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Audit Committee - Terms of reference

Constitution

The Board of Directors has established a Committee of the Board, known as the Audit Committee, with Terms of Reference as set out below.

Purpose

The Committee shall be accountable to the Board and shall assist the Board in meeting its responsibilities for the integrity of the Company's financial statements, including its obligations under applicable laws and regulations, for the effectiveness of the Company's internal control systems and for monitoring the effectiveness and objectivity of the internal and external auditors.

The Committee's responsibility and authority covers the entire Northern Rock plc Group of companies and any joint ventures which may be entered into.

Membership

All members of the Committee and its Chairman shall be appointed by the Board.

The Committee shall be selected from the Non-Executive Directors, and shall in any event comprise no fewer than three members. The Chairman of the Board shall not be a member of the Committee.

The Board may nominate one or more of the Committee's members as a designated "audit committee financial expert", and at least one of the members shall be determined by the Board to have recent and relevant financial experience.

A quorum shall comprise three members of the Committee. In the absence of the Committee Chairman, the remaining members present shall elect one of themselves to chair the meeting.

The Committee may invite any director, executive, external auditor or other person to attend any
meeting(s) of the Committee as it may from time to time consider desirable to assist the Committee in the fulfilment of its duties.

The Company Secretary or their nominee shall act as the Secretary of the Committee.

Meetings

The Committee shall meet as and when appropriate but not less than four times a year. Those meetings shall coincide with key dates in the Company's financial reporting cycle.

The Chairman of the Committee may call additional meetings to examine and consider such other matters related to its responsibilities as the Committee may consider desirable. External or internal auditors or any member of the Committee may request a meeting if they consider it necessary.

The Committee shall meet with the External Auditors and the Director, Audit & Compliance in private at least once a year, without the presence of the executives or the Chairman of the Board, to ensure that there are no issues of concern.

AUTHORITY

The Board authorises the Audit Committee to:

• establish an Auditor Independence Policy;
• investigate any activity within its Terms of Reference, and make any recommendations to the Board which it deems appropriate on any area within its remit where action or improvement is needed;
• seek any information that it requires from any director or employee of the Company, with access to all books, records and facilities of the Company, and the Board directs that all directors and all employees co-operate with any request made by the Committee; and
• obtain at the Company's expense appropriate external professional advice, through the Company Secretary, and if necessary invite external advisers with relevant experience to attend meetings of the Committee.

DUTIES

The Committee, in carrying out its duties under these Terms of Reference, shall:

• have regard to statutory and regulatory obligations applicable to the Company, and where practicable, the Combined Code and any other relevant corporate governance codes.

Internal control and risk management

• keep under review the Company's systems of internal control and risk management system;
• review and approve the statements to be included in the annual report concerning the internal controls and risk management.

Financial reporting

• receive, review and discuss with management the following documents prior to their submission to the Board:
• interim and year-end financial statements, together with any related announcements;
• other financial statements and material financial information, such as that required for US reporting, together with any related press releases
• receive and review representations from the Chief Executive Officer and the Chief Financial Officer before the publication of any financial information to the effect that they have disclosed to the Committee and to the external auditor:
• receive and review a report on all known material weaknesses in internal controls over financial reporting which could adversely affect the Company's ability to record, summarise and report financial information; and
• receive and review a report on all known fraud (whether material or not material) that involves management or other employees who have a significant role in the Company's internal controls over financial reporting
• inspect as necessary (and, where required, approve) any report or supervisory return which may be required to be made to the FSA together with any material correspondence;
• consider and report to the Board, when material, the effect of all changes in legislation, regulation and other guidance which may affect the conduct of the business of the Group, its systems of control, its business risks or any other matters relating to the way in which the directors manage the affairs of the Company and its subsidiaries;
• review, and challenge where necessary, the actions and judgements of management, in relation to the interim and annual financial statements before submission to the Board, paying particular attention to:
• critical accounting policies and practices, and any changes in them;
• decisions requiring a major element of judgement;
• the extent to which the financial statements are affected by any unusual transactions in the year and how they are disclosed;
• the clarity of disclosures;
• significant adjustments resulting from the audit;
• the going concern assumption;
• compliance with accounting standards;
• compliance with obligations under applicable laws and regulations; and
• management's and the external and internal auditors' reports on the effectiveness of systems for internal controls, financial reporting and risk management
• review related information that is presented with the financial statements, including operating and financial review, and corporate governance statements relating to audit and to risk management;
• review the accounting policies adopted, their appropriateness, their presentation and the impact of any proposed changes;
• review the extent of compliance with appropriate legislation, with accounting standards and other guidance, and the reasons for any deviations therefrom;
• consider the major findings of material internal investigations and management's response; and
• review the Company's internal financial controls and advise the Board, at least annually, on the soundness of the internal controls and risk management systems;

