Audit Committee report

Terms of reference

The terms of reference of the audit committee (“the committee”) require it to review the appropriateness and effectiveness of the company’s external financial reporting and its internal control and risk management processes. They also place upon the committee the responsibility of overseeing the appointment and performance of the external auditors, the scope of their duties, their independence and also to approve the appointment of the head of internal audit and to receive and act upon reports from the external and internal auditors. The committee has unrestricted access both to the external auditors and to the head of internal audit. The activities of the company’s risk committee are reported to the committee by the chief financial officer providing additional support to the committee in carrying out its duty to oversee on behalf of the board the internal control framework of the group.

The committee’s terms of reference were reviewed and updated by the board during 2010 and a copy is available on the company’s website or by application to the company secretary. The committee’s terms of reference take full account of the Smith guidance on the role of audit committees. The committee did not find it necessary to seek external advice during the year, other than through its dialogue with the external auditors.

Membership, meetings and attendance

The membership of the committee and details of the number of meetings held and attendance at each during the year are set out earlier in this corporate governance statement. The committee meets quarterly and additionally when necessary and during 2010 met on six occasions. The committee invites the chairman, the chief executive, the chief financial officer, the group controller, the director of internal audit and representatives of the external auditors to attend its meetings. The company secretary attends meetings in his role as secretary of the committee.

During the year, the committee has had a dialogue with the external auditors without executives present.

Activities

A summary of the committee’s activities during the year is set out below.

Financial reporting and external audit

The committee reviewed and approved the company’s annual and interim financial statements and first and third quarter trading updates after reviewing reports on the financial information prepared by the company’s auditors. The committee received reports routinely on the current status of material litigation to gain comfort that potential financial exposures had been appropriately dealt with in the financial statements. The committee also considered an analysis demonstrating that it was appropriate for the company to prepare its accounts on a going concern basis. The committee also reviewed and approved a paper proposing the reappointment of KPMG as the company’s auditors at the 2010 AGM.

As part of the committee’s responsibility to monitor the independence of the external auditors the committee reviewed the company’s existing policy on the provision of non-audit services by the company’s auditors and approved a minor clarification in the policy. The committee regularly reviews a schedule of non-audit matters carried out by the auditors which mainly relate to technical advice on taxation and other matters together with a limited amount of investigation activity. The level of non-audit fees incurred in the year is described in note 4 of the Notes to the accounts.

The committee considered a report setting out the findings of an internal evaluation of the 2009 audit process, which was the first audit conducted by KPMG. The results showed that overall the audit was considered to have met expectations. The auditors presented to the committee the audit strategy for 2010 which set out the areas of audit focus. The committee considers that the company’s auditors remain independent.

Risk

In the governance section above the board’s approach to risk management has been summarised and set out below are some of the committee’s actions on risk management during the year. Early in the year, the committee considered a paper on the development of the group assurance map, which had been amended to more clearly identify the specific risks in business units and the effectiveness of management responses alongside the proposed internal audit work in relation to the risks and the levels of assurance to be gained for each risk.

Later in the year, the committee reviewed the approach taken by the company to identify risks facing individual business units and the group as a whole. The committee reviewed the assessment made by management of the mitigating actions in place to identify the net residual risk taken in each of a range of matters relating to the group’s businesses, using assurance mapping methodology. The net risk position formed the basis of the group’s internal audit plan for 2011. During the year the company categorised risk against each of the group’s strategic thrusts. The committee found that the additional categorisation was a helpful tool in the analysis of risk. In relation to the group as a whole, the principal risks continued to relate to economic and market conditions and to the overall delivery of the operational excellence programme and the related issue of the capability of management to deliver change anticipated in the group’s strategic plan, further details on which are provided in the risks and uncertainties section.

The committee was updated on the activities of the group’s risk committee which had been re-constituted during the year to provide improved efficiency over the provision of functionally-led control mechanisms. The risk committee had reviewed the risk management processes relating to the commencement and monitoring of individual projects forming part of the Programme Olympic work streams and also reviewed the process developed in 2010 of a standardised approach to business continuity management across the group.

The committee reviewed the measures the company had in place and was introducing to ensure that there were appropriate processes to combat the risk of individuals committing acts that would be regarded under any jurisdiction as corrupt. This included the approval of a new anti-corruption policy that would supplement the group’s updated code of conduct on business ethics, distributed in 2010 to the management population and, in a simplified format, to colleagues worldwide. The committee was updated on the group’s management of its corporate tax arrangements, including the level of tax risks within the group and was satisfied that the group’s tax management was compliant with the risk tolerance set out in the group’s tax policy previously approved by the board.

Internal control

During the year the committee received presentations on the status of the internal control environment from the finance directors of the Asia Pacific division, the Textiles & Hygiene division and also of the Pest Control division.

During the year the company suffered from a breakdown in the control environment in the Philippines business, which although not significant to the group as a whole triggered a thorough review of systems and processes in the Philippines business utilising both internal and external resources. The committee reviewed on more than one occasion the circumstances of the breakdown and assessed implications for the group’s control framework in the region.

The Textiles & Hygiene division made a number of appointments to improve the quality of financial leadership. However, the Benelux businesses in particular suffered from relatively weak financial management and some control failings in respect of which action was initiated during the year.

The committee reviewed the work underway as part of Programme Olympic to modernise the financial and other transactional processing activities of the group, through the gradual creation of shared service centres. These are being established in the UK, Germany, Switzerland, Austria, the Benelux area, Spain and in Scandinavia. These changes are designed to improve the control environment and reduce risk as well as delivering operational efficiencies.

The committee considered a paper prepared to assist the committee and the board in carrying out its review of the effectiveness of the group’s system of internal controls. The paper set out the risk management process together with other measures such as the control self-assessment process, quarterly representation letters from business unit managers, the incidence of control failings and weaknesses and internal control developments during 2010. The committee reviewed the proposed statement to be provided to shareholders and confirmed that the statement was appropriate.

Internal audit

During the year the group’s internal audit resources were strengthened. Since the appointment of KPMG in September 2009 the internal audit function has utilised the output of the financial controls testing carried out by the external auditors to more efficiently target internal audit resources to deliver an improved level of assurance.

At each meeting the committee considered reports from the director of internal audit on control incidents including any matter which arose under the group’s whistle-blowing arrangements. No incident was material to the group as a whole. Any whistleblowing report is investigated by the group’s internal audit function and the outcome reported to the committee.

At each meeting, the committee considers a report on the status of internal audit review outcomes and the progress of their resolution. Primary responsibility for the adequacy of the financial control environment rests with line management, with the internal audit function and the results of the external auditors’ controls testing programmes providing the committee with assurance.

Committee evaluation

The committee conducted a review of its effectiveness which in 2010 was supported by an external evaluator. The review concluded that the committee had received sufficient, reliable and timely information from management to enable it to fulfil its responsibilities and highlighted some areas to improve the effectiveness of the committee’s oversight of the control environment and associated assurance processes. The result of the evaluation process was reported to the board early in 2011.

On behalf of the board,