is set out in detailed risk and control documents. These documents provide a comprehensive summary of the risks and controls that exist across the Finance function globally and support the Group’s risk and control assessments (see chapter Key risks and mitigations). During the year, the Committee received reports from Finance on the operation of the controls over the financial reporting process including changes to the finance management team, revenue and rebates processes and ongoing developments to processes and systems. New tools for allocating revenues in accordance with the Group’s transfer pricing policy and an automated solution for calculating segregated accounts performance fees will be implemented during 2017. A process for replacing the Group’s proprietary rebates engine is underway and is expected to be delivered in 2017. A reporting strategy is also being developed to ensure the Group remains well placed to manage future reporting demands.

The Committee receives regular reports from PwC on the audit scope, progress against the audit plan, an independent assessment of financial reporting, an audit opinion on the Annual Report and Accounts and an independent report on the half-year results. Relevant controls are also reviewed by PwC.

The Committee’s responsibilities include whether it can recommend to the Board that the Annual Report and Accounts when taken as a whole is fair, balanced and understandable and whether it provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. To support the Committee in making this recommendation it assessed the key messages being communicated in the Annual Report and Accounts, as well as the information the Committee and the Board as a whole had received and their discussions throughout the year.

The Group’s tax strategy is reviewed annually and is discussed with the external auditors (see chapter Our tax contribution for more information).

The Committee is required to report to shareholders on the process it follows in its review of significant judgemental issues that it has considered during the year. These issues are set out below.

Significant judgements and issues

Action

*

See glossary.

Accounting for acquisitions

 

During the year the Group made a number of acquisitions. These acquisitions required judgement as to the basis of consolidation and the fair value of assets and liabilities acquired.

See (PDF:) note 29 to the accounts.

The Committee considered reports from Group Finance that set out the basis of consolidation, including key assumptions used to determine the acquired intangible assets and goodwill. The Committee considered the work performed by Group Finance and a valuation specialist in establishing the key assumptions, including the terms of client relationships, the profit before tax and the discount rate. Having considered supporting information, the Committee was satisfied with the basis of consolidation and initial carrying value of the relevant assets.

Recognition and disclosure of liabilities

 

The Group has some uncertainty over the recognition, timing and amount in respect of certain obligations. These can arise in a number of areas but principally comprise legal and regulatory matters and leasehold related obligations. In addition, the calculation of the Group’s tax charge necessarily involves a degree of estimation and judgement, given the many jurisdictions in which it has operations and the complexity of the applicable tax rules in each of those jurisdictions.

During 2016 detailed reports were presented by management to the Committee addressing the judgemental issues and estimates, which included the key assumptions and basis for the main areas of uncertainty regarding the recognition of liabilities.

The Group Head of Tax presented an update on the Group’s tax strategy and associated governance process to the Committee in September. The Committee reviewed and approved the Group’s updated tax strategy which is published on the Group’s website. During the year changes were made to the Group’s transfer pricing policy to reflect new rules introduced as a result of the OECD BEPS* initiative.

Key judgements on uncertain liabilities have been discussed with PwC, who have completed their independent assessment. The Committee considers that the judgements made by management in respect of all relevant liabilities are reasonable and that appropriate disclosures have been included in the accounts.

See (PDF:) notes 5, (PDF:) 6 and (PDF:) 18 to the accounts.

During the year the Committee received updates on the Swiss Bank’s continuing engagement with the US Department of Justice under the terms of the agreement reached in 2015.

Carrying values of assets

 

The Group holds material balances in respect of acquisitions completed and the UK DB pension scheme surplus which are subject to judgement regarding their carrying value.

See (PDF:) notes 13 and (PDF:) 25 to the accounts.

The Committee considered reports prepared by management that set out relevant considerations in assessing the carrying value of material assets that required judgement in the determination of their valuation.

Acquisition related items comprising goodwill and intangible assets, were assessed against the performance and outlook of the relevant cash generating units and the application of growth assumptions and discount rates.

Reports from management included the key financial assumptions that had been used by the independent qualified actuaries, Aon Hewitt Limited, to determine the UK DB pension scheme surplus. The pension trustee company has also considered the low interest rate environment and its impact on yields for investments in the UK pension scheme, and while the scheme remains in surplus no material change to the scheme’s investment strategy has been recommended.

The basis for determining the carrying value of certain other assets was also considered in the management report.

Having considered the supporting information, the Committee was satisfied with management’s conclusions regarding the carrying values of the relevant assets.

Presentation of profits

 

Since 2013 the consolidated income statement separately presents exceptional items which are permitted by accounting rules for specific items of income or expense that are material.

See (PDF:) note 1(b) to the accounts.

The Committee considered and was satisfied with the continued presentation of exceptional items within a separate column in the consolidated income statement. This presentation is considered appropriate as it provides a transparent view of certain items and the underlying performance of the business. For 2016, exceptional items principally comprised amortisation of acquired intangible assets and costs associated with entering into the strategic relationship with Hartford Funds.