Whistleblowing and anti-money laundering

• review the procedures operated by the Company Secretary for handling allegations from whistleblowers and, upon request, review a log of all complaints; and
• review the procedures operated by the Money Laundering Reporting Officer to combat money-laundering activities and fraud.

Internal Audit

• review the effectiveness and service provided by the Company's Internal Audit function;
• review and assess the internal audit programme and monitor that the internal audit function is adequately resourced and has appropriate standing within the Company, and where appropriate request that internal audit undertakes specific work;
• review and monitor management's response to any major internal audit recommendation; and
• approve the appointment or dismissal of the Director, Audit & Compliance.

Compliance

• consider compliance and its controls and review the Company's policies for ensuring compliance with relevant regulations, industry codes and legal requirements in each of the markets where the Company is represented, and the effectiveness of those policies and procedures; and
• request that Compliance undertakes specific work where appropriate.

External Audit

• at the beginning of each audit cycle, monitor that appropriate plans are in place for the audit and that the scope of the audit plans reflects the terms of the engagement letter, following the audit, discuss and review the findings of its work with the external auditors;
• discuss with the external auditor, before the audit commences, the nature and scope of the audit and to review the auditor's quality control procedures and steps taken by the auditor to respond to changes in regulatory and other requirements;
• approve the terms of engagement in respect of statutory audit work, including letters of engagement;
• assess the performance and review and monitor the independence and objectivity of the external auditor and the effectiveness of the audit process, taking appropriate action to satisfy itself of such independence and objectivity;
• monitor compliance by the external auditor with relevant ethical and professional guidance on rotation of audit partners, level of fees paid by the Company compared to overall fee income of the firm, office and partner and other related requirements;
• make recommendations, through the Board, to be put to the shareholder for approval at the Annual General Meeting, in relation to the appointment, re-appointment or removal of the external auditor;
• approve the external auditor's fees for audit and non-audit services, including pre-approval of any fees and authorisations with respect to permissible non-audit services provided by the external auditor in compliance with the Company's Auditor Independence Policy, which seeks to ensure that the provision of permissible non-audit services does not impair the external auditor's independence or objectivity;
• review on an annual basis the qualification, expertise, resources and the services provided by the external auditor and the audit process;
• monitor and review the effectiveness of the relationship between the external and internal auditors;
• consider management's response to any major external audit recommendations;
• resolve disagreements between management and the external auditor regarding financial reporting; and
• set clear hiring policies for employees or former employees of the external auditor.

OTHER

The Committee may form sub-committees from its membership to address specific aspects of its duties.

The Committee shall consider any other matters requested by the Board from time to time.

The Committee may delegate such of its powers as it thinks necessary to designated individuals to assist them in carrying out work required by the Committee.

REVIEW

The Committee will conduct an annual review of its performance, and ensure that it is provided with sufficient resources to undertake its duties, and that sufficient training is provided to members on appointment and on an on-going basis, and recommend any changes it considers necessary to the Board for approval.

These Terms of Reference will be reviewed and, where necessary updated at least once a year.

REPORTING PROCEDURES

The Chairman of the Committee shall be responsible for reporting to the Board. The minutes of all meetings and resolutions of the Committee shall be circulated to the members of the Committee and to the Board. The Secretary will retain copies of the minutes and papers.

The Chairman of the Committee or another of its members will be available at the Company's Annual General Meeting to answer questions on matters falling within the Committee's remit.

© Northern Rock plc. 2008