BP Annual Report and Form 20-F 2011 - Company Reporting

Corporate governanceCommittee reportsAudit committeeChairman’s introductionIn the first quarter of the year the committee, under Douglas Flint’schairmanship, continued to spend considerable time reviewing andchallenging BP’s assessment of its financial responsibilities relating to thetragic incident in the Gulf of Mexico in April 2010. This task has remained akey area of focus under my chairmanship during the remainder of the year.We have continued to seek assurance that where liabilities are estimable,they are fully provided for, and where uncertainty is too great to supporta provision that appropriate disclosure is made. Some greater claritydeveloped during the year as experience was gained about the operationof the Deepwater Horizon Oil Spill Trust fund, and as settlements werereached with two of the partners in the Macondo well and two of thecontractors involved. However, as reported elsewhere in this document,major uncertainty remains in respect of litigation, potential fines andpenalties and other matters which will require significant attention from theaudit committee for the foreseeable future. The committee has thereforetaken care to preserve its regular agenda content so as to continue fulfillingits remit to the board with respect to monitoring risk management systemsand internal controls and financial reporting.Amongst other topics, we have reviewed controls in trading, debtand liquidity management and the company’s response to the UK BriberyAct. During the course of the year, I have also participated in the groupchief executive’s audit forum and the group financial risk committee(GFRC). In preparation for audit committee meetings, I have met regularlywith the chief financial officer, general auditor and the lead partner of theexternal auditors. I also spent time with the leadership team of the internalaudit function.I valued the time I took to visit one of the company’s largest datacentres in London, its European business service centre in Budapest, andthe trading floors in Houston and London. Such visits and interaction withstaff at all levels of the organization enhance both our understanding ofthe company’s activities and our assurance over the way they are beingmanaged.Although we lost Douglas Flint from the committee when hestepped down from the board, I am delighted that Andrew Shilston hasnow joined us. Andrew’s experience as the CFO at Rolls Royce, and hisprevious background in the energy business, complements the skillsalready present in the committee’s membership. I believe we have avery good mix of commercial, financial and audit expertise to addressthe complex accounting, audit and risk issues which the committeemonitors. I would also like to thank Ian Davis for his contribution to theaudit committee over the last two years. Ian is now stepping down fromthe committee in anticipation of a period of heavier workload related to theGulf of Mexico committee.Our report below seeks to highlight the key activities undertakenin 2011 and provide some insight into the outcomes of the committee’swork. I believe 2012 will be equally intense but the committee is wellequipped to address the tasks it faces.Brendan NelsonChairman of the audit committeeCommittee membersBrendan Nelson – committee chair (from 14 April 2011)George DavidIan Davis (retired from the committee on 3 February 2012)Phuthuma Nhleko (appointed 1 February 2011)Andrew Shilston (appointed 3 February 2012)Members who left during the year:Douglas Flint – previously chair of the committee (retired 14 April 2011)The audit committee is composed of independent, non-executive directorsselected to provide a wide range of financial, international and commercialexpertise appropriate to fulfil the committee’s duties.Brendan Nelson became chair of the audit committee upon the retirementof Douglas Flint from the board in April 2011. Mr Nelson, who was formerlyvice chairman of KPMG, is chairman of the Group Audit Committee of TheRoyal Bank of Scotland Group plc, a member of the Financial ReportingReview Panel, Vice President of the Institute of Chartered Accountantsof Scotland and a director of the Financial Skills Partnership. The board issatisfied that Mr Nelson, in succession to Mr Flint, is the audit committeemember with recent and relevant financial experience as outlined in theUK Corporate Governance Code. It considers that the committee as awhole has an appropriate and experienced blend of commercial, financialand audit expertise to assess the issues it is required to address. The boardalso determined that the audit committee meets the independence criteriaprovisions of Rule 10A-3 of the US Securities Exchange Act of 1934 andthat Mr Nelson may be regarded as an audit committee financial expert asdefined in Item 16A of Form 20-F.Committee role and structureThe role and responsibilities of the audit committee are set out in theappendix of BP’s board governance principles which is available on ourwebsite. We keep these under review and test their effectiveness inour annual evaluation of the audit committee. In addition, the chairs andsecretaries of the audit and safety, ethics and environment assurancecommittees have worked together to ensure their respective agendasneither duplicate nor omit coverage of key risk areas.The committee met 11 times over the past year including one jointmeeting with the safety, ethics and environment assurance committee(SEEAC). This joint meeting reviews the general auditor’s report on internalcontrol and risk management systems for the year in preparation for theboard’s report to shareholders in the annual report. It also reviews thegeneral auditor’s audit programme for the year ahead to ensure bothcommittees endorse the coverage.Each audit committee meeting is attended by the group chieffinancial officer, the group controller, the general auditor (head of internalaudit) and the chief accounting officer. The lead partner of our externalauditors (Ernst & Young) is also present.The committee also holds separate private sessions during theyear with the external auditor and the general auditor – these sessions arewithout the presence of executive management.The board is kept updated and informed of the audit committee’sactivities and any issues arising through verbal reports at its meetings fromthe committee chair and the circulation of the committee’s minutes.Audit committee processesInformation and adviceInformation and reports for the committee are received directly fromaccountable functional and business managers and from relevant externalsources. In addition, like our board and other committees, the auditcommittee can access independent advice and counsel when neededon an unrestricted basis. During 2011, external specialist legal advice inrelation to corporate reporting was provided to the committee by Sullivan &Cromwell LLP. As part of its annual evaluation, the committee reviews theadequacy of reliable and timely information from management that enablesit to fulfil its responsibilities. The 2011 evaluation indicated that membersrecognized the openness and transparent nature of the materials andpresentations provided by management.Training and visitsIn continuing to respond to the consequences of the Gulf of Mexico oilspill, the committee placed emphasis on receiving appropriate briefings onthe relevant applications of accounting policy, particularly provisioning andrelated disclosure. The committee received regular technical updates fromthe chief accounting officer on developments in financial reporting and anannual briefing on oil and gas reserves disclosures. In addition the externalauditors provided insight and commentary on international accountingpolicy developments.Induction programmes are provided for new members and aretailored around their roles on the audit committee. During 2011 BrendanNelson and Phuthuma Nhleko completed their audit committee inductionprogrammes. This included sessions on tax, trading operations, accounting,126 BP Annual Report and Form 20-F 2011