Barclays 2011 Annual Report Download - page 43

Board Audit Committee Chairman’s Report continued
I describe below the key issues we considered during 2011:
Financial Reporting and Significant Financial Judgements
Given continuing global economic uncertainty and market concerns
over the financial health of the sector, our role in monitoring significant
financial reporting issues is key in ensuring that trust in the financial
services sector and Barclays is maintained. We seek support from the
external auditor to assess whether suitable accounting policies have
been adopted and whether management has made appropriate
estimates and judgements. The main issues we reviewed in 2011 are set
out below:
– We regularly reviewed the Group’s investment in BlackRock, Inc.
and whether it should be impaired. Key in our decision-making was
whether the diminution in value could be considered to be significant
or prolonged. We closely monitored the BlackRock, Inc. share price
throughout the year and agreed with management's conclusion at
the time of our third quarter interim management statement that the
decline in value was such that the investment should be impaired.
The impairment has been recognised in the full year results for 2011.
– We monitored the goodwill held for our business in Spain throughout
2011. We agreed with management’s assessment that the goodwill
associated with our business in Spain should be written off during the
fourth quarter.
– The credit impairment charge during 2011 was significantly better than
prior year across each of the businesses. We examined the impairment
charge carefully to satisfy ourselves that this was appropriate.
– Management decided in late 2010 that it no longer intended to hold
the Protium loan for the long term given its low return on regulatory
capital. Consequently, and as part of finalising the year-end 2010
results, we agreed with management’s recommendation that the value
of the loan should be reduced to the fair value of the underlying assets.
This resulted in an impairment charge for the year ended 31 December
2010. During the second quarter of 2011, management decided to
restructure the loan and the proposal to purchase the outstanding
financial interest in Protium in order to facilitate earlier repayment of
the loan was agreed by Board Finance Committee (a specifically
authorised sub-committee of the Board). This resulted in Barclays
controlling Protium’s operating and financial policies and consolidating
Protium. The Committee agreed with the accounting treatment.
– Given the continuing economic and political uncertainty in the
Eurozone, we reviewed both our exposures to the selected Eurozone
countries of Ireland, Italy, Portugal, Spain and Greece and the form of
our disclosure of these exposures in our financial reporting during
2011. Our exposures have been reduced during 2011.
– We considered the impact of own credit and other one-off items that
could be treated as adjusting items to the adjusted Profit Before Tax
measure and worked with management to ensure that equal
prominence was given to both the statutory and adjusted results.
– As part of reviewing the results for 2011, we considered the
recognition and valuation of deferred tax assets in the US and Spain
and agreed with management’s judgement that the deferred tax
assets were appropriately supported by the forecasted profit.
We also considered the appropriateness of tax risk provisions made.
– We also reviewed the appropriateness of the judgements made
by management in valuing certain portfolios and asset classes and
were satisfied that these judgements were appropriate.
– Following the dismissal in May 2011 of judicial review proceedings
brought by the British Bankers' Association in relation to the
assessment and redress of Payment Protection Insurance (PPI) claims,
we reviewed management’s assumptions in arriving at a provision of
£1bn against future redress and administration of PPI claims.
We were content that the provision was adequate, although it will
be considered further against actual claims experience.
– We reviewed the year-end and half–year disclosures in respect of legal
proceedings and competition and regulatory matters, particularly in
the light of developments in the Lehman litigation.
Internal control
Our role is to review the effectiveness of the Group’s internal controls,
which is of particular resonance at a time when the business is subject to
significant change. We do this by receiving specific control environment
reviews from each of the businesses, by reviewing reports on control
issues of Group level significance, by looking in detail at specific control
issues and by receiving regular reports on regulatory compliance matters.
Specific issues we considered in 2011 are described below:
– We undertook control environment reviews of Barclaycard, Barclays
Africa, Barclays Capital, Europe Retail and Business Banking, Absa,
Barclays Corporate and Barclays Wealth. We reviewed carefully the
control environment in Barclays Capital given the pressures on the
business from both market conditions and heightened regulatory
scrutiny. We particularly wanted to ensure that the control
environment is robust and well-documented and that control
functions are adequately resourced. Specific areas of focus for the
Committee have been the trading and valuation models used by
Barclays Capital, and the governance that provides assurance around
them. Furthermore, following the report of unauthorised trading at
UBS, we received a report on a review of the controls in place at
Barclays Capital to ensure that they are designed effectively to prevent
the occurrence of a similar incident.
– We continued to monitor the controls and governance around
technology, in particular, the progress of a programme implemented
to put in place specific control enhancements that had been identified.
We also received a report on cyber security and the steps the Group
has taken to mitigate the risk of cyber attacks.
– We reviewed the programme that has been put in place to ensure that
the Group complies with the UK Bribery Act, which came into force in
July 2011.
– During the year we tracked the actions that had been agreed to
ensure compliance with the Deferred Prosecution Agreements entered
into as part of the settlement reached with US authorities following an
investigation into the Group’s compliance with US sanctions and US
dollar payment practices. This included reviewing whether the actions
are on track and monitoring the resources allocated to ensuring that
the programme is delivered.
– The FSA imposed a fine on Barclays Capital in January 2011 for
breaches of client asset segregation rules. We regularly reviewed the
remediation programme that was put in place to enhance the Group’s
processes and minimise the risk of reoccurrence.
– Following a fine for failures associated with the sales of two investment
funds, we reviewed the outputs of an independent third party review
and the progress of actions taken to review similar products.
– We received regular reports on the arrangements that the Group has
in place to enable employees to raise concerns and were updated on
action being taken to address any specific matters.
You can find further details of the Group’s system of internal control and
risk management, including the main features of our internal control and
risk management systems in relation to the financial reporting process,
in the Directors’ Report on page 48 and in the Risk Management section
on pages 67 to 158.
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 41
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