CONFIDENTIAL
AUDIT COMMITTEE
Minutes of the Meeting of the Audit Committee (the Committee) held at British Waterways’ London
Office, 1 Sheldon Square, Paddington W2 6TT on Wednesday 11 January 2012 at 10.30 a.m.
PRESENT:
Mr N Hugill (Chairman), Mr T Hales, Mr J Bridgeman and Mr R Green
APOLOGIES:
Mr P Sarwal, Dr J Hargreaves
IN ATTENDANCE:
M R Evans, Mr N Johnson, Mr P Ridal, Mr K Labbett, Mr A Glyde (all from
BW), Mr J Dodwell (Trustee Designate, CRT), Mr S Maslin, Mr T Lincoln, Ms C
Reid (all from Grant Thornton) and Mr M Devin (Prism Cosec, minutes)
12/A01 MINUTES OF THE PREVIOUS MEETING
The minutes of the meeting of the Committee held on Wednesday 14
September 2011 were amended and approved.
12/A02 ACCOUNTING POLICIES (BW/A337)
Mr Ridal introduced a report on (i) the process agreed with the UK and
Scottish Governments for the preparation and signing of the statutory
accounts following the transfer to the Canal and River Trust; and (ii) the
accounting policies to be used in the preparation of the annual report and
accounts for the year ended 31 March 2012 or longer period if extended.
The Committee (i) noted the process; and (ii) endorsed the proposed
accounting policies appended to the report.
12/A03 EXTERNAL AUDIT APPROACH (BW/A338)
Mr Lincoln presented Grant Thornton’s audit approach memorandum, drawing
to the attention of Committee members the key points. The date of the
transition remained the key determinant driving the audit timetable, to which
end Grant Thornton had held meetings with both Defra and the Scottish
Government since the last Audit Committee meeting in September and in
December had conducted a series of briefings for financial controllers on
charity accounting.
Turning to the key audit issues, Mr Lincoln explained that the preparation and
signing of the accounts, disclosure of the proposed statutory transfer of assets
to the CRT and going concern statement were dependent upon the transfer
date. Assuming disclosure of the transfer in the March 2012 year-end
accounts, an extensive post-balance sheet event note would be required
setting out the basis of the transaction and the proposed business model
going forward in terms of funding.
British Waterways Audit Committee – 11 January 2012
Confidential
The Committee agreed that a nuanced approach to the writing of the Group
overview section would be required, including a full narrative report
documenting the achievements of the past 50 years up to the transition to the
CRT and sensitive to the concerns of a cross section of interest groups. To
this end,
it was agreed that a short form annual report should also be
PR
produced.
It was noted that the going concern statement would apply to the 12 months
from the date of the signing of the financial statements in relation to the trade
and assets relating to BW Scotland post-transfer of the BW England & Wales
assets to the CRT.
Mr Lincoln drew the Committee’s attention the increase in the pension deficit
to approximately £125m as at the date of the last valuation (30th November
2011), which was due to falls in gilt yields. Grant Thornton’s actuarial
specialists would be reviewing the valuation and actuarial disclosures to
ensure appropriateness. Mr Bridgeman cautioned that several of the
assumptions might be liable to significant change, prefacing his remark by
declaring his interest as a pension fund trustee.
Mr Lincoln next considered the post-transaction accounting implications.
Acquisition fair value accounting principles would be applied to assets
transferred to the CRT and, in general, the accounts of the CRT would need to
be prepared in accordance with UK GAAP and the Charity SORP and Mr
Lincoln advised the Committee to seek the views of the Charity Commission
with regard to the issue of accounting format. Mr Johnson, commenting on
State aid, emphasised the importance of representing this as a continuation of
ongoing Government support.
The Committee noted and approved Grant Thornton’s fee proposal. Mr Ridal
anticipated some revision to the figures set out in GT’s report, specifically with
reference to the transfer audit, and so with no further meetings of the Audit
NH/PR
Committee scheduled until after completion of the statutory audit,
it was
agreed to delegate authority to Messrs Hugill and Ridal to consider and, if
appropriate, approve modest incremental fees for advisory work in relation to
this work. In addition, the Committee approved audit advisory work above
£12,500.
