BP 2013 Annual Report Download - page 79

Corporate governance
BP Annual Report and Form 20-F 2013 75
The committee examined developments relating to the interpretation of
the business economic loss claims element of the company’s
settlement with the Plaintiffs’ Steering Committee, including US court
rulings and monitored legal developments whilst considering the
impacts on the financial statements and other disclosures.
• Pensions and other post-retirement benefits
Accounting for pensions and other post-retirement benefits involves
judgement about uncertain events, including discount rates, inflation and
life expectancy. The committee examined the assumptions used by
management as part of its annual reporting process.
Risk reviews
The group risks allocated to the audit committee for monitoring in 2013
included risks associated with trading activities, compliance with applicable
laws and regulations and security threats against BP’s digital infrastructure.
For 2014, the board has agreed that the committee will maintain monitoring
of the same group risks. The committee held in-depth reviews of these
group risks over the year, examined succession planning and capability
development in the finance function and reviewed the effectiveness and
efficiency of the capital investment of a number of BP’s major projects.
Internal control and risk management
The committee reviewed the group’s system of internal control and risk
management over the year, holding a joint meeting with the SEEAC to
discuss key audit findings and management’s actions to remedy significant
issues. The committee reviews the scope, activity and effectiveness of the
group audit function and met privately with the general auditor and his
segment and functional heads during the year.
The committee received quarterly reports on the findings of group audit,
on identified fraud and misconduct and on key ethics and compliance
issues. A further joint meeting with the SEEAC was held to discuss the
annual certification report of compliance with the BP code of conduct. The
two committees also met to discuss the group audit and ethics and
compliance programmes for 2013. The committee held a private meeting
with the group ethics and compliance officer during the year.
External audit
The external auditors started the audit cycle with their plan which identified
key audit risks to be monitored during the year – including exposures
relating to the Gulf of Mexico oil spill, estimation of oil and gas reserves,
estimation of pension liabilities, recoverability of the group’s financial
assets in Egypt and future commodity prices and their impact on the
carrying value of the group’s assets. The committee received updates
during the year on the audit process, including how the auditors had
challenged the group’s assumptions on these issues.
• Acquisitions of interests in other entities
BP exercises judgement when assessing the level of control obtained in
a transaction to acquire an interest in another entity and when
determining the fair value of assets acquired and liabilities assumed. The
committee examined the accounting for BP’s transaction with Rosneft
and the judgement on whether the group has significant influence over
Rosneft, as where such influence exists, equity accounting is applied –
resulting in the recognition of BP’s share of Rosneft’s results each
quarter and the reporting of BP’s share of production and hydrocarbon
reserves. During the year the committee received reports from
management and the external auditor which assessed the extent of
significant influence, including BP’s participation in decision making
through director election to the Rosneft board and other factors.
• Taxation
Computation of the group’s tax expense and liability, the provisioning for
potential tax liabilities and the level of deferred tax asset recognition in
relation to accumulated tax losses are underpinned by management
judgement. The committee reviewed the judgements exercised on tax
provisioning as part of its annual review of key provisions.
• Derivative financial instruments
BP uses judgement when estimating the fair value of some derivative
instruments in cases where there is an absence of liquid market pricing
information – for example, long-term gas contracts which have a lengthy
duration. This approach is taken for the group’s longer-term, structured
derivative products, natural gas embedded derivatives and the forward
contracts entered into in 2012 to purchase shares in Rosneft. The
committee received reports from the external auditor on the valuation
models developed for these contracts and reviewed disclosures relating
to these instruments in the notes to the financial statements.
• Provisions and contingencies
The group holds provisions for the future decommissioning of oil and
natural gas production facilities and pipelines at the end of their
economic lives. Most of these decommissioning events are in the long
term and the requirements that will have to be met when a removal
event occurs are uncertain. Judgement is applied by the company when
estimating issues such as settlement dates, technology and legal
requirements. The committee received briefings on the group’s
decommissioning, environmental remediation and litigation provisioning,
including key assumptions used, the governance framework applied
(covering accountabilities and controls), discount rates and the
movement in provisions over time.
• Gulf of Mexico oil spill
Judgement was applied during the year to the significant uncertainties
over the provisions and contingencies relating to the incident.
The committee regularly discussed the provisioning for and the
disclosure of contingent liabilities relating to the Gulf of Mexico oil spill
with management and the external auditors, including as part of the
review of BP’s stock exchange announcement at each quarter end.
•Financialresultsannouncements.
•AnnualReportandForm20-F.
•Accountingjudgementsandestimates.
•Developmentsinnancialreporting
and accounting.
•Oilandgasreservesdisclosures.
•Fair,balancedandunderstandable.*
* Undertaken jointly with the SEEAC.
Audit committee focus in 2013
•Externalauditorindependence
confirmation.
•Non-auditfees–policyandapproval.
•Auditplan,feesandengagement.
•Auditorperformanceandeffectiveness.
•Keyareasofjudgementforyearendaudit.
•Audittendering.
•Cybersecurity.
•Trading.
•Compliancewithbusinessregulations.
•Successionanddevelopmentinnance.
•Effectivenessofinvestment.
•ReviewofeffectivenessofBP’ssystemof
internal control and risk management.*
•Groupauditreports.
•Fraudandmisconductreports.
•Ethicsandcompliancereports.
•Annualethicscertication.*
Financial
disclosure
External
audit
Risk
reviews
System of internal
control and risk
management