Continued

Internal controls
The Board has overall responsibility for the Group's system of internal control and risk management and for reviewing the effectiveness of this system. Such a system can only be designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can therefore only provide reasonable, and not absolute, assurance against material misstatement or loss.

The Board is of the view that an ongoing process for identifying, evaluating and managing sufficient risks faced by the Group was in place throughout 2003 and up to the date that the Annual Report 2003 was approved. This process is regularly reviewed by the Board and accords with the internal control guidance for directors as required by the Combined Code.

A risk management committee consisting of senior functional managers exists to enhance management's ability to review and monitor the effectiveness of this process on a regular basis. The terms of reference of the committee include supporting corporate governance requirements, recommending business risk strategy and developing policies and procedures for risk management and internal controls. They also include the monitoring of the effectiveness of internal controls and the design of processes to test the effectiveness of control.

Businesses are required to include internal controls on agendas for their regular management meetings and to report half yearly to the risk management committee on actions taken to review the effectiveness of those controls. Businesses are also required to have processes to identify risks and, so far as possible, take action to reduce those risks.

At the meeting held in December 2003, the Board carried out its annual review of the effectiveness of internal controls. This involved a presentation from the risk management committee on action taken during the year to identify and reduce risks and to increase awareness of both risk management and the importance of having effective internal controls.

Audit Committee and Auditors
The Audit Committee comprises Michael Hartnall who is Chairman and Edward Wilson. The Chairman of the Company is not a member of the Audit Committee.

The Committee operates under written terms of reference which are available on the Company's website and upon request.

The responsibilities of the Committee include a detailed review of the interim and annual financial statements prior to their recommendation to the Board for approval.

The Audit Committee undertakes an annual review of the Company's financial controls. The annual review of the Company's internal control and risk management systems is undertaken by the Board of the Company.

It is intended that during 2004 a process will be implemented which will enable the effectiveness of the Internal Audit Department to be monitored and reviewed by the Audit Committee.

The Audit Committee will continue to keep under review the scope and results of the external audit and its cost effectiveness. The Audit Committee will make recommendations to the Board for the reappointment/removal of the external auditors and for approval of their remuneration and terms of engagement.

The Audit Committee reviews the process which is in place to ensure the independence and objectivity of the external auditors, including changes to the membership of the external audit team at regular intervals. The Committee has also put in place a process to review and monitor the effectiveness of the external audit.

A policy regarding the engagement of the external auditor to supply non-audit services has been implemented. The policy recognises the importance of maintaining the objectivity and independence of the external auditors by minimising their involvement in projects of a non-audit nature. It is, however, also acknowledged that due to their detailed understanding of the Company's business it may sometimes be necessary to involve the external auditors in non-audit related work.

The work which the Audit Committee undertakes to discharge its responsibilities centres around its meetings. It is proposed that in 2004 and in subsequent years the Audit Committee will meet at least four times; in February, June, July and September.

Board report on corporate governance continues on the next page >
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