Mr Evans queried Grant Thornton’s position in relation to the procurement
rules in the event that vesting was delayed beyond 31st March 2012. Mr
Maslin explained that, in the event of a delay, Grant Thornton’s current
appointment covering the 2011-12 financial year would be extended
automatically and that an issue would arise only if GT were commissioned to
undertake work relating to the 2012-13 financial year.
12/A04 AUDIT COMMITTEE ARRANGEMENTS (BW/A339)
Mr Johnson tabled an appendix dated 10th January to his paper dated 21st
December 2011, which set out the process, responsibilities and proposed
timetable for the preparation of the annual report and accounts and Scotland
separation assuming a vesting date of 31st March 2012. The appendix set out
a suggested arrangement in the event of a delay in vesting as now seemed
likely.
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British Waterways Audit Committee – 11 January 2012
Confidential
If the transfer were to be delayed beyond 1st April 2012, it was proposed that
the annual report and accounts should be prepared as normal and laid before
both the UK and Scottish governments as in previous years.
Any transfer to the CRT after 1st April would be accounted for as a disposal of
assets from BW to the CRT as a significant transaction during the year ended
31st March 2013. BWS would then report on the period from 1st April 2012 to
the transfer date (BW trading as a GB entity) and from the date of transfer to
31st March 2013 (Scotland only entity). Mr Johnson confirmed that the
executive had endorsed this approach and further stated that the draft
NJ
Transfer Order could be changed to accommodate this proposal.
It was
agreed to approve the approach outline above.
Mr Hugill enquired at what point it would be appropriate for BWS to select an
auditor. Mr Johnson explained that the BW Board was able to make this
selection subject to the approval of the Scottish government and that BWS
could then either retain the appointed auditor or select an alternative auditor at
some future point. Mr Maslin said that Grant Thornton would be happy to be
appointed as auditor if invited to do so by the Scottish government. Mr
Bridgeman emphasised the importance of carrying out the post-transaction
audit in accordance with a timetable of the trustees’ choosing rather than by a
deadline imposed by government.
12/A05 RISK
UPDATE
(BW/A340);
CRT
RISKS
(BW/A341);
SCOTTISH
SEPARATION RISKS (BW/A342)
Mr Evans presented an update on the corporate risk dartboard, highlighting
the principal changes to the previous version, and asked the Committee to
consider the current risks and adequacy of the management actions being
taken.
Risk update
Environmental regulation remained a red risk because costs and obligations
remained undefined. Similarly, the continued water shortage had resulted in a
planned £700k spend on measures to improve flows into the waterways
network to mitigate the impact of a potentially dry summer. On a more
positive note, joint venture performance/banking covenants had moved from
yellow to green following the exit from Gloucester Quays and reduction in Isis
debt. It was also anticipated that the gap in steady state funding would narrow
following the completion of the funding agreement.
The Committee discussed at length the issue of staff morale, which remained
a red risk. This was being impacted not only by the transition to the third
sector but also the planned re-location from Paddington to Milton Keynes.
Strenuous efforts continued to be made using a variety of means, including
focus groups and ‘mending the line’ initiatives to encourage line managers to
manage staff expectations more appropriately although, as Mr Green noted,
staff anxiety was quite normal given the extent of the changes now underway.
Mr Green added that the executive team should focus also on the impact of
the changes, especially Scottish separation, on IT systems. Mr Evans
acknowledged that this was an area of weakness for many organisations
undergoing change but said that this had received close attention and that
85% of systems remained unaffected by the planned changes.
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British Waterways Audit Committee – 11 January 2012
Confidential
CRT project risks
Mr Evans presented Mr Stirling’s report dated 23rd December. The principal
movement in risk related to the parliamentary process, in particular, the 60-
day consultation process to be conducted by the Efra Committee. Mr
Bridgeman said that there should be no moratorium on good news stories
during this period relating to the work being done by BW/CRT. The vesting
date was likely to be delayed until June on account of the scrutiny process for
the Transfer Order although this was outside the control of BW/CRT.
