Aviva 2013 Annual Report Download - page 77

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
75
Directors’ and Corporate governance report continued
regularly held private sessions to discuss issues to be raised with
management in the main meeting, and met separately with
senior management, and with the CAO and the external auditor
without management present. The committee chairman held
regular meetings with management, the CAO and with the
external audit partner to ensure he and the committee were
aware of issues that needed to be raised at the committee.
The chairman of the committee reported to subsequent
meetings of the Board on the committee’s work and the Board
received a copy of the agenda and the minutes of each meeting
of the committee.
In performing its duties, the committee had access to the
services of the CAO, the Group Company Secretary, senior
financial management and external professional advisers.
Committee expertise
Glyn Barker is a chartered accountant and has held a number of
senior positions at PricewaterhouseCoopers LLP (PwC) where,
most recently, he was UK-Vice Chairman. Michael Hawker, a
senior fellow of the Financial Services Institute of Australasia, is
a former Chief Executive Officer and Managing Director of
Insurance Australia Group. Patricia Cross has held a number of
senior executive roles at National Australia Bank, Chase
Manhattan Bank and Banque Nationale de Paris in addition to
non-executive roles at a number of financial services companies
and has held honorary roles on the Australian Financial Centre
Forum and Financial Sector Advisory Council. Sir Adrian
Montague was formerly Chairman of Friends Provident plc and
Deputy Chairman of UK Green Investment Bank plc and has
significant experience in the financial services industry.
The Board is satisfied that Glyn Barker and Michael Hawker
each have recent and relevant financial experience and that
Glyn Barker meets the US requirements to be an audit
committee financial expert.
Glyn Barker succeeded Russell Walls as committee chairman
on 8 May 2013. As former Vice-Chairman of PwC, Glyn Barker
has a recent connection with the Group’s current auditor.
However, in the two years prior to his retirement he did not
perform any audit work and had no responsibility for the audit
business of PwC and has confirmed that he does not have any
significant ongoing financial connection with the firm. As he
retired from PwC before PwC was appointed as the Company’s
auditor and, as he complies with the rules of the US Securities
and Exchange Commission and the Auditing Practices Board’s
Ethical Standards on auditor independence, the committee is
satisfied that PwC is independent of the Company.
Committee activities during 2013
The work of the committee followed an agreed annual work
plan and principally fell under four main areas: financial
statements and accounting policies, internal controls, oversight
of the internal audit function and oversight of external audit.
The committee’s work in each of these areas is described below.
The following chart shows how the committee allocated its time
during 2013.
Financial statements and accounting policies
In conjunction with members of management and the internal
and external auditors, the committee reviewed the Group’s
financial announcements, the Annual report and accounts and
associated documentation, the half year results and the interim
management statements, and the going concern assumptions in
relation to the Annual report and accounts and half year results.
The committee placed particular emphasis on their fair
presentation and the reasonableness of the judgement factors
and appropriateness of significant accounting policies used in
their preparation.
Audit Committee – allocation of agenda time
15% Financial reporting
15% External audit, auditor engagement and policy
20% Internal audit
20% Control improvements
20% Financial reporting control framework and nancial
reporting developments
10% Others (including governance, tax, treasury
and dividends)
The committee considered a number of significant issues in
relation to the financial statements including judgements,
methodology and assumptions which are described below.
Commercial mortgages
In the Half Year 2013 results the Company announced a net
increase in the credit default allowance on the commercial
mortgage portfolio by £300 million to £1.5 billion. This resulted
from recognition of the risk of default on the riskier mortgages
in the portfolio. The committee called an ad hoc meeting
specifically to discuss this issue in July 2013 and challenged
management on whether the proposed reserve increase was
sufficient. The committee was satisfied with management’s
review. The committee agreed the net increase in allowance
was appropriate based on current facts. At Full Year 2013 the
total allowances for commercial mortgage defaults was £1.3
billion (2012: £1.2 billion including an implicit investment
margin of £0.2 billion) against the risk of default on our riskier
mortgages. The value of the commercial mortgage portfolio at
31 December 2013 was £11.1 billion. The allowance was
reassessed by the committee in February 2014 and the
committee was satisfied that the allowance remained
appropriate. Given the significance of the estimate the
committee will continue to monitor this issue closely.
Insurance liabilities
The committee reviewed the key assumptions used in
calculating long-term business contract liabilities, including the
annuitant mortality assumptions and the credit default
allowance on the corporate bond portfolio adopted by the UK
Life business. The committee was satisfied with management’s
review of these assumptions.
The Group’s general insurance reserves were reviewed
including understanding the key developments, risks and
uncertainties and providing appropriate challenge. The
committee was satisfied with management’s analysis and
believes that the methodology and assumptions applied in
calculating the year end liabilities for that business are
appropriate.
Aviva Investors
In 2013 we found evidence of improper allocation of trades in
fixed income securities in Aviva Investors which occurred
between 2006 – 2012 and a thorough investigation was carried
out by Internal Audit. The committee considered the valuation
of the provision for potential client compensation arising from
these breaches of the dealing policy.
Valuation of investments
The Committee has reviewed management’s judgements on the
Group’s fair value hierarchy of disclosures. The Committee
approved management’s proposal to change the classification
level for financial assets, in particular, commercial mortgage
assets which have been classified as Level 3. Further detail is
contained in note 23.