Composition of the Board Audit Committee

The Board appointed Audit Committee as at the end of the year comprises the following Non-Executive Directors of the Bank.

Mr. D.S. Weerakkody - Chairman
(appointed w.e.f. April 01, 2011)

Mr. L. Hulugalle
(appointed w.e.f. May 27, 2011)

Mr. M.P. Jayawardena
(appointed w.e.f. December 30, 2011)

Prof. U.P. Liyanage
(appointed w.e.f. December 30, 2011)

The Chairman of the Committee,
Mr. D.S. Weerakkody and
Mr. L. Hulugalle are Independent Directors.

Mr. D.S. Weerakkody who was a member of the Board Audit Committee, was appointed the Chairman of the Committee w.e.f. April 01, 2011, upon Mr. R.M.S. Fernando, the former Chairman of the Committee, ceasing to be a Director of the Bank w.e.f. March 30, 2011. Mr. B.R.L. Fernando and Dr. H.S. Wanasinghe who were members of the Committee ceased to be members upon relinquishing their services as Directors of the Bank w.e.f. December 31, 2011.

The Chairman of the Committee, an Independent Non-Executive Director, is an Associate of the Chartered Institute of Management Accountants, U.K. and a Fellow of the Certified Management Accountants, Sri Lanka and possesses considerable experience in the field of Finance and Management.

Refer the profiles of the members.

Mr. Reyaz Mihular, a senior practising Chartered Accountant with long years of experience in Audit, Accounting Standards and Financial Reporting serves the Committee in the capacity of a Consultant. The Bank’s Deputy General Manager - Inspection functions as the Secretary of the Committee.

Purpose and Terms of Reference

The purpose of the Board Audit Committee is to assist the Board of Directors in its general oversight of financial reporting, internal controls and functions relating to internal and external audit. The Charter of the Board Audit Committee, which is periodically reviewed and revised with the concurrence of the Board of Directors, clearly defines the Terms of Reference of the Committee. The Committee is responsible to the Board of Directors and reports on its activities regularly. The composition requirements, roles and functions of the Committee are set out in the Banking Act Direction No. 11 of 2007 on ‘Corporate Governance for Licensed Commercial Banks in Sri Lanka’ (hereinafter referred to as the Direction), ‘Rules on Corporate Governance under Listing Rules of the Colombo Stock Exchange’ and ‘Code of Best Practice on Corporate Governance’ issued jointly by The Institute of Chartered Accountants of Sri Lanka and the Securities and Exchange Commission of Sri Lanka.

Committee Meetings

During the financial year ended December 31, 2011, nine Committee Meetings were held. The proceedings of the Meetings are recorded with adequate details and reported regularly to the Board of Directors. The attendance of the Committee Members at the Meetings is given in the table. On the invitation of the Committee, the Engagement Partner of the Bank’s External Auditors, Messrs Ernst & Young, attended 5 meetings during the year. In addition, the Managing Director, the Chief Operating Officer, the Chief Financial Officer, the Chief Risk Officer, the Deputy General Manager - Systems Audit and the Deputy General Manager - Inspection attend the Committee Meetings by invitation. Members of the Senior Management of the Bank were invited to participate in the Meetings as and when the necessity arose.

Mandate and Role of the Committee

The Board Audit Committee assists the Board of Directors in fulfilling effectively its oversight responsibilities for the Bank’s accounting and financial reporting processes and audit of the Financial Statements of the Bank. The Committee has been mandated to:

• Examine in any manner, issues relating to the financial and other connected affairs of the Bank.
• Monitor all internal and external audit and inspection programmes, review internal and external audit/inspection reports and follow-up on their findings and recommendations.
• Analyse and review the risks faced by the Bank and examine the adequacy, efficiency and the effectiveness of internal control and procedures in place to avoid, mitigate or transfer such risks.
• Review the quality and the appropriateness of accounting policies and their adherence to statutory and regulatory compliance and applicable accounting standards.
• Review the Interim Financial Statements and the Bank’s Annual Report and Accounts, prepared for publication before submission to the Board.
• Monitor the financial reporting systems in place to ensure the integrity and the soundness of the information provided to the Board of Directors, Regulatory Authorities, Management and the other Stakeholders.
• Ensure that the Bank has adopted and adhere to policies which firmly commits the Bank to achieve the highest standards of good Corporate Governance Practices so that its operations conform to the highest ethical standards, good industry practices and in the best interest of all stakeholders.

The Bank has discharged the responsibilities and has complied with the requirements specified in the Section 3 (6) (ii) of the Direction.

Financial Reporting

The Committee assists the Board to discharge their responsibility in the preparation of Financial Statements that reflect a true and fair view on financial position and performance in accordance with the Bank’s accounting records and as per the requirements of the Sri Lanka Accounting Standards. The Committee reviews:

• The adequacy and effectiveness of the Internal Control Systems and Procedures to provide reasonable assurance that all transactions are accurately and completely recorded in the books of account.
• The effectiveness of the Financial Reporting Systems in place to ensure reliability of the information provided to the stakeholders.
• The accounting policies and determines the most appropriate accounting policies after considering all choices available.
• The processes by which compliance with Sri Lanka Accounting Standards and other regulatory provisions relating to financial reporting and disclosures are ensured.
• The Annual Report and Accounts and the Interim Financial Statements prepared for publication prior to submission to the Board.

