Annual Financial Report - 37 of 54

RNS Number : 0488I

HSBC Holdings PLC

20 March 2015

 



Board committees

1   Established on 17 January 2014.

2   Established on 5 December 2014.

The Board has established a number of committees consisting of Directors, Group Managing Directors and, in the case of the Financial System Vulnerabilities Committee, co-opted non-director members. The key roles of the Board committees are described above. The Chairman of each non-executive Board committee reports to each meeting of the Board on the activities of the committee since the previous Board meeting.

Group Management Board

Role and members

The GMB exercises all of the powers, authorities and discretions of the Board of Directors in so far as they concern the management and day-to-day running of the Company and its subsidiaries.

Members           Stuart Gulliver (Chairman), Iain Mackay and Marc Moses who are executive Directors, and Ann Almeida, Samir Assaf, Peter Boyles, Simon Cooper, John Flint, Pam Kaur (non-voting), Alan Keir, Stuart Levey, Antonio Losada, Sean O'Sullivan and Peter Wong, all of whom are Group Managing Directors.

The Group Chief Executive chairs the GMB. The head of each global business and global function and the chief
executive of each region attend GMB meetings, either as members or by invitation.

The GMB is a key element of our management reporting and control structure such that all of our line operations are accountable either to a member of the GMB or directly to the Group Chief Executive, who in turn reports to the Group Chairman. The Board has set objectives and measures for the GMB. These align senior executives' objectives and measures with the strategy and operating plans throughout HSBC.

The Chairman of the GMB reports to each meeting of the Board on the activities of the GMB.

The Group Chief Risk Officer chairs regular Risk Management Meetings of the GMB. The Risk Management Meetings provide strategic direction and oversight of enterprise-wide management of all risks and establish, maintain and periodically review the policy and guidelines for the management of risk within the Group. The Risk Management Meeting also reviews the development and implementation of Global Standards reflecting best practices which must be adopted and adhered to consistently throughout the Group. The Head of Group Financial Crime Compliance and Group Money Laundering Reporting Officer attends this section of the Risk Management Meeting.

Group Audit Committee

Chairman's Statement

The GAC has non-executive responsibility for oversight of and provision to the Board of advice on matters relating to financial reporting and internal controls over financial reporting. This report sets out the activities of the GAC that underpin this work and issues faced by the committee during the year.

Key areas of GAC activity during the year include: overseeing the external auditor transition from KPMG Audit Plc ('KPMG') to PricewaterhouseCoopers LLP ('PwC'); considering provisioning for conduct-related legal and regulatory issues; and integrating the approach to financial reporting and internal controls to ensure consistency across committees of the Board.

In 2015, an area of focus for the GAC will be to monitor the implementation of recovery and resolution plans, which are designed to ensure that the effects of a banking failure are mitigated, thus avoiding severe systemic disruption, while protecting the economic functions provided by the relevant banking entity. The GAC will also monitor the financial control and reporting implications of ring-fencing the retail banking operations in the UK and the establishment of operating companies globally. A further area of focus in 2015 will be the implementation of revised International Financial Reporting Standard 9 'Financial Instruments' concerning the classification and measurement of financial instruments ('IFRS 9'). This is of particular significance given the potential impact IFRS 9 will have on how we classify and measure financial assets.

Kathleen Casey joined the GAC in March 2014 and Phillip Ameen joined the GAC on 1 January 2015, bringing with them extensive experience in US financial regulatory policy and accounting standards setting and reporting, respectively. Further details are provided in Kathleen's and Phillip's biographies on page 265.

Finally, I would like to thank Renato Fassbind, whom I succeeded as Chairman of the GAC, John Coombe and the late Marvin Cheung, all of whom stepped down from the GAC during the year, for their respective contributions to the work of the committee.

Jonathan Symonds

Chairman, Group Audit Committee

23 February 2015

Role and membership

The key areas of responsibility for the GAC include:

·   monitoring the integrity of financial statements;

·   overseeing the internal controls systems over financial reporting;

·   monitoring and reviewing the effectiveness of the Internal Audit function;

·   reviewing the Company's financial and accounting policies and practices; and

·   oversight and remuneration of the external auditor and advising the Board on the appointment of the external auditor.

		Meetings                attended	Meetings                    eligible                to attend
Members1
Jonathan Symonds (Chairman)2,7		2	2
John Coombe3		4	4
Renato Fassbind4		5	5
Kathleen Casey5,7		4	4
Marvin Cheung6		4	5
Rachel Lomax7		7	7
Meetings held in 2014			7

1   All members are independent non-executive Directors.

2   Appointed as a member and Chairman on 1 September 2014.

3   Retired as Chairman and member on 23 May 2014.

4   Appointed Chairman on 23 May 2014 and retired as a member and Chairman on 1 September 2014.

5   Appointed as a member on 1 March 2014.

6   Retired as a member on 1 August 2014.

7   The Board has determined member to be independent according to SEC criteria and may be regarded as audit committee financial experts for the purposes of section 407 of the Sarbanes-Oxley Act and have recent and relevant financial experience for the purposes of the UK Corporate Governance Code.

