Croda: World Leaders in Speciality Chemicals

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at 09:28 (BST) 24 Oct 2014
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Terms of reference – Audit committee


A. Membership

  1. The Committee will consist of at least three members, each appointed by the Board of Directors (the “Board”), on the recommendation of the Nomination Committee in consultation with the Chairman of the Committee.
  2. All members of the Committee will be non-executive directors who are independent in character and judgement and free from any business or other relationship or circumstance that are likely to affect, or could appear to affect, the exercise of their independent judgement. At least one member shall have recent and relevant financial experience ideally with a professional qualification from one of the professional accountancy bodies.
  3. The Board shall appoint the Chairman of the Committee and determine the period for which he shall hold office. The Chairman of the Board shall not be a member of the Committee.
  4. The Company Secretary or their nominee shall act as the Secretary of the Committee.

B. Meetings

  1. Meetings shall be held not less than three times a year as appropriate to coincide with key dates in the Company’s financial reporting cycle including once at the planning stage before the audit and once after the audit at the reporting stage.
  2. A meeting of the Committee may be called by any member of the Committee or by the Secretary or, if they consider that one is necessary, the external auditors or the internal auditors.
  3. The quorum for any meeting shall be two.
  4. In the absence of the Chairman of the Committee, the remaining members present shall elect one of their number to chair the meeting.
  5. The Chairman of the Board, the Group Chief Executive, the Group Finance Director, the Group Financial Controller, the head of internal audit (if any) and a representative from the external auditors shall be invited regularly to attend meetings.  Other people e.g. representatives of the finance function, may be invited to attend and speak at meetings at the request of the Chairman of the Committee.
  6. Outside of the formal meeting programme, the Chairman of the Committee will maintain a dialogue with key individuals in the company involved in the company’s governance, including the Chairman of the Board, the Group Chief Executive, the Group Finance Director, the external lead audit partner and the head of internal audit.

C. Responsibilities

The Committee should carry out the duties below for the parent company, major subsidiary undertakings and the Group as a whole, as appropriate.

