Audit Committee

Members

Anthony Hobson (Chairman)
Coline McConville
Kate Nealon
John Ormerod

Terms of Reference

The following are the terms of reference of the Audit Committee (“the Audit Committee”) of HBOS plc. The Audit Committee also acts as the Audit Committee for the HBOS Group and for each regulated entity that is not wholly within a single Division of the Group (being Halifax plc and Bank of Scotland), other than Capital Bank.  The Audit Committee is supported by five Risk Control Committees.

1. Membership

1.1       The membership of the Audit Committee shall comprise at least four Non-Executive Directors of HBOS or co-opted members, who shall be independent of management and free of any relationship which could interfere with the exercise of their independent judgement. 

1.2       At least one member of the Audit Committee should have significant, recent and relevant financial experience. 

1.3       A quorum for the Audit Committee is two Audit Committee members. 

1.4       The composition of the Audit Committee and the Chairman of the Audit Committee are approved by the Chairman of HBOS. 

1.2              The Secretary is appointed by the Chairman of the Audit Committee.

2. Proceedings of the Committee

2.1       The Audit Committee may invite or require other persons to attend meetings where appropriate to assist in the effective discharge of the Audit Committee’s duties.  The Group Finance Director; the Group Risk Director; the Director, Group Finance, the Group Chief Accountant; Head of Group Internal Audit and the Director, Group Risk, together with a representative of the external auditors, will normally be in attendance at meetings, or for selected agenda items as considered appropriate by the Chairman.

2.2              At least once a year the Audit Committee will meet the external auditors without Executive Directors or other management present.

2.3              At least once a year the Audit Committee will meet the Head of Group Internal Audit without Executive Directors or other management present.

2.4       Similarly, the Audit Committee may meet separately with the Chief Executive, the Group Finance Director and the Group Risk Director without any other Executive Directors being present.

2.5       The Chairman of the Audit Committee will be available to the Head of Group Internal Audit, the Group Company Secretary and the Group Risk Director (and each of their direct reports) to discuss any matters of concern in relation to financial reporting matters, internal control concerns or compliance with the Group’s legal and regulatory obligations, in the widest sense, should this be considered necessary by those individuals.

2.6       The Chairman will be available in person at the Annual General Meeting of the Company to answer Shareholders' questions about the activities of the Audit Committee.

2.7              The terms of reference of the Audit Committee shall be made publicly available, explaining the role and authority delegated to the Audit Committee by the Board.

2.8              The terms of reference and the effectiveness of the Audit Committee shall be reviewed at least annually and any necessary recommendations made to the Board.

3. Frequency of Meetings

3.1       The Audit Committee shall meet at least four times a year.  Any Audit Committee member or the Secretary may call additional meetings as necessary.  The external auditors may also request additional meetings.

4. Authority

4.1       The Audit Committee is authorised by the HBOS Board to undertake any activity within its terms of reference.  It acts in respect of Group businesses and has the power to use Risk Control Committees and where appropriate subsidiary and joint venture Audit Committees under its direction and for guidance to assist it in this work. The Audit Committee is authorised to obtain outside legal or other independent professional advice and to secure the attendance of outsiders with relevant experience and expertise if it considers this necessary.  The Audit Committee is entitled to sufficient resources from the Company to undertake its duties.

4.2              Although normally decisions are reached on a consensus, in the event of a disagreement, decisions on any matter are made by the majority, with the Chairman of the meeting having a second, casting vote in the event of a tie.  An Audit Committee member who remains opposed to a proposal after a vote can ask for his or her dissent to be noted in the minutes.

4.3              Where a disagreement between the Audit Committee and the Board cannot be resolved the Audit Committee has the right to report the issue to the shareholders as part of the report on activities in the Annual Report.

4.4              It is the responsibility of the Chairman of the Audit Committee to develop detailed terms of reference for the Audit Committee for approval by the Board and to ensure the effectiveness and efficiency of the Audit Committee.

 

5. Principal Duties

5.1       External Audit

5.1.1    Oversees the Group's relationship with the external auditors and at least annually formally reviews that relationship.

5.1.2    Considers the appointment of the external auditors, the fees paid to the auditors (set in the context of the external auditors regulatory requirements), and any questions of resignation or dismissal of the external auditors and makes recommendations to the HBOS Board on these matters.

5.1.3    Reviews and agrees with the external auditors the scope of the audit before the audit commences and, subsequently, the result of the audit.

5.1.4    Reviews from time to time and at least annually the cost effectiveness of the audit and the qualification, expertise, independence and objectivity of the external auditors, including reviewing the nature and extent of non-audit and consultancy services supplied to the Group by the external auditors.

5.1.5        Develops and recommends to the Board the Policy in relation to the provision of non-audit services by the external auditors; the aim being to ensure that the provision of such services does not impair the external auditors' independence or objectivity.

5.1.6        Reviews, with the external auditors the relationships between the Company and the external auditors and the policies and procedures for maintaining independence.