Scotland risks
Mr Evans presented Mr Dunlop’s report dated 4th January. It was noted that
proposals were being developed to grant delegated authority to BWS and
these would be considered by the BW Board in either March or April.
It was noted that Scottish Government would be unable to appoint Grant
Thornton as auditor until after the Transfer Order had completed its passage
through parliament. Mr Hugill requested that this be communicated to Dr
Hargreaves.
12/A06 INTERNAL AUDIT PLAN 2012-13 (A/343)
Mr Labbett presented the Internal Audit plan and asked the Audit Committee
to comment on and approve the general direction of travel and coverage of the
plan.
Mr Labbett explained that the plan had been developed to cover the period
2012-13, the first period of the CRT, allocating resource over a range of
carefully identified strategic objectives. Whilst most of the key processes and
standards remained unchanged, a new workstream relating to compliance
with the regulatory regime for charities had been factored into the plan. It was
acknowledged that, as the trustees considered the developing risk profile of
the CRT, they may wish to re-prioritise tasks and include new ones into the
internal audit plan.
The Committee considered the role of the corporate website in attracting
donors and volunteers for the CRT. Mr Evans said that the website would be
a critical gateway for potential supporters and Mr Hugill enquired how the
Internal Audit team might assist in the management of the risks associated
with the website. Mr Labbett replied that this area was receiving attention and
that more work would be done in the forthcoming financial year to provide
assurance as to the resilience of the new website.
The Audit Committee approved the internal audit plan and commended it to
the Audit Committee of the CRT.
12/A07 INTERNAL AUDIT PROGRESS REPORT (BW/A344)
Mr Labbett introduced his report, stating that the work of the Internal Audit
Team during the period had included efficiency, safety and performance
measurement reviews. As a result of this work, an issue had been identified
relating to contract management and the need for improved tendering
processes and a methodology for investigating potential irregularities.
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British Waterways Audit Committee – 11 January 2012
Confidential
Mr Glyde summarised the precise nature of the irregularities and steps being
taken to address these. A supervisor had on five occasions shared tenders
from one company with another whilst both were competing for the same
tender. Consequently, one company had an unfair advantage over the other
and BW had awarded contracts unfairly. It had transpired that the supervisor
had in June 2011 declared a relationship with the relevant company but had
not done so on his previous returns.
This extent of this risk was considered to be more likely in the case of small
contracts, ie those below £20k, at which point more formal tendering
processes are applied. In the instance cited, the same individual had both
commissioned and certified the work.
Appropriate management action was in progress to address this problem.
Specifically, the Internal Audit and Legal Departments had worked closely
together to establish a framework to underpin a more robust contract
management system and Vince Moran was implementing the agreed
procedure.
Mr Hugill enquired how this issue might have been identified had the incident
cited above not occurred. Mr Labbett replied that his team carried out
healthchecks to identify trends, for example, an increase in the number of
contracts awarded to a specific contractor. In the case cited, Internal Audit
had identified similar trends in the same location and was working with the
Legal and HR Departments to address the issue. A further update would be
provided in a subsequent report to the Audit Committee.
Summarising, Mr Green, whilst noting the actions outlined above, stressed the
importance of ensuring that the Audit Committee concentrated on managing
principles and policies and not on managing outcomes.
The Audit Committee noted that the Property Committee would be considering
a report at its meeting on 1st February on the risk management process for the
acquisition and ongoing management of Daisyfield, an investment property
believed to have been underperforming since its acquisition in July 2007. The
key point for the Audi Committee was that a more robust process had
superseded the investment policy in place at the time.
12/A08 DATE OF NEXT MEETING
Mr Johnson hoped to be able to provide greater clarity by the end of February
as to whether the next scheduled meeting on Wednesday 13 June would be a
meeting of the BW or BWS Audit Committee.
There being no further business, the Chairman closed the proceedings at 1:00pm.
______________________________
Chairman
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