Corporate governance report

Accountability and audit

Audit Committee

The Audit Committee members are Sir Patrick Brown (Chairman), Alex Scott-Barrett and Jenny Williams. Alex Scott-Barrett is a chartered accountant and the Board is satisfied that he has recent and relevant financial experience.

The Committee’s membership complies with the Combined Code. The Chairman, Managing Director and Finance Director are invited to Audit Committee meetings with the permission of its Chairman but have no right of attendance. Managers from within the Group are invited to Audit Committee meetings to discuss issues relating to their areas of the business. During the year, the Committee met with both the external Audit Partner and Internal Audit Manager to discuss audit business, without the executive directors being present. The Committee remains satisfied that the internal audit function is able to operate with independence and is not under any pressure from the executive management of the Company to produce particular results.

The Committee members receive regular briefings from the external auditors to enable them to keep up to date on financial reporting standards.

The purpose of the Audit Committee is to assist both executive and non-executive directors of NWG to discharge their individual and collective responsibilities in relation to:

• ensuring the financial and accounting systems of NWG and its subsidiaries are providing accurate and up to date information on their current position;
• ensuring NWG’s published financial statements represent a true and fair reflection of this position; and
• assessing the scope and effectiveness of the Group’s risk management systems and the integrity of its internal financial controls.

During the year its work included:

• monitoring the integrity of the financial statements of the Company;
• reviewing the Company’s internal financial controls by considering reports of both the internal and external auditors, directing questions to management and reviewing the financial risks and controls information provided to them on an annual basis;
• monitoring and reviewing the effectiveness of the internal audit function by reviewing the scope of the annual audit plan, the results of those audits and monitoring the completion of actions identified during the audit;
• monitoring and reviewing the performance and effectiveness of the external auditors, in particular, by reviewing the scope and costs of the audit process;
• reviewing the external auditors’ independence by monitoring the extent of the provision of non-audit services and receiving reports from the external auditors;
• monitoring the potential impact and management of significant risks to the business using a risk methodology (meeting the recommendations of the 2005 Turnbull Review Group guidance) which sets out and rates all identified risks, including operational, external, financial, environmental, social and governance risks;
• reviewing the Committee’s terms of reference;
• reviewing the Group’s accounting and treasury policies; and
• reviewing the Company’s interim management statements, half-yearly and preliminary results’ announcements and final published annual report and financial statements.

Given the importance of NWL to the Group’s business, the Committee works closely with the Audit Committee of NWL. In particular, both committees review significant regulatory reports for Ofwat and regularly review NWL’s debt recovery strategy and performance. In addition, meetings were held with the Ofwat Reporter during the year to discuss the June Return and Draft and Final Business Plans.

The Audit Committee Chairman reports to the Board following each meeting of the Committee and committee minutes are circulated to the Board.

External auditors

Ernst & Young LLP have been the Group’s auditors since 2003. The audit engagement partner is subject to change every five years and was last changed in 2008.

Non-audit services

The Committee has approved a procedure for the approval of non-audit services to safeguard the objectivity and independence of the external auditors, which complies with the requirements of the Auditing Practices Board’s Ethical Standard No. 5. The external auditors are not permitted to provide bookkeeping, financial information systems design and implementation, or internal audit outsourcing services. Permitted services require prior approval, either from the Audit Committee Chairman, if under £50,000, or from the Audit Committee, if over £50,000. The Company requires the auditors to report annually details of all non-audit services provided. A breakdown of the cost of audit and non-audit services provided by the auditors is set out in note 4 to the financial statements.

On 27 May 2009, Ernst & Young confirmed to the Audit Committee, in accordance with ISA 260 (Communication of audit matters to those charged with governance), that they have considered their relationship with the Company and that, in their professional judgement, the objectivity of the audit engagement partner and audit staff is not impaired.