Annual Financial Report - 38 of 56

RNS Number : 6346S

HSBC Holdings PLC

18 March 2016

 

Board committees

The Board has established a number of committees consisting of Directors, Group Managing Directors and, in the case of the Financial System Vulnerabilities Committee and the Philanthropic & Community Investment Oversight Committee, co-opted non-director members. The key roles of the Board committees are described above. The Chairman of each non-executive Board committee gives an oral report at each meeting of the Board on the activities of the committee since the previous Board meeting.

The Group Management Board ('GMB'), chaired by the Group CEO, is a management forum providing recommendations and advice requested by the Group CEO, to assist him in his management of the day-to-day operations of HSBC Holdings plc and its subsidiaries pursuant to the authority delegated to him by the Board of Directors.

The Group Chief Risk Officer, operating under the delegated authority of the Group CEO, chairs regular Risk Management Meetings of the GMB ('RMM'). The RMMs 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.

 
Group Audit Committee

I am pleased to present the 2015 report of the Group Audit Committee ('GAC'). The GAC has been very active during 2015, successfully completing the transition of the external auditor to PwC, who formally took office during the year. The GAC has instituted a process across the Group Committees to ensure clarity of accountability and an enhanced reporting protocol with the audit committees of the Group's major operating subsidiaries. This ensures clear lines of accountability at a Group, regional, country and business line level. In addition to financial reporting the GAC has taken accountability for recovery and resolution planning. During the year the GAC has closely monitored the transition to the Committee of Sponsoring Organisations of the Treadway Commission 2013 ('COSO') internal control framework as detailed in this report. The completion of this transition, which has occupied a considerable amount of time, and the remediation of entity level controls has supported the Board's ability to assess the effectiveness of the system of internal controls over financial reporting as detailed more fully on page 277. The GAC also considered the enhanced governance requirements associated with a new regulatory requirement for a viability statement, as now set out on page 277 of this Report. In 2016, the GAC's work will include overseeing improvements to the internal control framework and environment over financial reporting, the controls around the Group's resolution and recovery plans, as well as the ring fencing of the retail banking operations in the UK. We will continue working closely with the Group Risk Committee including where necessary, joint meetings, to ensure continued alignment of our respective accountabilities. I should like to thank members of the Committee, Internal Audit and PwC, as well as management, for their assistance and expertise during the year. Jonathan Symonds Chairman Group Audit Committee 22 February 2016

 

Members

Jonathan Symonds (Chairman)

Phillip Ameen

Kathleen Casey

Rachel Lomax

Based upon a review that has been undertaken, the Board has confirmed that it is satisfied that each member of the GAC is independent according to SEC criteria, may be regarded as audit committee financial experts for the purposes of section 407 of the Sarbanes-Oxley Act and has recent and relevant financial experience for the purposes of the UK and Hong Kong Corporate Governance Codes.

The Committee has complied with the relevant parts of the Competition and Markets Authority Final Order on the statutory audit market for the year ended 31 December 2015.

Role and responsibilities

The role and responsibilities of the GAC are set out in its terms of reference which can be found on our website at www.hsbc.com/about-hsbc/corporate-governance/board-committees.

The key areas of responsibility for the GAC include:

·   monitoring the integrity of financial statements;

·   overseeing the internal controls systems relating to financial reporting;

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

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

·   oversight and remuneration of the external auditor and making recommendations to the Board on the appointment of the external auditor; and

·   reviewing with management steps for recovery and resolution planning.

Governance

During 2015, the GAC held seven meetings, including a joint meeting with GRC. Attendance of the current GAC members is set out in the table on page 258. The Group Finance Director, Group Chief Accounting Officer, Group Head of Internal Audit and other members of senior management attended meetings of the GAC, by invitation, to contribute to the discussions relating to their respective areas of expertise. The external auditor, PwC, also attended all meetings and in camera sessions with internal and external audit were held at every meeting. The Chairman of the GAC had regular meetings with a number of the attendees separately to discuss agenda planning and specific issues as they arose during the year. The GAC Chairman reported matters of significance to the Board after each meeting and the minutes of the GAC meetings were made available to all Board members.

During 2015, an accounting and control maturity map was developed as a means of focusing accountabilities across the various Board Committees and to allow the escalation of issues relating to financial reporting or internal controls. The GAC worked closely with the Group Risk Committee ('GRC') and met jointly during 2015 to define and draw out areas of commonality between the GAC and the GRC and thereby avoid duplication between the two committees. From this work, it was concluded that the GAC would have accountability for recovery and resolution planning. The GRC has accountability for data integrity and quality, stress testing and the operational risk framework, which is a critical part of the internal control framework.

