The Audit Committee is a sub-committee of the Board whose main role is to encourage and safeguard the highest standards of integrity, financial reporting, risk management and internal controls.

The Committee's responsibilities are set out in written terms of reference which include all matters indicated by the Disclosure and Transparency Rules and the Code, which are available for inspection on the Company's website, and include reviewing the form and content of interim and year end accounts and results announcements, risk management and internal financial controls, monitoring internal audit, considering the appointment of the external auditor and agreeing the nature and scope of their work and monitoring and reviewing their independence, objectivity and effectiveness.

Composition of the Audit Committee

The Audit Committee comprises J.A. Biles, Dr K. Rajagopal and E. Lindqvist (appointed 1 June 2012) who are all independent Non-Executive Directors. J. Vogelsang, who was a member of the Audit Committee resigned as a member of the Committee on 31 December 2011. Their biographical details are set out in the Board of Directors and their remuneration is shown in the Board report on remuneration. The Chairman of the Audit Committee since 16 August 2007 has been Mr J.A. Biles, who was appointed a Director on that date, following a recommendation from the Nomination Committee. The Audit Committee Chairman is considered to have recent and relevant financial experience. Mr Biles is a chartered accountant, who served as a plc finance director (FKI plc from 1998 to 2004 and Chubb Security plc from 1991 to 1997) and until its takeover in January 2012 was also the Chairman of the Audit Committee of Charter International plc (2005-2012). The Company Secretary is secretary to the Audit Committee. The Chairman, Group Chief Executive, Group Finance Director, J Vogelsang, Group Financial Controller, Vice President of Risk, Group Treasurer, Head of Tax, other senior finance personnel, external auditor and internal auditors attend Audit Committee meetings as appropriate by invitation.

Fair, balanced and understandable Overview of Annual Report and Accounts

In light of discussions undertaken by the Directors during Board and Audit Committee meetings, the Directors were satisfied that the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Main activities of the Audit Committee

The Audit Committee met four times during 2012, and in February 2013, to consider this financial report and all Committee members attended the maximum number of meetings they were scheduled to attend. The Committee also meets separately with the Vice President of Risk, internal auditors and with the external auditor, without management being present, after the end of most formal meetings.

In addition, the Committee Chairman has preparatory meetings with the external auditor, internal auditors and, where necessary, with Group senior management, prior to Committee meetings. At their meetings, the Audit Committee considers an agenda of items including the minutes of the last meeting and a list of action points from previous meetings, to ensure that these are progressed. In addition, a number of specific items were reviewed:

• Significant issues, judgements and estimates in relation to the financial statements were considered and addressed by the Committee by discussing and challenging these during meetings. The Committee considered the following key estimates and judgements ensuring that appropriate rigour had been applied as part of the year end process:
  • The accounting for the acquisitions in the year, in particular the assumptions adopted in determining the fair value of assets and liabilities including goodwill and intangible assets
  • The appropriateness of the Company's tax provisions were reviewed on a country by country basis taking account of acquisitions completed in 2012 to ensure that tax provisions were adequately stated
  • Impairment of goodwill, intangible and tangible fixed assets, including an assessment of the discount rates used, and the appropriateness of specific risk factors applied to cash generating units and the adequacy of sensitivities applied
  • Environmental costs, including the adequacy of the Group's provisions
  • Remaining restructuring actions, and the appropriateness of outstanding provisions
  • Claims provisions and litigation, including the adequacy and valuation of provisions
  • Validity of the going concern assumption used in preparation of the Annual Report and Accounts was reviewed in considerable depth. Appropriate downside sensitivity analysis has been performed on net debt profile, committed facility headroom, financial covenants and Euro based sales. There is a reasonable expectation that the Group has adequate resources to continue in operational existence even if the situation outlined in the sensitivity analysis occurred
  • Actuarial assumptions relating to retirement benefit schemes
• A quarterly report on internal audit from the Vice President of Risk was presented at each meeting and the findings discussed. During the year the plan for the ensuing year's work was considered.
• The external auditor also presented, for the year end statutory audit and interim review engagements respectively, their audit plans at the December and April meetings covering scope of work to be done and during the year there was a detailed review of their management letter covering the auditor's findings in respect of 2011.
• The external auditor presents their audit plan and procedures, and in particular the identification of significant risks, to the Audit Committee every year before the interim and the final audit. Following completion of the audit, the external auditor confirmed that no additional matters had arisen during the audit which would have required them to alter their planned procedures. The Audit Committee also requested feedback from both management and audit teams as well as operating companies' financial management about the effectiveness of the audit carried out in the various locations around the world where the Company operates.
• The Audit Committee is also presented with an update on any material litigation in which the Group may be involved.
• At each meeting an update is presented on any new accounting developments and requirements and any changes in corporate governance arrangements that may affect the Group.
• On a regular basis, the Committee reviewed papers on liquidity, banking arrangements and the appropriateness of the going concern assumption for preparation of the financial statements. The Committee's activities supported the Directors in their assessment of the going concern position of the Group, which is set out in the Finance Director's report.
• The Audit Committee met with the external auditor without management.
• The Audit Committee reviewed the effectiveness of the external audit process and reported to the Board.

