Audit Committee Terms of Reference

1  Applicability

1.1  These Terms of Reference for the Xaar plc Audit Committee (the "Committee") are effective with effect from 16 August 2011, and supersede all previous Terms of Reference.

2  Membership

2.1  The members of the Audit Committee shall be appointed by the Board, on the recommendation of the nomination committee.  Membership of the Audit Committee shall be confined to independent non-executive directors.  The chairman of the Board can be a member of, but not chair, the Audit Committee, provided he is considered independent on appointment.

2.2  The Audit Committee shall have at least three members.  The members, at least one of whom shall have recent and relevant financial experience, shall be independent non-executive directors who are independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. 

2.3  The Audit Committee's chairman ("Chairman"), who shall be an independent non-executive director, shall be appointed by the Board, on the recommendation of the nomination committee.  The Board shall determine how long the Chairman shall hold office.  In the absence of the Committee Chairman and/or an appointed deputy, the remaining members present shall elect one of themselves to chair that meeting.

2.4  Appointments to the Audit Committee shall be for a period of up to three years, which may be extended for further periods of three years, provided the director remains independent.

2.5  If a member is unable to act for any reason, the Chairman may appoint another non-executive director as an additional member, provided always that the majority of members of the Audit Committee shall be independent, as described in clause 2.2.

3  Secretary

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

4  Quorum

4.1  The quorum necessary for the transaction of business shall be two members present in person.  A duly convened meeting of the Committee at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions vested in or exercisable by the Committee.

5  Attendance at Meetings

5.1  No one other than the Committee members shall be entitled to attend Committee meetings.   

5.2  Other persons shall attend meetings if invited by the Committee.

5.3  The Committee shall allocate all or part of at least one meeting a year to discussions with the external auditors with no members of management present. Those discussions need not be at the same meeting.

6  Frequency of Meetings

6.1  Meetings shall be held not less than four times a year (to coincide with key dates in the company's financial reporting cycle) and as otherwise required.

6.2  The external auditor may request a meeting if they consider that one is necessary.

7  Notice of Meetings

7.1  Meetings of the Committee shall be summoned by the Secretary of the Committee at the request of any of its members or at the request of the external or internal auditor if they consider it necessary.

7.2  Unless otherwise agreed, notice of each meeting confirming the venue, time and date, together with an agenda of items to be discussed, shall be forwarded to each member of the Committee, any other person required to attend and all other non-executive directors, no later than 3 working days before the date of the meeting.  Supporting papers shall be sent to Committee members and to other attendees as appropriate, at the same time.

8  Minutes of Meetings

8.1  The Secretary shall minute the proceedings and resolutions of all Committee meetings, including the names of those present and in attendance.

8.2  Draft minutes of Committee meetings shall be circulated promptly to all members of the Committee and the Chairman of the Board.  Once agreed, minutes should be circulated to all other members of the Board, unless it would be inappropriate to do so (for example, if a conflict of interest exists).

9  Annual General Meetings

9.1  The Chairman of the Committee shall attend the Annual General Meeting prepared to respond to any shareholder questions on the Committee’s activities.

10  Authority

10.1  The Committee is authorised by the Board to:

10.1.1  investigate any activity within its terms of reference;

10.1.2  seek any information that it requires from any employee of the Company and all employees are directed to cooperate with any request made by the Committee;

10.1.3   call any employee to be questioned at a meeting of the Committee as and when required;

10.1.4   obtain, within any budgetary restraints imposed by the Board, outside legal or independent professional advice, at the company's expense, and secure the attendance of outsiders with relevant experience and expertise if it considers this necessary; and

10.1.5  have the right to publish in the Company’s annual report details of any issues that cannot be resolved between the Committee and the Board.

11  Duties

11.1  The Committee should carry out the duties below for the Company, major subsidiary undertakings and the group as a whole, as appropriate.

11.2  The duties of the Committee shall be:

Financial Reporting

11.2.1  to monitor the integrity of the financial statements of the Company, including its annual and half-yearly reports, interim management statements, preliminary results' announcements and any other formal announcement relating to the Company's financial performance, reviewing significant financial reporting issues and judgements contained in them;

11.2.2  to review, and challenge where necessary:

(i)  the consistency of, and any changes to, accounting policies both on a year on year basis and across the group;

(ii)  the methods used to account for significant or unusual transactions where different approaches are possible;

(iii)  whether the Company has followed appropriate accounting standards and made appropriate estimates and judgements, taking into account the views of the external auditor;

(iv)  the clarity of disclosure in the Company’s financial reports and the context in which statements are made; and

(v)   all material information presented with the company's financial statements, such as the business review / operating and financial review and the corporate governance statement (insofar as it relates to the audit and risk management).

Internal controls and risk management systems

11.2.3  to keep under review the adequacy and effectiveness of the Company’s internal financial controls and risk management systems; and

11.2.4  to review and approve the statements to be included in the annual report concerning internal controls and risk management;

Compliance, whistleblowing and fraud

11.2.5  to review the adequacy and security of the Company's arrangements for its employees and contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters.  The  Committee shall ensure that these arrangements allow proportionate and independent investigation of such matters and appropriate follow-up action;

11.2.6  to review the Company's procedures for detecting fraud; and

11.2.7  to review the Company’s systems and controls for the prevention of bribery and receive reports on non-compliance.