  1. Financial reporting
    1. The Committee shall monitor the integrity of the financial statements of the Company, including its annual and half-yearly reports, interim management statements, preliminary results’ announcements and any other formal announcement relating to its financial performance, reviewing and reporting to the Board on significant financial reporting issues and judgements which they contain having regard to matters communicated to it by the auditor.
    2. The Committee shall review and challenge where necessary:
      1. the consistency of, and any changes to, accounting policies, both on a year on year basis and across the Company/Group;
      2. the methods used to account for significant or unusual transactions where different approaches are possible;
      3. whether the Company has followed appropriate accounting standards and made appropriate estimates and judgements, taking into account the views of the external auditor;
      4. the clarity of disclosure in the Company’s financial reports and the context in which statements are made; and
      5. all material information presented with the financial statements, such as the business review/operating and financial review and the corporate governance statement (insofar as it relates to the audit and risk management).
    3. Where the Committee is not satisfied with any aspect of the proposed financial reporting by the company, it shall report its views to the Board.
  2. Narrative reporting
    The Committee should review the process of compiling the annual report and accounts and report to the Board on their findings. The Committee’s report should assist the Board in determining whether, in the Board’s view, the annual report and accounts when taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy.
  3. Internal controls and risk management systems
    The Committee shall:
    1. keep under review the adequacy and effectiveness of the Company’s internal controls and risk management systems; and
    2. review and approve the statements to be included in the annual report concerning internal controls and risk management.
  4. Whistleblowing and fraud
    The Committee shall:
    1. review the adequacy and security of the Company’s arrangements for its employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters. The Committee shall ensure that these arrangements allow proportionate and independent investigation of such matters and appropriate follow up action;
    2. review the Company’s procedures for detecting fraud; and
    3. review the Company’s systems and controls for the prevention of bribery and receive reports on non-compliance.
  5. Internal audit
    The Committee shall:
    1. monitor and review the effectiveness of the Company’s internal audit function in the context of the Company’s overall risk management system;
    2. approve the appointment and removal of the head of the internal audit function;
    3. consider and approve the remit of the internal audit function and ensure it has adequate resources and appropriate access to information to enable it to perform its function effectively and in accordance with the relevant professional standards. The Committee shall also ensure the function has adequate standing and is free from management or other restrictions;
    4. review and assess the annual internal audit plan;
    5. review promptly all reports on the Company from the internal auditors;
    6. review and monitor management’s responsiveness to the findings and recommendations of the internal auditor; and
    7. meet the head of internal audit at least once a year, without management being present, to discuss their remit and any issues arising from the internal audits carried out. In addition, the head of internal audit shall be given the right of direct access to the Chairman of the Board and to the Committee.
  6. External Audit
    The Committee shall:
    1. consider and make recommendations to the Board, to be put to shareholders for approval at the AGM, in relation to the appointment, re-appointment and removal of the Company’s external auditor. The Committee shall oversee the selection process for new auditors and if an auditor resigns the Committee shall investigate the issues leading to this and decide whether any action is required;
    2. oversee the relationship with the external auditor including (but not limited to):
      1. approval of their remuneration, whether for fees for audit services or non- audit services and that the level of fees is appropriate to enable an adequate audit to be conducted;
      2. approval of their terms of engagement, including any engagement letter issued at the start of each audit and the scope of the audit;
      3. assessing annually their independence and objectivity taking into account relevant UK professional and regulatory requirements and the relationship with the auditor as a whole, including the provision of any non-audit services;
      4. satisfying itself that there are no relationships (such as family, employment, investment, financial or business) between the auditor and the company (other than in the ordinary course of business) which could adversely affect the auditor’s independence and objectivity and monitoring implementation of the Board’s policy on the employment of former employees of the Company’s auditors;
      5. monitoring the auditor’s compliance with relevant guidance on the rotation of audit partners, the level of fees paid by the Company compared to the overall fee income of the firm, office and partner and other related requirements;
      6. assessing annually their expertise and resources and the effectiveness of the audit process which shall include a report from the external auditor on their own internal quality and compliance procedures;
      7. seeking to ensure co-ordination with the activities of the internal audit function;
    3. meet regularly with the external auditor, including once at the planning stage before the audit and once after the audit at the reporting stage. The Committee shall meet the external auditor at least once a year, without management being present, to discuss their remit and any issues arising from the audit;
    4. review and approve the annual audit plan and ensure that it is consistent with the scope of the audit engagement;
    5. review the findings of the audit with the external auditor. This shall include but not be limited to, the following:
      1. a discussion of any major issues which arose during the audit;
      2. any accounting and audit judgements;
      3. levels of errors identified during the audit;
      4. the effectiveness of the audit;
    6. review any representation letter(s) requested by the external auditor before they are signed by management;
    7. review the management letter and management’s response to the auditor’s findings and recommendations;
    8. develop and implement a policy on the supply of non-audit services by the external auditor, taking into account any relevant ethical guidance on the matter.
  7. Reporting responsibilities
    1. The Secretary shall minute the proceedings of all Committee meetings, including the names of those present
    2. The Secretary shall circulate the minutes of meetings of the Committee to all members of the Board.
    3. The Committee Chairman shall report formally to the Board on the proceedings of the Committee after each meeting on all matters within its duties and responsibilities and shall also formally report to the Board on how it has discharged its responsibilities. This report shall include:
      1. the significant issues that it has considered in relation to the financial statements (required under paragraph C.1.1) and how these were addressed;
      2. its assessment of the effectiveness of the external audit process (required under paragraph C.6.2.6) and its recommendation on the appointment or reappointment of the external auditor; and
      3. any other issues on which the Board has requested the Committee’s opinion.
    4. The Committee shall make whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed.
    5. The Committee shall produce a report on its activities to be included in the Company’s annual report. The report should include an explanation of how the Committee has addressed the effectiveness of the external audit process; the significant issues that the Committee considered in relation to the financial statements and how these issues were addressed, having regard to matters communicated to it by the auditor; and all other information requirements set out in the UK Corporate Governance Code.
    6. In the compiling the reports referred to in C.7.3 and C.7.5 the Committee should exercise judgement in deciding which of the issues it considers in relation to the financial statements are significant, but should include at least those matters that have informed the Board’s assessment of whether the company is a going concern. The report to shareholders need not repeat information disclosed elsewhere in the annual report and accounts, but can provide cross-references to that information
    7. The Chairman of the Committee, or, in his unavoidable absence, an appointed deputy, shall attend the Company’s Annual General Meeting to answer shareholders’ questions.
  8. Other matters
    The Committee shall:
    1. have access to sufficient resources in order to carry out its duties, including access to the company secretariat for assistance as required;
    2. be provided with appropriate and timely training, both in the form of an induction programme for new members and on an ongoing basis for all members;
    3. give due consideration to laws and regulations, the provisions of the UK Corporate Governance Code and the requirements of the UK Listing Authority’s Listing, Prospectus and Disclosure and Transparency Rules and any other applicable rules as appropriate;
    4. monitor the co-ordination of the internal and external auditors;
    5. oversee any investigation of activities which are within its terms of reference;
    6. at least once a year, review its own performance, constitution and terms of reference to ensure it is operating at maximum effectiveness and recommend any changes it considers necessary to the Board for approval

In carrying out their responsibilities, Committee members must act in accordance with the statement of directors’ duties set out in sections 171 – 177 of the Companies Act 2006.

D. Authority

  1. The Committee is authorised by the Board:
    1. to seek any information it requires from any employee of the Company in order to perform its duties;
    2. to investigate any matters within its terms of reference;
    3. when necessary for the fulfilment of its duties, to obtain any outside legal or other professional advice, and to secure the attendance of external advisors at its meetings, at the Company’s expense;
    4. to commission any reports or surveys which it deems necessary to fulfil its obligations; and
    5. have the right to publish in the company’s annual report, details of any issues that cannot be resolved between the Committee and the Board.

Adopted by the Board of Croda International Plc
on 23 April 2014