5.1.7        Agrees and monitors the Group's policy for the employment of former employees of the external auditor.

5.1.8    Reviews and approves/recommends the Group Audit Engagement Letter.

5.2       Internal Audit

5.2.1    Reviews the activities, resources, organisational structure and the operational effectiveness of the internal audit function, and where appropriate, makes recommendations to the Board.

5.2.2    Reviews reports from the internal audit function which address the adequacy and effectiveness of the Group's systems of internal financial control.

5.2.3    Reviews any significant findings and recommendations made by Internal Audit and monitors management’s responses to those findings.

5.2.4        Reviews and approves the Annual Internal Audit Plan to ensure adequate coverage of the Group's significant business risks and that the plan reflects an appropriate consideration of the key risks.

5.2.5        Reviews and approves annually the Internal Audit Charter.

5.2.6    Seeks to ensure that the activities of internal audit are co-ordinated with the external auditors.

5.2.7    Approves the appointment and removal of the Head of Group Internal Audit.

5.2.8    Approves the budget and resources available to Group Internal Audit.

5.3       Financial Reporting

5.3.1    Reviews the interim and preliminary announcements to the Stock Exchange and the Annual Report and Accounts of the Company, Halifax plc and Bank of Scotland before submission to the appropriate Boards for approval, and, through reports from the executive management and the external auditors to the Committee, considers the following:

-     compliance with legal, regulatory and statutory requirements;

-     compliance with the requirements of any body by which the activities of the Group or its subsidiaries are regulated, including the UK Listing Authority and the requirement for compliance with the Combined Code;

-     the appropriateness of accounting policies selected, the consistency with which they are applied and any changes in accounting policies and practice;

-     the appropriateness of the material judgements and estimates made in the course of preparation of the accounts;

 

-     the section of the Directors' Report which describes the role and responsibilities of the Audit Committee and the actions taken by the Audit Committee to discharge those responsibilities;

-     significant adjustments resulting from the audit;

-     the going concern assumption;

-     audit representation letters; and

-     external auditors management letters and responses.

5.3.2    Consider any issues raised by executive management and the external auditors relating to the interim review and year end audits, and any matters the external auditors may wish to discuss (in the absence of management where necessary).

5.4       Regulatory Reports

5.4.1    Considers  any reports presented to the Audit Committee by skilled persons under section 166 of the Financial Services & Markets Act 2000 and other relevant reports issued by the external auditors and external regulator, including the external auditor’s management letter and the appropriateness of management’s response.

5.5       Internal Control and Risk Management

The Committee exercises this role through the reports it receives from internal and external auditors; from the Risk Control Committees; from the Group Risk Director; and from executive management.  The Committee: -

5.5.1    reviews, on behalf of the HBOS Board, the effectiveness of the Group’s system of internal control (including financial, operational, compliance and risk management);

5.5.2    reviews the proposed statement on the Directors’ review of the Group’s system of internal control (including financial, operational, compliance and risk management) prior to endorsement by the HBOS Board and as appropriate the Principal Subsidiaries;

5.5.3    reviews the processes and procedures for ensuring that material business risks are properly identified and managed and that appropriate systems of monitoring and control are in place;

5.5.4    considers material breaches of agreed risk limits whether caused by control weakness or breakdown, dishonesty, fraud or negligence and seeks to ensure the management action in response is commensurate to the breach reported;

5.5.5    receives regular reports from Group Internal Audit, Group Risk and the Group Money Laundering Reporting Officer.  These reports deal with the activities of these functions and provide an independent opinion on such matters.  The Committee seeks to ensure that appropriate action is taken on issues arising from such reports and that all companies within the Group respond in a timely manner to recommendations made.  The Committee assesses the co-ordination of these functions and whether the functions are adequately resourced by competent people;

5.5.6    considers and reviews the annual objectives of Group Risk to ensure adequate oversight of risks faced by the Group (including credit, insurance & investment, market, liquidity, operational and compliance risks) significant regulatory risks and the system of internal controls and reporting of those risks within the businesses.  Receives reports on material issues arising and considers the adequacy of management's plans;

5.5.7    reviews the minutes and work of the Risk Control Committees and any audit committee falling outwith the Divisional Structure, and seeks to ensure that there is appropriate management response to any material matters identified;

5.5.8    receives regular reports on significant litigation and tax compliance issues involving the Group;

5.5.9    considers the executive reports covering material non-compliance with legal, regulatory and statutory requirements and the requirements of any body by which the Group is regulated;

5.5.10  reviews the arrangements for oversight of joint ventures and controlling stakes in subsidiaries and monitors, on an annual basis, the policy for such arrangements;

5.5.11  considers the appropriateness of the "whistleblowing" procedures and the key issues emerging on a regular basis; and

5.5.12    considers other matters, as determined by the HBOS Board.

6. Minutes

6.1       The minutes of meetings of the Audit Committee are circulated to all members of the Audit Committee and to nominated recipients as soon as practicable after the meeting.  The minutes are also circulated to all members of the HBOS Board.