Governance

The table below sets out the governance structure for the Board Committees whose duties relate to the integrity of HSBC's reporting to shareholders and other investors. Each major operating subsidiary has established a board committee with non-executive responsibility for oversight of matters relating to financial reporting.

A forum for the chairmen of our principal subsidiary company committees with non-executive oversight responsibility for financial reporting and risk-related matters was held in June 2014 to share views and to facilitate a consistent approach to the way in which these subsidiary company committees operate. The next forum is scheduled to be held in June 2015.

Governance structure for the oversight of financial reporting

Authority		Membership		Responsibilities include:
Board		Executive and non-executive Directors		·  Financial reporting ·  Appointing senior financial officers
Disclosure Committee		Representatives from global businesses, functions and certain Group companies		·  Reviewing the Group's material communications with investors ·  Assisting the Group Chief Executive and Group Finance Director to discharge their obligations relating to financial reporting under the Securities Exchange Act of 1934 ·  Monitoring and reviewing the effectiveness of controls and procedures established to ensure that information is disclosed appropriately and on a timely basis ·  Reporting findings and making recommendations to the Group Chief Executive, Group Finance Director and the GAC
Subsidiary board committees responsible for oversight of financial reporting and global business audit committees		Independent non-executive directors and/or HSBC Group employees with no line of functional responsibility for the activities of relevant subsidiary or global business, as appropriate		·  Providing reports to the GAC on financial statements and internal controls over financial reporting of relevant subsidiaries or businesses, as requested

How the Committee discharged its responsibilities

Throughout the year, the GAC received regular reports on a number of matters including internal audit findings and follow-up work, accounting issues and judgements, and legal and regulatory matters. The GAC received presentations from a number of members of the senior management including the Group Finance Director, Group Chief Accounting Officer and Group Head of Internal Audit. The Chairman of the GAC also had meetings with a number of these individuals separately, providing an additional forum to discuss specific issues.

During the year, the GAC held meetings with the Group Head of Internal Audit and with the external auditors in the absence of management.

In discharging its responsibilities the GAC undertakes the following principal activities:

•   oversight and challenge of the effectiveness of internal control processes that form the internal control framework for financial reporting and also of those internal controls processes that relate to the Sarbanes-Oxley Act. The Group Head of Internal Audit and the external auditor regularly report to the GAC without management present. During the year, the GAC confirmed that the Finance function was adequately resourced and that qualifications and experience of staff in that function were appropriate. Further details on internal control can be found on pages 288 to 290;

·     the adoption for full implementation in 2015 of the revised Committee of Sponsoring Organisations of the Treadway Commission ('COSO') framework, an integrated internal control framework to meet our internal controls obligations under the Sarbanes-Oxley Act and also under the UK and Hong Kong corporate governance codes;

•   review of HSBC's financial and accounting policies and their application to the reporting of the Group's activities and financial performance. Further details of this area of the GAC's work are provided in the 'Principal activities and significant issues considered' table on page 279;

•   monitoring of the legal and regulatory environment; the GAC received regular reports on litigation and on the application of changes in law, regulation, accounting policies and practices including reports on developments in programmes to implement IFRSs, Basel III/CRD IV and the recommendations of the Parliamentary Commission on Banking Standards, particularly as they relate to accounting policies and financial reporting;

•   review of the effectiveness of the Internal Audit function. The GAC's effectiveness review encompassed the scope of the Internal Audit function's work and the adequacy of the skills of the internal audit team. The GAC found the Internal Audit function remained effective and this conclusion was supported by the findings of a quality assurance review of the Internal Audit function undertaken by PwC. During the year, the GAC terms of reference and the audit charter of internal audit were updated to clarify the GAC's responsibility for the oversight of the governance of the Internal Audit function and the reporting line of the Group Head of Internal Audit to the Chairman of the GAC. The Audit Charter is available on the HSBC website at www.hsbc.com/
investor-relations/governance/internal-control;

•   an annual assessment of the effectiveness of the external auditor which includes assessments by the Group's chief financial officers of its major geographical regions. The GAC also considered the level of scrutiny applied during the audit and the interaction of the auditor with senior management. Following this review the GAC was satisfied that KPMG continued to perform effectively as external auditor; and

·   an annual review of the independence of the external auditor. All services provided by KPMG during the 2014 were pre-approved by the GAC and were entered into under the pre-approval policies established by the GAC. The pre-approved services relate to regulatory reviews, agreed-upon procedures reports, other types of attestation reports, the provision of advice and other non-audit services allowed under the SEC independence rules. The services fall into the categories of audit services, audit-related services, tax services and other services.

Following its review, the GAC confirmed that it considered KPMG to be independent and KPMG, in accordance with industry standards, has provided the GAC with written confirmation of its independence for the duration of the financial year ended 31 December 2014. The GAC approved the remuneration and terms of engagement and recommended to the Board the re‑appointment of KPMG for the financial year ended 31 December 2014.

The GAC's oversight of the audit tender process in 2013 resulted in the GAC's recommendation to the Board that PwC be appointed as the Group's auditor for the financial year beginning on 1 January 2015. The GAC has recommended to the Board that PwC be appointed at the forthcoming Annual General Meeting. PwC provided written confirmation of its independence from HSBC prior to its appointment. During 2014, regular meetings were held with PwC's audit engagement team to assist in developing the 2015 external audit plan.

The Board has approved, on the recommendation of the GAC, a policy for the employment by HSBC of former employees of KPMG and PwC. The GAC receives an annual report on such former employees who are employed and the number in senior positions. This report enables the GAC to consider whether there has been any impairment, or appearance of impairment, of the external auditor's judgement, objectivity or independence in respect of the audit. An analysis of the remuneration paid in respect of audit and non-audit services provided by KPMG for each of the past three years is disclosed in Note 7 on the Financial Statements.

In addition to addressing the matters noted above, the GAC considered the significant accounting issues described below. The GAC considered the appropriateness of management's judgements and estimates, where appropriate discussing these with KPMG, the external auditors, and reviewing the matters referred to in the external auditor's report as risks of material mis-statement.

The GAC undertakes an annual review of its own terms of reference and effectiveness. The terms of reference can be found on our website at www.hsbc.com/ investor-relations/governance/ board‑committees.

Principal activities and significant issues considered include:

Key area	Action taken
Appropriateness of provisioning for legal proceedings and regulatory matters	The GAC received reports from management on the recognition and amounts of provisions, the existence of contingent liabilities, and the disclosures relating to provisions and contingent liabilities, for legal proceedings and regulatory matters. Specific areas addressed included the legal action brought by the US Federal Housing Finance Agency in respect of mortgage-backed securities offerings, and provisioning arising from investigations conducted by the UK Financial Conduct Authority and US regulators and law enforcement agencies relating to trading activities in the foreign exchange market. In 2015, the GAC considered reports and disclosures concerning potential liabilities in connection with investigations of HSBC's Swiss Private Bank by a number of tax administration, regulatory and law enforcement authorities.
Loan impairment, allowances and charges	The GAC reviewed loan impairment allowances for personal and wholesale lending. Significant judgements and estimates reviewed included a review of loss emergence periods across our wholesale loan portfolios, consideration of the effect of falling oil prices on potential wholesale loan impairments, notable individual cases of impairment in wholesale lending and the adequacy of collective impairment allowances on personal lending portfolios.
UK customer remediation	The GAC considered the provisions for redress for mis-selling of payment protection insurance policies, provisions for mis-selling of interest rate hedging products, and liabilities in respect of breaches of the UK Consumer Credit Act.
Valuation of financial instruments	The GAC reviewed developments in market practice regarding accounting for funding costs in the valuation of uncollateralised derivatives. In line with evolving market practice, in the fourth quarter of 2014 we adopted an FFVA to account for the impact of incorporating the cost of funding into the valuation of uncollateralised derivatives.
Bank of Communications Co., Limited ('BoCom') impairment testing	During the year the GAC considered the regular impairment reviews of HSBC's investment in BoCom and management's conclusions that the investment is not impaired. When testing investments in associates for impairment, IFRS requires the carrying amount to be compared with the higher of fair value and value in use. The GAC reviewed a number of aspects of management's work in this area including the sensitivity of the result of the impairment review to estimates and assumptions of projected future cash flows and the discount rate.
Goodwill impairment testing	No impairment was identified as a result of the annual goodwill impairment test, and the review for indicators of impairment as at 31 December 2014 identified no indicators of impairment. The result for GPB Europe is sensitive to key assumptions and is subject to enhanced disclosure.
Recognition of deferred tax assets	In considering the recoverability of the Group's deferred tax assets, the GAC reviewed the recognition of deferred tax assets in the USA, Brazil and Mexico, and the associated projections of future taxable income.
Non-GAAP financial measures	The GAC considered the change in the non-GAAP financial measures presented from 'underlying performance' to an 'adjusted performance' measure in the 2014 ARA.

 

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