bank-r-and-a

Overview Strategic report Corporate governance Risk management Financial statements Other information
Audit Committee report continued
Liability Management Exercise
(LME) accounting
The accounting for the LME was complex and the valuation of the Bank highly
judgemental. The Committee reviewed alternate valuation methodologies
including internal calculations, based on the Bank’s financial plan, and
external market valuations. The Committee considered the external valuation,
appropriately discounted for the relatively thin volume of transactions to be
the most robust and in line with accounting standards. The valuation used
sat within a range of possible valuations.
Conduct risk and legal provisioning
The Audit Committee discussed each conduct risk provision including
recognition, level of provision and associated disclosures. Detailed papers
were presented setting out the underlying assumptions in each provision,
and these were debated and challenged by the Audit Committee.
As part of reviewing the results for 2013, the Audit Committee reviewed
recommendations from management that further provisions should be
taken in respect of a number of risks including PPI and Interest Rate Swap
Mis-selling. Key assumptions included population affected, size of redress,
customer response rate and interest rates. The Committee also considered
completeness of these provisions. The Committee took legal as well as
management advice in considering the Bank’s breaches of the Consumer
Credit Act and reviewed the quantum of the related provisions.
Impairment of loans and advances
to customers
The Audit Committee reviewed detailed papers presented by management
covering the drivers of the Non-core division impairment provision, including
inter-alia the emergence period and probability of default, the impairment of
governance and controls and methodologies and the substantive evidence
supporting model parameters.
In terms of the corporate collective provision, the Committee reviewed and
challenged changes to the methodology and supporting data analysis,
particularly in respect of probabilities of default, loss emergence periods and
management overlays to model outputs. The outcome was benchmarked
against the treatment adopted by the Bank’s peer group.
The Committee carefully considered evidence in the post balance sheet
period as to whether additional provisions were required relating to the
conditions existing at the balance sheet date.
CFSMS assets
The Committee considered whether the intangible and tangible assets solely
used by the Bank but held on the balance sheet of CFSMS (previously a
fellow subsidiary of The Banking Group) should, under accounting standards
‘risk and rewards’ test, in fact be held on the balance sheet of the Bank.
Following debate and challenge covering legal ownership, the historical
position and other factors, the Directors concluded that the preferable
accounting treatment would be to include these assets in the Bank’s 2013
balance sheet and restate prior years.
Pensions
There were two major judgements concerning pensions which the Audit
Committee considered in the year. Firstly whether the accounting of the
Bank’s participation in the Pace defined benefit scheme post separation from
The Co-operative Group should be on a defined contribution defined benefit
basis. After debate, the Committee concurred with management that the
information is not currently available to account on a DB basis.
The second judgement concerned the Britannia pension scheme, held on
the balance sheet of CFSMS. The Committee discussed and agreed with
management that the pension scheme was correctly accounted for in the
books of CFSMS.
Unadjusted errors
The auditors reported to the Committee the mis-statements that they had
found in the course of their work and no material amounts remain unadjusted.
Internal controls
Where material risks have been identified, the Bank has instigated action to
strengthen its systems of internal control to mitigate these risks. The Board
is ultimately responsible for the Bank’s system of internal controls and it
discharges its duties in this area by ensuring management implements
effective systems of risk identification, assessment and mitigation. These risk
management systems are designed to manage, rather than eliminate, the
risk of failure to achieve business objectives and cannot provide absolute
assurance against material misstatement or loss.
Management is responsible for establishing and maintaining adequate
internal controls over financial reporting, including the consolidation process.
Internal controls over financial reporting are designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes. A strategic planning,
budgeting and forecasting process is in place. Monthly financial information is
reported to the Board and management. ExCo reviews performance against
budget and forecast on a monthly basis and senior financial managers
regularly carry out an analysis of material variances.
Responsibility for reviewing the effectiveness of the internal controls has been
delegated to the Audit Committee by the Board.
The Committee uses information drawn from a number of different sources
to carry out this review:
• Internal Audit provides objective assurance – their annual work plan is
developed in conjunction with management and approved by the Audit
Committee focusing on key risks and key internal controls. In the light of
Internal Audit’s recommendations, management develops and implements
corrective action plans, which are tracked to completion by Internal Audit,
with the results reported to executive management and to the Committee;
• An annual review of the Bank’s systems of internal control was undertaken
by the Committee and facilitated by the Risk Function;
• Further objective assurance is provided by the external auditors and other
external specialists.
48
The Co-operative Bank plc Annual report and accounts 2013