The annual forum for the chairs of the major subsidiary audit and risk committees was held in June 2015 which resulted in an enhanced reporting protocol, providing clearer understanding of the roles and lines of accountability at Group, regional, country and business line levels. The operation of this enhanced engagement protocol will be closely monitored during 2016 and reviewed at the next annual forum.

How the Committee discharged its responsibilities

Financial reporting

The table on page 265 shows the key areas considered during the year and the action taken.

The GAC reviewed HSBC's financial and accounting judgements and their application to the quarterly and annual reporting of the Group's activities and financial performance. In addition, the GAC reviewed the external analysts' presentations and the key financial metrics included in the 10 strategic actions, particularly the planning of risk-weighted assets.

The legal and regulatory environment was monitored and consideration given to changes in law, regulation, accounting policies and practices including developments in programmes to implement IFRS 9 Financial Instruments and Basel III/CRD IV.

Internal control and risk management

Pursuant to the requirement of section 404 of the Sarbanes-Oxley Act, the Group undertook an annual assessment of the effectiveness of internal control over financial reporting.

The GAC reviewed the Group's system of internal control over financial reporting and the developments affecting it over the course of 2015. The GAC considered the process used to evaluate the effectiveness of the system, overseeing the transition by management to the COSO framework. The transition included a comprehensive programme of upgrades across all entity level controls. This work focused on those entity level controls that did not meet the required standards and the GAC received progress updates from management at each meeting. In addition, particular emphasis was given to the remediation of controls over access management in IT and the financial controls necessary to mitigate the impact on financial reporting. Applying this new framework, the GAC assessed the effectiveness of the internal control system over financial reporting as part of the Board's overall assessment of internal controls. The Board's assessment can be found on page 275 under the heading 'Internal Control'.

Internal Audit

The GAC approved Internal Audit's annual plan, resource and budget, and considered the performance of the Group Head of Internal Audit. As this role reports to the Chairman of GAC, frequent meetings were held during the year. The GAC regularly met with the Group Head of Internal Audit without the presence of management.

The GAC annually assesses the performance and effectiveness of the Global Internal Audit function. The GAC's effectiveness review encompassed the scope of the function's work and the adequacy of the skills of its team. The GAC considered that the Global Internal Audit function remained effective. The Global Internal Audit Charter is available on the HSBC website at www.hsbc.com/investor-relations/governance/internal-control.

During the year, work was undertaken to streamline Global Internal Audit reporting across committees and to ensure key thematic issues were appropriately highlighted. These items included, for example, entity level controls remediation, financial crime compliance project execution and systems and data security. Enhancement was also made to the management information in relation to audit conclusions and the tracking-to-resolution of outstanding audit recommendations. This enhancement better aligned audit recommendations to the individual accountabilities of senior managers.

Additional resources were granted to internal audit during the year to increase assurance to all the Board committees on the execution of critical projects.

External audit

Following a competitive tender process undertaken in 2013, PricewaterhouseCoopers LLP ('PwC') was formally appointed as the Group's external auditors at the 2015 AGM. The GAC met privately with the external auditor whilst the GAC Chairman maintained regular contact with the audit partner throughout the year.

The GAC reviewed PwC's audit approach and strategy for 2015.

The fees paid to PwC for the year ended 31 December 2015 amounted to $98.4m of which $35m was payable in respect of non-audit services. Non-audit services accounted for 35.6% of the total fees payable. All non-audit services provided by PwC during 2015 were pre-approved by the GAC in accordance with the audit independence policy. The policy provides a framework for confirming that services do not create a mutual or conflicting interest and to not place PwC in the position of auditing their own work.

A further breakdown of the fees paid to the auditors for each of the last three financial years can be found in Note 7 on the Financial Statements.

The GAC considered PwC to be independent and PwC, in accordance with professional ethical standards, has provided the GAC with written confirmation of its independence for the duration of the financial year ended 31 December 2015.

The GAC has therefore recommended to the Board that PwC be re-appointed as the auditors. Resolutions concerning the re-appointment of PwC and their audit fee for 2016 will be proposed to shareholders at the 2016 AGM.

Whistleblowing

The GAC and the Conduct & Values Committee are responsible for reviewing the Group's whistleblowing procedures. The GAC received regular updates on concerns raised under these procedures which related to accounting, internal accounting controls or auditing matters, as well as management actions taken in response.

