Audit Committee and Auditors
The Audit Committee consists of Mr Mehta (Chairman), Mr Chandra and Mr Macdonald, all of whom are independent Non-executive Directors. The Board considers that Mr Mehta has the relevant financial experience by virtue of his previous full time role at HSBC Bank and through his experience on the audit committees of other international companies.
Mr Chandra, who chaired the Government of India’s Committee on Corporate Governance, has a deep understanding of corporate governance issues in general and of the Indian environment in particular. During his career, Mr Macdonald has held senior positions in banking and financial services companies.
The activities of the Audit Committee are summarised below. In addition, the Group’s main subsidiaries, a number of which are listed on stock exchanges in India, have their own audit committees in accordance with local corporate governance requirements.
By monitoring their discussions and findings, the Audit Committee gains further insights into the quality of financial reporting and internal control.
The Audit Committee reviews the Group’s arrangement for its employees to raise concerns through whistleblowing policy in confidence, about possible wrongdoing in financial reporting or other matters. The Committee ensures that these arrangements allow proportionate and independent investigation of such matters and appropriate follow-up action.
During the year, the Audit Committee’s activities included:
- formally reviewing the Company’s draft preliminary announcement, the Annual Report and half-year report;
- reviewing the Company’s risk matrix;
- considering accounting issues and related disclosures in relation to the disposal of Sterlite Gold and the acquisition of Sesa Goa and integration of Sesa Goa’s accounting processes into the Group’s reporting framework;
- in consultation with the external auditor, determining the most appropriate accounting treatment of Sterlite’s US ADR listing;
- reviewing the internal audit reports of the Company;
- approving the internal audit plan for 2008–09, which includes the review of Management Assurance Service function;
- review fraud or misappropriation cases if any;
- evaluating the performance and effectiveness of the external auditor. This was done using a detailed questionnaire, the results of which have been considered by the Committee and which formed the basis of the Committee’s recommendation to the Board to recommend the re-appointment of Deloitte & Touche LLP as the Company’s auditors for the year ending 31 March 2009;
- reviewing the external audit engagement, scope and strategy; and
- review of the Group’s whistleblowing policy and regular update on the Group’s preparation for future Sarbanes-Oxley compliance requirements.
A copy of the Audit Committee’s terms of reference is available on request from the Company Secretary.
The Audit Committee and the Board place great emphasis on the objectivity of the Group’s auditor, Deloitte & Touche LLP (‘Deloitte’), in their reporting to shareholders. The audit partner and senior manager are 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 Deloitte unrelated to the audit. This activity also forms part of Deloitte’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 Deloitte and are then referred to the Board for approval.
Rotation of the audit partner’s responsibilities within Deloitte is required by their profession’s ethical standards. There is also rotation of key members within the audit team. Accordingly, the current signing partner of the firm is being rotated from next year.
The Committee has a policy for the provision of non-audit services by the auditors. Under this policy, the Audit Committee has agreed a scope of services which the external auditors are permitted to deliver to the Group. The policy also specifies which services are prohibited in order to safeguard the ongoing independence of the external auditors. An analysis of the non-audit fees can be found in note 8 to the financial statements.
Other than audit, the Chief Financial Officer is required to give prior approval of work carried out by Deloitte 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 confidence in the independence of Deloitte in their reporting on the audit of the Group.
Financial Reporting Systems
The Group has a comprehensive financial reporting system, which is reviewed and modified as circumstances require. Procedures include: preparing operational budgets for the forthcoming year for review and approval by the Board; preparing budgets and forecasts using conservative and consistent assumptions, which are continuously reviewed; monitoring performance against key performance indicators throughout the financial year and updating forecasts with reference to information on key risk areas.
In addition, monthly management reports are prepared both on a divisional and consolidated basis. These are presented to the Executive Committee.
Internal Control and Risk Management
The Directors have overall responsibility for ensuring that the Group maintains a robust system of internal control to provide them with reasonable assurance that all information used within the business and for external publication is adequate.
This includes financial, operational and compliance control and risk management, to ensure that shareholders’ interests and the Company’s assets are safeguarded. In line with best practice, the Board has reviewed the internal control system in place during the year and up to the date of the approval of this report.
This review ensures that the internal control system remains effective. Where weaknesses are identified as a result of the review, new procedures are put in place to strengthen controls and these are in turn reviewed at regular intervals. During the course of its review of the system of internal control, the Board has not identified nor been advised of any failings or weaknesses which it has determined to be significant.
The Group’s internal audit activity is managed through the Management Assurance Services (‘MAS’) function and is an important element of the overall process by which the Board obtains the assurance it requires to ensure that risks are properly identified, evaluated and managed. This process has been in place for the year under review and up to the date of signing of this report. It also provides assurance on the effectiveness of relevant internal controls.
The scope of work, authority and resources of MAS are regularly reviewed by the Audit Committee and its work is supported by the services of leading international accountancy firms (but specifically not including the Group’s external auditors). The Audit Committee has, during the year, reviewed the level of internal audit resources within the Group and believes that it is appropriate to the Group’s size.
Each of the Group’s principal subsidiaries has in place procedures to ensure that sufficient internal controls are maintained. These procedures include a monthly meeting of the relevant management committee and a quarterly meeting of the audit committee of that subsidiary.
These committees are appointed by the board of directors of each relevant subsidiary and the minutes of their proceedings are reviewed by the Company Secretary. Any adverse findings are reported to the Audit Committee.
The responsibilities of MAS include recommending improvements in the control environment and ensuring compliance with the Group’s procedures and policies.
The planning of internal audit is approached from a risk perspective. For internal audit purposes, the Group is divided into three auditable groupings, namely: manufacturing/operating entities, special projects and other entities. In preparing an internal audit plan, reference is made to the Group’s risk matrix, inputs are sought from senior management and project managers and audit committee members and reference is made to past audit experience and financial analysis.
This process is designed to manage rather than eliminate the risk of failing to achieve the Group’s business objectives. As such, the process can only provide reasonable rather than absolute assurance against material misstatement or loss.