BP » Topics » Internal controls and risk management

This excerpt taken from the BP 20-F filed Mar 4, 2008.
Internal controls and risk management
In 2007, the audit committee reviewed reports on risks, controls and assurance for the BP business segments (Exploration and Production and Refining and Marketing), together with gas, shipping, BP Alternative Energy and BP’s trading function. A monitoring review was also carried out on the performance of major BP projects against their original sanctioned investment.
     A joint meeting with SEEAC was held in early 2007 to review the general auditor’s report on internal controls and risk management; a further joint meeting took place in early 2008 on the same theme.
     The committee discussed key regulatory issues during the year as part of its standing agenda items, including a quarterly review of the company’s evaluation of its internal controls systems as part of the requirement of Section 404 of the Sarbanes-Oxley Act. The effectiveness



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of BP’s enterprise level controls was examined through the annual assessment undertaken by the internal audit function.
     In addition to the standing items on the agenda, the committee considered a range of other topics including an update on TNK-BP, a review of the group’s decommissioning provisions and the legal settlements reached in the US. The committee also received an independent report on the group’s US trading operations and visited the trading operations in the UK.

External auditors
The lead audit partner from Ernst & Young attends all meetings of the audit committee at the request of the committee chairman. Other audit partners are invited to attend meetings where they can utilize their areas of expertise, for example, during business segment or function reviews.
     The committee held two private meetings during the year with the external auditors without the presence of BP management, in order to discuss any issues or concerns from either the committee or the auditors.
     Performance of the external auditors is evaluated by the audit committee each year, with particular scrutiny of their independence, objectivity and viability. Independence is assisted through the limiting of non-audit services to tax and audit-related work that fall within defined categories. This work is pre-approved by the audit committee and all non-audit services are monitored quarterly.
     Fees paid to the external auditors for the year (see Financial statements – Note 17 on page 126) were $75 million, of which 16% was for non-audit work. Non-audit services provided by Ernst & Young have remained constant from 2006, and audit fees ($63 million in 2007 compared with $61 million in 2006) are also little changed as the impact of inflation and exchange rate movements have been offset by efficiency gains.
     A new lead audit partner is appointed every five years and other senior audit partners and staff are rotated every seven years. No partners or senior staff from Ernst & Young who are currently connected with the BP audit may transfer to the group. During the year, the committee approved the appointment of a new lead partner from Ernst & Young to replace the current partner who reaches five years’ service in early 2008.
     The audit committee has considered both the proposed fee structure and the audit engagement terms for 2008 and has recommended to the board that the reappointment of the external auditors be proposed to shareholders at the 2008 AGM.

Internal audit
BP’s internal audit function advises the committee on the company’s identification and control of risk. The general auditor attends each committee meeting at the invitation of the committee chairman and presents a quarterly internal audit and controls report.
     During the year, the audit committee evaluated the performance of the internal audit function and agreed to the proposed forward programme of work. The committee was also involved with finding a successor to the general auditor who is due to retire in 2008. An external consultant was engaged to undertake the search and the committee approved the appointment of an external candidate with deep audit experience.
     In 2007, the committee met once with the general auditor in a private session without the presence of executive management.

Fraud reporting and employee concerns on financial matters
The audit committee received a quarterly report from internal audit on instances of actual or potential fraud, and concerns relating to the financial accounting of the company. The committee also received reports on a quarterly basis from the group compliance and ethics function, which captured issues relating to financial matters raised through the employee concerns programme, OpenTalk, together with topics highlighted by the company’s annual certification process.

Performance evaluation
The committee conducts a yearly evaluation of its performance. For 2007, the review methodology included a survey of committee members and those individuals who regularly attend committee meetings. The

survey results were analysed by the company secretary’s office and discussed at the November audit committee meeting. Areas for future focus were identified following the evaluation, including training opportunities for committee members. These have been incorporated into the committee’s agenda for 2008.
     The audit committee plans to meet 12 times during 2008.

Safety, ethics and environment assurance committee report
Membership
The committee’s members consist solely of independent non-executive directors who have been selected to provide a wide range of operational and international expertise appropriate to fulfil the committee’s duties.
     Members of SEEAC during 2007 were Dr Walter Massey (chairman), Antony Burgmans, Sir William Castell and Sir Tom McKillop. Support was provided by the committee secretary, David Pearl (deputy company secretary).
     The committee chairman, Dr Massey, will retire as a director at the 2008 AGM. The appointment of his successor will be announced at the 2008 AGM. Mrs Cynthia Carroll will be joining the committee in due course.

Meetings and attendance
SEEAC met eight times during 2007.
     At the request of the committee chairman, each SEEAC meeting is attended by the lead partner of the external auditors (Ernst & Young) and the BP general auditor (head of internal audit).
     Reports and presentations to SEEAC are led by a member of executive management. Following a change in executive responsibilities during the year, the executive liaison with SEEAC changed from Iain Conn to Dr Anthony Hayward, who attended three meetings of the committee in the second half of 2007. Private sessions without executive management in attendance are held at the end of each meeting.

Role and authority of the committee
On behalf of the board, SEEAC monitors observance of the executive limitations policy relating to the environmental, health and safety, security and ethical performance of the company and compliance to its code of conduct.
     In common with the other BP board committees, the board governance principles set out the main tasks and requirements for SEEAC. These include monitoring and obtaining assurance that the management or mitigation of material non-financial risks is appropriately addressed by the group chief executive.

Agendas
The committee’s tasks are broad as they cover all non-financial risk, and in constructing the forward agenda, the committee considers the risks identified in BP’s business and annual plans and also the review of risks conducted by the general auditor.
     The forward agenda includes standing items that enable the committee to monitor and assess how the executive limitations policy is being observed (for example, health, safety and environment reports) and to review the non-financial risks identified in the business plan (for example, regional risk reviews). The committee also holds a joint session with the audit committee to review the general auditor’s report on internal controls and risk management.
     During the year, the forward agenda is supplemented with any emerging issues or developments that may arise.

Information
The committee receives information on agenda items from both internal and external sources, including internal audit, the safety and operations function, the group compliance and ethics function and Ernst & Young. Like other board committees, SEEAC can access independent advice and counsel if it requires, on an unrestricted basis.
     The activities of the committee and any issues that have arisen are reported back to the main board by the committee chairman following each meeting.



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Committee activities in 2007

This excerpt taken from the BP 20-F filed Mar 6, 2007.
Internal controls and risk management
In the course of 2006, the audit committee reviewed reports on risks, control and assurance for all the BP business segments (exploration and production, refining and marketing and gas, power and renewables), together with BP’s trading function. Reviews were also carried out on BP’s long-term contractual commitments and the manner in which the risks and control systems for these contracts were being managed.
     Key regulatory issues are discussed throughout the year by the committee as part of its standing agenda items. These include a quarterly review of the company’s evaluation of its internal controls systems as part of the requirement of Section 404 of the Sarbanes-Oxley Act. The committee also examines the effectiveness of BP’s enterprise level controls through the annual assessment undertaken by the company’s internal audit function.
     In addition to the recurring items on the agenda, the audit committee considered a range of other specific topics during the year, including a review of tax planning and provisions, an evaluation of the company’s pension and post-retirement benefit assumptions and an assessment of BP’s oil and gas reserves methodology.

EXCERPTS ON THIS PAGE:

20-F
Mar 4, 2008
20-F
Mar 6, 2007
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