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

Corporate governancefinancial reporting and controls and the structure of BP’s finance function.Individual private sessions with the external and internal auditors were alsoprovided. During 2012 we will undertake an audit committee induction forAndrew Shilston.When the board visited Houston in May, audit committee memberstook the opportunity to visit the computing facility and the trading floorat the Westlake complex. During the May trip, two members of thecommittee, including the chairman, also visited the Atlantis offshoreplatform in the Gulf of Mexico. In July the committee visited thecompany’s data centre in London to review IT service and security matters.Earlier in the year Mr Nelson accompanied SEEAC members on a visit tothe Whiting refinery where they were briefed on the progress of the majormodernization project. These visits enable the committee to see firsthandexamples of risk management and to address questions directly toemployees on site.2011 Audit committee activitiesGulf of MexicoThe responsibilities of the board’s monitoring committees in reviewingthe company’s response to the Gulf of Mexico incident have beencarefully delineated. Whilst the Gulf of Mexico committee has consideredthe ongoing work of the Gulf Coast Restoration Organization (GCRO)and litigation matters, and the SEEAC has reviewed the company’simplementation of the recommendations of the Bly Report, the auditcommittee’s focus has been on financial reporting and controls. Thecommittee has reviewed each quarter the provisions and contingenciesrelated to the incident and their disclosure. It has also received a reportfrom the group controller on the status of financial controls in the GCRO.Financial reportingThe group’s quarterly financial reports, the BP Annual Report andForm 20-F and the BP Summary Review were reviewed by the committeebefore recommending their publication to the board. In undertakingthis review, the committee discussed with management how they hadapplied critical accounting policies and judgements to these documents,including key assumptions regarding provisions for litigation, environmentalremediation and decommissioning. The committee also reviewed theimpairment testing process and the pricing assumptions that were utilized.In considering the robustness of the valuations the committee alsoreferred to analysis undertaken by the external auditors. This year, with anumber of assets held for sale, the committee was appropriately engagedin reviewing their accounting treatments. Further details on impairmentreviews are included in the Financial statements – Note 5. The committeealso reviewed the company’s methodology underpinning its disclosuresrelating to oil and gas reserves.Monitoring business riskAs discussed elsewhere in this annual report, the board periodicallyreviews the company’s group risks and allocates monitoring of theirmanagement and/or mitigation to itself or its committees. Within theaudit committee’s area of monitoring in 2011 were liquidity management,trading risk and corruption risk. During the year, the committee alsoundertook functional reviews of information technology and services,integrated supply and trading, business service centres and the governanceand control of major project investment. Each year the committee alsoreviews risk, governance and the control environment relating to TNK-BP.Reports on the work of the group financial risk committee – theexecutive-level committee that provides assurance on the managementof BP’s financial risk – were provided during the year by the chief financialofficer.Internal control, audit and risk managementThe forward agenda for the audit committee contains standing itemson internal control – these include quarterly reports of internal auditfindings, internal control deficiencies in financial reporting, and an annualassessment of BP’s enterprise level controls. The committee also receiveda joint report from the group controller and chief information officer onaccess controls and segregation of duties.An important input into the board’s review of the company’s riskmanagement and internal control systems is the annual joint meetingbetween the audit committee and the SEEAC. This takes place at thestart of each year to review the general auditor’s report on internalcontrol and risk management systems for the previous year. The generalauditor reviews his team’s findings and management’s actions toremedy significant issues identified in that work. His report also includedinformation on the results of audit work undertaken by the safety andoperational risk audit team and reviews by the group’s finance controlteam. As noted earlier, this joint meeting also reviews the coming year’sforward programme of audit work.External auditorsIn 2011 the committee held two scheduled meetings with the externalauditors without management being present. These sessions providedthe opportunity for direct feedback and dialogue between the committeeand the auditors. In addition, the chair of the audit committee met privatelywith the external auditors before each audit committee.Performance of the external auditors is evaluated by the auditcommittee each year. This year the committee put particular focus onassessing audit quality against a set of agreed key performance indicators.The company has also developed an auditor assessment tool which willbe completed on an annual basis and apply five main performance criteria– robustness of the audit process, independence and objectivity, quality ofdelivery, quality of people and service, and value-added advice.The committee reviews the composition of the audit team annuallyand meets the relevant partners when undertaking business or functionreviews. Additionally, the committee has the opportunity to assess specifictechnical capabilities in the audit firm when addressing specialist topics,such as environmental provisioning and impairment testing.We maintain auditor independence through limiting non-auditservices to tax and audit-related work that fall within defined categories.For a list of those categories, the process by which non-audit work isapproved when the audit committee concludes that it is in the interestsof the company to purchase non-audit work from the external auditor(rather than another supplier), see the section Principal accountants’ feesand services on page 136. A new lead audit partner is appointed everyfive years and other senior audit staff are rotated every seven years. Nopartners or senior staff from Ernst & Young who are connected with theBP audit may transfer to the group.Non-audit work by Ernst & Young is subject to the auditcommittee’s pre-approval policy. Non-audit work undertaken by Ernst& Young and by other accountancy firms is regularly monitored by thecommittee.Fees paid to the external auditor for the year were $55 million, ofwhich 20% was for non-audit work (see Financial statements – Note 16).Non-audit fees increased from $8 million in 2010 to $11 million in 2011 dueto additional work undertaken in providing services related to corporatefinance transactions. This increase resulted from Ernst & Young’sengagement to carry out financial due diligence in connection with actualand proposed sales of assets in North America.The audit committee considers both the fee structure and the auditengagement terms and monitors progress during the year. In October thecommittee reviewed with management the criteria which would triggertendering the audit. The criteria considered were independence, qualityof service, audit quality, cost/value for money and regulatory changes.The committee and management believe that assessed against eachof these criteria there is no case for recommending going to tender thisyear. Nonetheless, preparatory work has been undertaken to understandthe potential for other audit firms to participate in a tender should this beindicated at a future date. The committee has recommended to the boardthat the re-appointment of Ernst & Young as the company’s externalauditors be proposed to shareholders at the 2012 AGM.Internal auditThe committee receives quarterly reports from the general auditor whichenable the committee to monitor the progress of the internal audit againstits planned schedule of audits as well as to track key findings and anymaterial actions that are overdue or have been rescheduled. In reviewingCorporate governanceBP Annual Report and Form 20-F 2011 127