Internal Audit

11.2.8  to review annually the need for an internal audit function and, if an internal audit function is in place, then;

11.2.9  to monitor and review the effectiveness of the Company’s internal audit function in the context of the Company’s overall risk management system;

11.2.10  to consider and approve the remit of the internal audit function and ensure it has adequate resources and appropriate access to information to enable it to perform its function effectively and in accordance with the relevant professional standards.  The Committee shall also ensure the function has adequate  standing and is free from management or other restrictions;

11.2.11  to approve the appointment and removal of the head of the internal audit function;

11.2.12  to review and assess the annual internal audit plan;

11.2.13  to review reports addressed to the Committee from the internal auditor;

11.2.14  to review and monitor management's responsiveness to the internal auditor's findings and recommendations; and

11.2.15  to meet the head of internal audit at least once a year, without management being present, to discuss their remit and any issues arising from the internal audits carried out.  In addition, the head of internal audit shall be given the right of direct access to the chairman of the Board and to the Committee.

External Audit

11.2.16  to consider and make recommendations to the Board, to be put to shareholders for approval at the AGM, in relation to the appointment, re-appointment and removal of the Company’s external auditor.  The Committee shall oversee the selection process for a new auditor and if an auditor resigns the Committee shall investigate the issues leading to this and decide whether any action is required;

11.2.17  to oversee the Company's relationship with the external auditor including (but not limited to):

(i)  recommendations on their remuneration, whether fees for audit or non-audit services and that the level of fees is appropriate to enable an adequate audit to be conducted;

(ii)  approval of their terms of engagement, including any engagement letter issued at the start of each audit and the scope of the audit;

(iii)  assessing annually their independence and objectivity taking into account relevant UK professional and regulatory requirements and the relationship with the auditor as a whole, including the provision of any non-audit services;

(iv)  satisfying itself that there are no relationships (such as family, financial, employment, investment or business) between the auditor and the Company (other than in the normal course of business);

(v)   agreeing with the Board a policy on the employment of former employees of the external auditor, then monitoring the implementation of this policy;

(vi)  monitoring the external auditor's compliance with relevant ethical and professional guidance on the rotation of audit partner, the level of fees that the Company pays in proportion to the total fee income of the firm, office and partner and other related requirements;

(vii)  assessing annually the qualifications, expertise and resources of the external auditor and the effectiveness of the audit process, which shall include a report from the external auditor on their own internal quality procedures; and

(viii)  seeking to ensure co-ordination with the activities of the internal audit function;

11.2.18  to meet regularly with the external auditor, including once at the planning stage before the audit commences and once after the audit at the reporting stage.  The Committee shall meet the external auditor at least once a year, without management being present, to discuss the auditor’s remit and any issues arising from the audit;

11.2.19  to review and approve the annual audit plan and ensure that it is consistent with the scope of the audit engagement;

11.2.20  to review with the external auditor the findings of the audit.  This shall include but not be limited to a discussion of any major issues that arose during the course of the audit, any accounting and audit judgements, levels of errors identified during the audit and the effectiveness of the audit;

11.2.21  to review any audit representation letter(s) requested by the external auditor before they are signed by management;

11.2.22  to review the management letter and management’s response to the auditor’s findings and recommendations; and

11.2.23  to develop and implement the Company's policy on the supply of non-audit services by the external auditor, taking into account any relevant ethical guidance on the matter.

12  Reporting

12.1  The Committee shall prepare a report on its role and responsibilities and the actions it has taken to discharge those responsibilities for inclusion in the annual report and accounts. Such a report should specifically include:

12.1.1  a summary of the role and main responsibilities of the Committee;

12.1.2  the names and qualifications of all members of the Committee during the period;

12.1.3  the number of Committee meetings and attendance by each member; and

12.1.4  the way the Committee has discharged its responsibilities.

12.2  Where disagreements between the Committee and the Board cannot be resolved, the Committee shall report the issue to the shareholders as part of the report on its activities in the company's annual report.

12.3  If the Board does not accept the Committee's recommendation regarding the appointment, reappointment and removal of the external auditor, the Committee shall include a statement explaining its recommendation and reasons why the Board has taken a different stance in the annual report.

12.4  The Committee chairman shall attend the AGM and shall answer questions, through the chairman of the Board, on the Committee's activities and responsibilities.

13  Other Matters

13.1  The Committee shall:

13.1.1  be provided with appropriate and timely training, both in the form of an induction programme for new members and on an ongoing basis for all members;

13.1.2  give due consideration to laws and regulations, the provisions of the UK Corporate Governance Code and the requirements of the UK Listing Authority’s Listing, Prospectus and Disclosure and Transparency Rules and any other applicable rules, as appropriate;

13.1.3  be responsible for co-ordination of the internal and external auditors;

13.1.4  oversee any investigation of activities which are within its terms of reference;  and

13.1.5  at least once a year, review its own performance, constitution and terms of reference to ensure it is operating at maximum effectiveness and recommend any changes it considers necessary to the Board for approval.