Corporate Governance - Audit Independence

Audit Independence

The Audit Committee consists entirely of independent Non-Executive Directors:

• Andrew Dougal, Chairman
• Philip Green
• Steve Mogford
• Vanda Murray

Andrew Dougal is an accountant who previously held a number of senior executive positions, including Chief Executive of Hanson plc, the international building materials company after its demerger from Hanson, the international diversified industrial group, where he was Finance Director. Andrew was appointed to the Audit Committee in October 2011.

Philip Green was Chief Executive of United Utilities Group plc from 2008 to 2011. Previously he was Chief Executive of Royal P&O Nedloyd, a director of Reuters Group plc and a Chief Operating Officer at DHL for Europe and Africa. Philip was appointed to the Audit Committee in June 2011.

Steve Mogford is Chief Executive of United Utilities Group plc. Prior to this appointment, Steve was Chief Executive of SELEX Galileo Ltd. From April 2000 to May 2007, he was a Director of BAE Systems plc. Steve was appointed to the Audit Committee in September 2006.

Vanda Murray is Chairman of Vphase plc, Deputy Chairman of the North West Regional Development Agency and a Non-Executive Director of SIG plc and The Manchester Airport Group plc. Vanda was appointed to the Audit Committee in July 2005.

Appointments to the Committee are made by the Board.

The Audit Committee has in attendance at meetings, by invitation of the Committee, Executive Directors, representatives of the external auditors, (KPMG Audit Plc), the Group Head of Risk and the Head of Internal Audit. It is also able to invite others as it requires from time to time. The Committee also meets privately with both the external and internal auditors.

The responsibilities of the Audit Committee include:

• the review of the annual and interim financial statements;
• consideration of the impact of changes to accounting regulations and the financial and accounting policies of the Carillion Group;
• compliance with statutory and other external requirements;
• reviewing the role of the internal audit function and the results of its audit work and the response of management;
• reviewing the scope and results of the external audit and its cost-effectiveness;
• ensuring that the internal and external audit functions are complementary;
• monitoring the independence and objectivity of the external auditor and ensuring that the services provided (including non-audit services) provide a proper balance between objectivity and value for money;
• recommending to the Board the external auditor to be proposed to shareholders for appointment.

The Committee is authorised by the Board to (i) seek any necessary information to fulfil its duties (ii) call any member of staff to be questioned at a meeting of the Committee as and when required and (iii) obtain external professional advice, at the Company's expense, which might be necessary for the fulfilment of its duties.

The members of the Committee receive fees as Non-Executive Directors which also reflect their membership of the Audit Committee and other Board Committees. The chairman of the Audit Committee receives and additional fee for this role.

The Audit Committee and Board place great emphasis on the objectivity of the Group's auditor, KPMG Audit plc, in their reporting to shareholders.

The KPMG audit director and manager is present at Audit Committee meetings to ensure full communication of matters relating to the audit.

The overall performance of the auditor is reviewed annually by the Audit Committee, taking into account the views of management, and feedback is provided to senior members of KPMG unrelated to the audit. This activity also forms part of KPMG's own system of quality control. The Audit Committee also has discussions with the auditor, without management being present, on the adequacy of controls and on any judgmental areas. These discussions have proved satisfactory to date.

The scope of the forthcoming year's audit is discussed in advance by the Audit Committee. Audit fees are reviewed by the Audit Committee after discussions between the businesses and the local KPMG offices and are then referred to the Board for approval. Rotation of audit director's responsibilities within KPMG is required by their profession's ethical standards. The current audit director responsible for the Carillion engagement is in his second year of signing the report. There is also rotation of key members within the audit team.

Assignments awarded to KPMG and its associates have been and are subject to controls by management that have been agreed by the Audit Committee so that audit independence is not compromised. In summary, the procedures are:

• Audit related services: as auditor this is the main area of work of KPMG and its associates. If any additional accounting support is required then this is considered competitively;
• Tax consulting: in cases where they are best suited, Carillion uses KPMG and its associates but the Group also uses other tax consultancies. Significant pieces of tax work are evaluated competitively;
• General and systems consulting: all significant consulting projects are subject to competitive tender.

Other than audit, the Group Finance Director is required to give prior approval of work carried out by KPMG and its associates in excess of a predetermined threshold; part of this review is to determine that other potential providers of the services have been adequately considered.

These controls provide the Audit Committee with adequate confidence in the independence of KPMG in their reporting on the audit of the Group.