The Vice President of Risk has responsibility for developing the Group's risk management framework, including internal audit, and enhancing the Group's risk assessment and mitigation activities. This appointment demonstrates the Board's continued commitment to maintain sound risk management and internal control systems.

During 2012 the Audit Committee also:

• assessed and confirmed the independence of the external auditor;
• having reviewed the effectiveness of the audit, the performance and capabilities of the external auditor and having taken into account their tenure of office from 2002 and whether the position should be formally tendered, recommended to the Board that the auditor be reappointed and agreed their fees;
• discussed putting the audit out to tender after the conclusion of the audit of the accounts for the year ending 31 December 2019, five years after the current audit partner rotates off the assignment;
• approved the Group's accounting policies;
• approved the management representations to the external auditor;
• reviewed arrangements for reporting and investigating fraud and employee concerns; normal internal audit activity and operation of the Group's 'Open Door' policy uncovered a small number of potentially fraudulent incidents which were all fully investigated. None had any material financial impact on the Group and, where necessary, systems and procedures were amended to minimise the risk of recurrence;
• reviewed the effectiveness of internal controls and risk management processes and recommended certain changes;
• reviewed the terms of reference for the Audit Committee; and
• assessed the Committee's own effectiveness.

Training

The Committee receives regular technical updates as part of the agenda of each Committee meeting as well as specific or personal training as required. A training session was held during November 2012, where Deloitte updated the Committee on a number of relevant accounting matters and discussed trends in corporate reporting.

Independence of external auditor

The Audit Committee has put in place safeguards to ensure that the independence of the audit is not compromised. In this respect, the Audit Committee reviewed:

• the external auditor's plan for the current year, noting the role of the senior statutory auditor, who signs the audit report and who, in accordance with the professional rules, has not held office for more than five years, and any changes in the key audit staff;
• the arrangements for day-to-day management of the audit relationship; and
• the overall extent of non-audit services provided by the external auditor as specified below.

Non-audit fees paid to the auditor are available in note 3. There has been no significant non-audit engagement.

The policy in respect of services provided by the external auditor is as follows:

• Audit-related services: The external auditor is invited to provide services where their position as auditor renders them best placed to undertake the work. This includes reporting and certification connected with borrowings, shareholders and circulars, regulatory requirements and work in respect of acquisitions and disposals.
• Other services: No contracts in excess of £20,000 in value can be awarded to the external auditor without prior approval from the Chairman of the Audit Committee.
• Tax and general consulting work: In general and where conflict could arise, the work is not awarded to the external auditor and is put out to tender.
• There are no contractual restrictions on who the Audit Committee can choose as external auditor.

Internal audit

Following a review of the Group's internal audit processes and capabilities a decision was taken by the Committee to outsource the major part of the internal audit provision. The Group went out to tender to three major accounting firms and after receiving presentations from them, the contract for services was awarded to Ernst & Young LLP, who commenced their work in April 2012.

Internal Audit independently reviews the risk and control processes operated by management. It carries out independent audits in accordance with an internal audit plan which is agreed with the Audit Committee before the start of the financial year. This plan takes account of the risk management framework surrounding major business risks in each operation and provides the required degree of coverage. The Audit Committee requires that all accounting centres are visited at least once every two years and that all plants are visited at least once every five years. From 2013 onwards additional assurance will be obtained through control self assessments, when all plants and accounting centres will be required to self certify annually the effective operation of their controls. The accuracy of these returns will be checked by Internal Audit. Internal Audit reports include recommendations to improve internal controls together with agreed managerial action plans to resolve issues raised. Internal audit follows up the implementation of recommendations and reports progress to senior management and the Audit Committee. The Committee noted that the 2012 Internal Audit programme was successfully completed. The effectiveness of the Internal Audit function is reviewed and discussed on an annual basis with the Vice President of Risk and the Engagement Partner of Ernst & Young LLP.

Overview

As a result of its work during the year, the Audit Committee has concluded that it has acted in accordance with its terms of reference and has ensured the independence and objectivity of the external auditor.

On behalf of the Audit Committee: