BP (BP)

Activities in 2004

Financial reports

        During the year, the committee reviewed all annual and quarterly financial reports before recommending their publication on behalf of the board. In particular, the committee discussed significant accounting policies, estimates and judgements that had been applied in preparing these reports and received independent advice from the external auditors.

Accounting treatment

        The committee also received during the year separate reports concerning the Group's environmental and decommissioning provisions, tax exposures, pension assumptions and the status of current litigation. The committee gained assurance that such liabilities and contingencies were appropriately reflected in the financial results.

System of internal control

        Each year, specific reports on risk management and internal control within selected business and functional activities are considered. During 2004, the Exploration and Production and Petrochemicals

146

segments were reviewed, along with accounting issues of the supply and trading function that services all BP's businesses. Given the increased public and regulatory attention to hydrocarbon reserves reporting, the committee sought and received additional assurance that BP's management and recording processes are applied in a consistent and coherent manner throughout the Group. Following the adoption of the US Sarbanes-Oxley Act of 2002, an increased regulatory requirement has been placed on all companies that offer shares by listing on US stock exchanges. The committee has monitored the Company's response to the applicable requirements of this Act and, in particular, its progress in evaluating internal controls as required by rules pursuant to Section 404 of the Act.

Employee concerns reporting/whistleblowing

        The committee receives regular reports of the matters raised through the employee concerns programme (OpenTalk) and, through this process, is alerted to instances of potential fraud or matters of concern raised related to the finances and financial accounting policies of the Group.

Auditor independence and rotation

        The committee reviews on behalf of the board the independence, objectivity and viability of the auditors before an appointment recommendation is made to shareholders at the AGM. A new lead audit partner is appointed every five years and other senior audit staff are rotated every seven years.

Policy on non-audit services provided by the auditor

        To safeguard the independence of the audit process, non-audit services provided by the auditor are limited to defined audit-related work and tax services that fall within specific categories. Additionally, all such services must be pre-approved by the committee. These services have been substantially reduced in 2004 but overall fees paid to Ernst & Young have increased, since audit fees have risen significantly across the market due to the increased regulatory burden on listed companies.

Internal audit

        The committee considers the internal auditor's programme and its effectiveness twice a year. It receives regular reports of work undertaken, actions recommended and the executive management's responses to those recommendations.

Performance evaluation

        Each year the committee critically reviews its own performance and considers where improvements can be made. During 2004, the committee strengthened its tracking of outstanding issues and clarified the scope of its role and relationship with that of the ethics and environment assurance committee. It also allocated additional time to training, not least on the implications of the introduction of IFRS. To accommodate all such matters and discharge its ongoing tasks the committee increased the number of meetings from nine in 2003 to 13 in 2004.

Activities in 2004

Financial reports

        During the year, the committee reviewed all annual and quarterly financial reports before recommending their publication on behalf of the board. In particular, the committee discussed significant accounting policies, estimates and judgements that had been applied in preparing these reports and received independent advice from the external auditors.

Accounting treatment

        The committee also received during the year separate reports concerning the Group's environmental and decommissioning provisions, tax exposures, pension assumptions and the status of current litigation. The committee gained assurance that such liabilities and contingencies were appropriately reflected in the financial results.

System of internal control

        Each year, specific reports on risk management and internal control within selected business and functional activities are considered. During 2004, the Exploration and Production and Petrochemicals

140

segments were reviewed, along with accounting issues of the supply and trading function that services all BP's businesses. Given the increased public and regulatory attention to hydrocarbon reserves reporting, the committee sought and received additional assurance that BP's management and recording processes are applied in a consistent and coherent manner throughout the Group. Following the adoption of the US Sarbanes-Oxley Act of 2002, an increased regulatory requirement has been placed on all companies that offer shares by listing on US stock exchanges. The committee has monitored the Company's response to the applicable requirements of this Act and, in particular, its progress in evaluating internal controls as required by rules pursuant to Section 404 of the Act.

Employee concerns reporting/whistleblowing

        The committee receives regular reports of the matters raised through the employee concerns programme (OpenTalk) and, through this process, is alerted to instances of potential fraud or matters of concern raised related to the finances and financial accounting policies of the Group.

Auditor independence and rotation

        The committee reviews on behalf of the board the independence, objectivity and viability of the auditors before an appointment recommendation is made to shareholders at the AGM. A new lead audit partner is appointed every five years and other senior audit staff are rotated every seven years.

Policy on non-audit services provided by the auditor

        To safeguard the independence of the audit process, non-audit services provided by the auditor are limited to defined audit-related work and tax services that fall within specific categories. Additionally, all such services must be pre-approved by the committee. These services have been substantially reduced in 2004 but overall fees paid to Ernst & Young have increased, since audit fees have risen significantly across the market due to the increased regulatory burden on listed companies.

Internal audit

        The committee considers the internal auditor's programme and its effectiveness twice a year. It receives regular reports of work undertaken, actions recommended and the executive management's responses to those recommendations.

Performance evaluation

        Each year the committee critically reviews its own performance and considers where improvements can be made. During 2004, the committee strengthened its tracking of outstanding issues and clarified the scope of its role and relationship with that of the ethics and environment assurance committee. It also allocated additional time to training, not least on the implications of the introduction of IFRS. To accommodate all such matters and discharge its ongoing tasks the committee increased the number of meetings from nine in 2003 to 13 in 2004.