The Audit Committee is a sub-committee of the board whose role and responsibilities are set out in written terms of reference which are available for inspection on the company’s website and include:

• reviewing the interim and full year accounts and results announcements of the company and any other formal announcements relating to the company’s financial performance, including monitoring their integrity and reviewing significant reporting issues and judgements contained therein, and recommending them to the board for approval;
• reviewing the Group’s systems of internal financial control and risk management;
• monitoring and reviewing the effectiveness of the company’s internal audit function and considering regular reports from internal audit on internal financial controls and risk management;
• considering the appointment or changing of external auditors and overseeing the process for their selection and making recommendations to the board on their appointment which will be put the shareholders for their approval at a general meeting and to approve their remuneration and terms of engagement;
• agreeing the nature and scope of the external auditor’s work and considering their reports on the company’s accounts, reports to shareholders and their evaluation of the systems of internal financial control and risk management; and
• monitoring and reviewing the external auditor’s independence, objectivity and effectiveness, taking into account professional and regulatory requirements.

COMPOSITION OF THE AUDIT COMMITTEE

The Audit Committee comprises all of the independent non-executive directors whose biographical details are set out in the Board of Directors and Advisors section. Their remuneration is shown in the Board Report on Remuneration.

The Chairman of the Audit Committee since 16 August 2007 has been Mr John Biles, who was appointed a director on this date, following a recommendation from the Nomination Committee. Prior to that date the Chairman was Mr Richard Scholes.

Both Chairmen are considered to have recent and relevant financial experience. Mr Biles is a chartered accountant, who served as a plc finance director (FKI plc from 1988 to 2004 and Chubb Security plc from 1991 to 1997) and is currently also the Chairman of the Audit Committee of ArmorGroup International plc (2004), Charter plc (2005) and Hermes Pensions Management Limited (2005). The Company Secretary is secretary to the Audit Committee. The Chairman, Chief Executive, Finance Director, Corporate Development Director, Head of Internal Audit, Group Financial Controller, Group Treasurer, Head of Tax and external auditors attend Audit Committee meetings as appropriate by invitation. The Committee also meets separately with the Head of Internal Audit and with the external auditors without management being present.

MAIN ACTIVITIES OF THE AUDIT COMMITTEE

The Audit Committee met four times during 2007 and in February 2008 to consider this financial report.

• at their meetings, the Audit Committee reviewed the preliminary and interim announcements of results and the draft reports and accounts for the financial year and the half year. On these occasions the Committee reviewed reports from the external auditors, identifying any accounting or judgemental items requiring its attention and commenting on risk management and control matters.
• a quarterly report from the Head of Internal Audit was presented at each meeting and the findings discussed. During the year the plan for the ensuing year’s work was considered.
• the external auditors also presented their audit plan at the December and May meetings covering scope of work to be done and during the year there was a detailed review of their management letter covering the auditors’ findings in respect of 2006.
• executives are, from time to time, required to make presentations to the Audit Committee on risk and other subjects. At the December meeting, presentations on tax and treasury were made and the Group’s treasury policies reviewed and updated.
• the Audit Committee has also been presented with information about material litigation.

During 2007 the Audit Committee also:

• assessed the independence of the external auditors;
• having reviewed their performance, recommended to the board to reappoint the auditors and agreed their fees;
• approved the Group’s accounting policies;
• approved the management representations to the auditors;
• reviewed arrangements for reporting and investigating fraud and employee concerns;
• reviewed Bodycote business principles;
• reviewed the effectiveness of internal controls and risk management process;
• reviewed the terms of reference for the Audit Committee; and
• assessed the Committee’s own effectiveness.

INDEPENDENCE OF EXTERNAL AUDITORS

The Audit Committee has put in place safeguards to ensure that the independence of the audit is not compromised. The policy in respect of services provided by the external auditors is as follows.

• Audit related services. The external auditors are invited to provide services where their position as auditors renders them best placed to undertake the work. This includes reporting and certification connected with borrowings, shareholders and other circulars, regulatory requirements and work in respect of acquisitions and disposals.
• Tax consulting. Where the external auditors are best suited to carry out the work they are asked to do it; this particularly applies to work relating to tax compliance. Major exercises or any work where conflicts would arise are put out to tender.
• General consulting work. In general and where conflicts could arise, the work is not awarded to the external auditors and is put out to tender.

INTERNAL AUDIT

Internal audit independently reviews the risk and control processes operated by management. It carries out independent audits in accordance with an internal audit plan which is agreed with the Audit Committee before the start of the financial year. This plan takes account of the risk management framework surrounding major business risks in each operation and provides a high degree of financial and geographical coverage. Internal audit reports include recommendations to improve internal controls together with agreed managerial action plans to resolve issues raised. Internal audit follows up the implementation of recommendations and reports progress to senior management and the Audit Committee.

The effectiveness of the internal audit function is reviewed and discussed on an annual basis with the Head of Internal Audit.

On behalf of the Audit Committee

J.A. Biles
Audit Committee Chairman
26 February 2008