Tesco 2012 Annual Report Download - page 65

of the Audit Committee and the other Board committees are
distributed to the Board and each Committee submits a report
for formal discussion at least once a year. These processes provide
assurance that the Group is operating legally, ethically and in
accordance with approved financial and operational policies.
Audit Committee
The Audit Committee reports to the Board each year on its review of
the effectiveness of the internal control systems for the financial year
and the period to the date of approval of the financial statements.
Throughout the year the Committee receives regular reports from
the external auditors covering topics such as quality of earnings and
technical accounting developments. The Committee also receives
updates from Internal Audit and has dialogue with senior managers on
their control responsibilities. It should be understood that such systems
are designed to provide reasonable, but not absolute, assurance against
material misstatement or loss.
Internal Audit
The Internal Audit department is independent of business operations
and has a Group-wide mandate. It undertakes a programme to
address internal control and risk management processes with
particular reference to the Turnbull Guidance. It operates a risk-based
methodology, ensuring that the Group’s key risks receive appropriate
regular examination. Its responsibilities include maintaining the Key
Risk Register, reviewing and reporting on the effectiveness of risk
management systems and internal control with the Executive
Committee, the Audit Committee and ultimately to the Board. Internal
Audit facilitates oversight of risk and control systems across the Group
through risk committees in Asia, Europe and Tesco Bank and audit
committees in a number of our businesses and joint ventures.
The Head of Internal Audit also attends all Audit Committee meetings.
External audit
PwC, the Company’s external auditor, contributes a further
independent perspective on certain aspects of our internal financial
control systems arising from its work, and reports to both the Board
and the Audit Committee. The engagement and independence of
external auditors is considered annually by the Audit Committee
before it recommends its selection to the Board.
The Company has a Non-audit services policy for work carried out by
PwC. This is split into three categories as explained below:
 pre-approved for the external auditors – is predominantly the review
of subsidiary undertakings’ statutory accounts and is audit-related
innature;
 work for which Committee approval is specifically required –
transaction work and corporate tax services, and certain advisory
services; and
 work from which the external auditors are prohibited.
The Audit Committee concluded that it was in the best interests of the
Company for the external auditors to provide a number of non-audit
services during the year due to their experience, expertise, and
knowledge of the Group’s operation.
Auditor objectivity and independence was achieved by ensuring
that personnel involved in the non-audit work were not involved in
the audit, and by ensuring that management took responsibility for
all decisions made.
The fees paid to the Auditors in the year are disclosed in Note 3 to the
Group financial statements.
PwC also follows its own ethical guidelines and continually reviews its
audit team to ensure its independence is not compromised. PwC’s
independence is also considered by the Audit Committee regularly.
oversee the Finance Risk Register. The Board assesses significant
social, environmental and ethical (‘SEE’) risks to the Group’s short and
long-term value, and incorporates SEE risks into the Key Risk Register
where they are considered material or appropriate. During the year
the Board regularly reviewed the Risk Register and also undertook
an in-depth assessment of product safety.
We recognise the value of the ABI Guidelines on Responsible
Investment Disclosure and confirm that, as part of its regular risk
assessment procedures, the Board takes account of the significance
of SEE matters to the business of the Group. We recognise that a
number of investors and other stakeholders take a keen interest in how
companies manage SEE matters and so we report more detail on our
SEE policies and approach to managing material risks arising from SEE
matters and the KPIs we use both on our website (www.tescoplc.com/
plc/corporate_responsibility/) and in our Corporate Responsibility
Review 2012. To provide further assurance, the Group’s Corporate
Responsibility KPIs are audited on a regular basis by Internal Audit.
Internal controls
The Board is responsible for the Company’s system of internal controls
and for reviewing the effectiveness of such a system. We have a
Group-wide process for clearly establishing the risks and responsibilities
assigned to each level of management and the controls which are
required to be operated and monitored.
The CEO of each subsidiary business is required to certify by way
of an annual governance return that the Group’s governance and
compliance policies and processes have been adopted. The returns
received from across the Group are reviewed and discussed by the
Compliance Committee and the results of that review are also
considered by the Audit Committee as part of the Annual Assessment
of Risk Management and Internal Controls, which is prepared by
Internal Audit as part of the year end process. For certain joint ventures,
the Board places reliance upon the internal control systems operating
within our partners’ infrastructure and the obligations upon partners’
boards relating to the effectiveness of their own systems.
Such a system is designed to manage rather than eliminate the risk of
failure to achieve business objectives and can only provide reasonable
and not absolute assurance against material misstatement or loss.
In respect of Group financial reporting, Group Finance is responsible
for preparing the Group financial statements, using a well-controlled
consolidation process. Group Finance contains a technical accounting
team, which reviews external technical accounting developments,
financial reporting and accounting policy issues. It is also responsible
for the maintenance of the Group’s accounting policy manual, which is
in accordance with International Financial Reporting Standards. Group
Finance maintains its own risk register and assesses its own controls
systems. This incorporates risks such as wrong or unclear accounting
policies, ineffective financial close processes, inaccurate or incomplete
Group financial and management accounts, reputational risk, IT
risks, fraud and people risks. Group Internal Audit also reviews the
effectiveness of controls operating in the Group Finance function.
The results of Group Finance’s risk register review and Group Internal
Audit’s findings are reported to the Audit Committee on an
annualbasis.
The Board has conducted a review of the effectiveness of internal
controls and is satisfied that the controls in place remain appropriate.
Monitoring
The Board oversees the monitoring system and has set specific
responsibilities for itself and the various committees as set out below.
Both Internal Audit and our external auditors play key roles in the
monitoring process, as do several committees including the Compliance
Committee and the Corporate Responsibility Committee. The minutes
Tesco PLC Annual Report and Financial Statements 2012 61
STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEW
General information Directors’ remuneration reportBoard of Directors Principal risks and uncertainties Corporate governance