Ongoing development

Throughout the year, the GAC received presentations on a range of topics including IFRSs financial accounting developments, new reporting requirements and briefings on developments in the regulatory environment.

Committee effectiveness

The effectiveness of the GAC was evaluated as part of the overall performance evaluation of the Board.

Governance structure for the oversight of financial reporting

				·
Board		Executive and non-executive Directors		·  Financial reporting ·  Appointing senior financial officers
Disclosure Committee		The Group's Finance Director, Chief Risk Officer, Chief Legal Officer, Chief Accounting Officer, Company Secretary, Chief Operating Officer, Head of Investor Relations, Head of Communications and Head of Strategy and Planning		·  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
Major operating subsidiaries audit committees (or equivalent)		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 twice yearly assurance to the GAC on financial statements and internal controls over financial reporting of relevant subsidiaries or businesses, as requested ·  Regular reporting to the GAC in connection with any material issues regarding controls over financial reporting

Principal activities undertaken during 2015 include:

External auditor	Overseeing and assessing the effectiveness of PricewaterhouseCoopers LLP during its first year as the Group's external auditor. In assessing the effectiveness of the external auditor an audit assessment questionnaire is used to obtain feedback on the audit process. In addition, an assessment against best practice is undertaken. The assessment focuses on the overall audit process, its effectiveness and the quality of output.
Implementation of COSO Framework	GAC closely monitored the transition to the COSO Internal control framework. The transition involved a comprehensive programme of upgrading entity level controls.
Controls over IT access management	A significant issue for the GAC in 2015 was the tracking of progress over access rights to operating systems, applications and data used in the financial reporting process. This was an area identified by Internal Audit as requiring improvement and a substantial programme of work has been under way involving HSBC Operations, Services and Technology and Finance functions.
Hedge accounting review	GAC has overseen remediation work to address issues identified in relation to certain hedge accounting activities in a number of countries.

Significant accounting judgements considered during 2015 included:

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 provisioning arising from investigations by US regulators and law enforcement agencies relating to trading activities in the foreign exchange market and competition law investigations relating to foreign exchange trading activities in a number of jurisdictions. The GAC also considered management's judgements regarding provisions and contingent liabilities in connection with investigations of HSBC's Swiss Private Bank by a number of tax administration, regulatory and law enforcement authorities, and the measurement of the provision in relation to US Securities litigation ('Jaffe').
Quarterly and annual reporting	The GAC reviewed key judgements in relation to the quarterly and annual reporting. In addition, the GAC considered external analysts' presentations and other key financial metrics included in the 10 strategic actions.
Loan impairment, allowances and charges	The GAC reviewed loan impairment allowances for personal and wholesale lending. Significant judgements and estimates for personal lending included a review of loss emergence periods across the retail loan portfolios. For wholesale lending, the effects on potential wholesale loan impairments of lower oil and gas prices, the VW vehicle emissions scandal, and trends in economic factors affecting credit quality in mainland China were considered, along with judgemental allowance adjustments for economic factors and notable individual cases of impairment. In particular, the GAC considered management's judgements and assumptions informing the recognition of a judgemental collective impairment allowance for oil and gas exposures, additional to impairment allowances recognised for individual identified cases, as at 31 December 2015.
Valuation of financial instruments	The GAC reviewed the key valuation metrics and judgements involved in the determination of fair value of financial instruments. The GAC considered the valuation control framework, valuation metrics, significant year‑end judgements and emerging valuation topics.
Viability statement	The Directors now have an obligation under the UK Corporate Governance Code to state whether they believe the Group and parent company will be able to continue in operation and meet liabilities as they fall due over the next three years. During the year, the GAC considered the enhanced governance requirements surrounding the publication of the Viability Statement.
UK customer remediation	The GAC considered the provisions for redress for mis-selling of payment protection insurance ('PPI') policies, in the UK, including management's judgements regarding the effect of the proposed time-bar for claims, on which the UK Financial Conduct Authority ('FCA') is to consult. The GAC also considered the implications of the 2014 UK court case ('Plevin') for the non-disclosure of levels of commission in relation to the historical sales of PPI products, and liabilities in respect of breaches of the UK Consumer Credit Act.
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 require 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	The GAC noted that no impairment was identified as a result of the annual goodwill impairment test as at 1 July 2015. However, the review for indicators of impairment as at 31 December 2015 identified indicators of impairment which resulted in a formal re-test of GPB Europe and GB&M North America. The results for these CGU's are sensitive to key assumptions and are 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 US and Brazil and the associated projections of future taxable income.

 

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