Having assessed the prevailing Internal Controls Systems and Procedures, the Committee is of the view that adequate controls and procedures are in place to provide reasonable assurance that the Bank’s assets are safeguarded and that the financial position of the Bank is well-monitored and accurately reported.

Regulatory Compliance

Compliance with Mandatory Banking and other statutory requirements and the Systems and Procedures in place to assess the compliance with such requirements, have been under close scrutiny. The Committee monitors compliance with all such legal and statutory requirements through the quarterly reports being submitted to the Committee by the Corporate Management. As a further monitoring measure, the Bank’s inspection function has been mandated to conduct test checks covering all regulatory compliance requirements.

Risks and Controls

The Committee reviewed the effectiveness of the Internal Control Procedures in place to identify and manage all significant risks. A Risk Grading Matrix has been adopted for identifying, assessing and measuring the operational risks identified during inspections. The Committee seeks and obtains the required assurances from the Business Units on the remedial action in respect of the identified risks in order to maintain the effectiveness of Internal Control Procedures in place.

Internal Audit and Inspection

With the concurrence of the Board of Directors, the Bank continued to engage the services of five firms of Chartered Accountants approved by the Central Bank of Sri Lanka to supplement the Bank’s Inspection Department in carrying out branch inspections.

A programme of inspection has been formulated and the Committee regularly reviews the programme and its implementation and closely monitors the internal audit and the inspection functions. Over 340 inspection reports on Branches and Head Office Departments received the attention of the Committee and the operational deficiencies, lapses highlighted and the recommendations were given due attention. Some of the Branches were visited by the Members of the Committee to get a better understanding of the branch operations. Major findings of internal investigations with recommendations of the management were considered and appropriate instructions issued. The representatives from the audit firms assisting in branch inspections were invited to make presentations to the Committee on their observations and findings.

External Audit

The Committee assists the Board of Directors to implement the processes of engaging External Auditors for the audit services in compliance with the provisions of the Direction and agree on their remuneration with the approval of the shareholders.

The Committee makes all possible endeavours to ensure that the Auditors comply with the guidelines issued to them by the Central Bank of Sri Lanka and the application of the relevant accounting standards.

The Committee also reviewed the non-audit services provided by the Auditors with a view to ensuring that such functions do not fall within the restricted services and provision of such services will not impair the External Auditors independence and objectivity.

The Committee met with the External Auditors at the conclusion of the interim audit conducted as at June 30, 2011 to discuss their findings. Prior to commencement of the Annual Audit, the Auditors presented their audit plan, scope and the methodology proposed to be adopted in conducting the audit and discussed the audit plan with the Committee. At the conclusion, their findings and the significant issues arising out of the audit were discussed with the Committee. Non-Executive Directors had separate meetings with Auditors without any Executive being present to ensure that the Auditors had the independence to discuss and express their opinions on any matter and also for the Committee to have the assurance that all information and explanations requested by the Auditors have been provided by the management fully.

The Board Audit Committee also met the Auditors at the conclusion of the audit to review the Auditor’s Management Letter before it is submitted to the Board of Directors and to the Central Bank of Sri Lanka.

Internal Controls

The Committee with the assistance of the External Auditors closely monitored the procedures designed to maintain an effective internal control mechanism to provide reasonable assurance regarding reliability of the financial reporting system in place at the Bank and that the Bank has complied with the requirements stipulated in the Sections 3 (8) (ii) (b) and (c) of the Direction.

The Committee regularly examines the major decisions taken by the Assets and Liabilities Committee (ALCO), the Credit Policy Committee and the Executive Integrated Risk Management Committee. All exceptional items charged to the Income Statement, long outstanding items in the Bank’s Chart of Accounts, Credit Quality, Risk Management procedures and adherence to classification of non-performing loans and provisioning requirements specified by the Central Bank of Sri Lanka are regularly monitored. The Internal Control Procedures in place have been reviewed bringing in newly identified risks with control and mitigating measures there against. The credit monitoring and follow-up procedures too were reviewed.

Good Governance

Through the Code of Ethics and Whistle-Blowers Charter, all staff have been educated and encouraged to resort to whistle-blow when they suspect wrong doings or other improprieties. Highest standards of Corporate Governance and adherence to the Bank’s Code of Ethics are ensured. All appropriate procedures are in place to conduct independent investigations into incidents reported through whistle-blowing or identified through other means. Whistle-Blowers Charter guarantees the maintenance of strict confidentiality of the identity of the whistle-blowers.

Audit Committee Charter

The Audit Committee Charter was last reviewed and revised in January 2011 with the concurrence of the Board.

Evaluation of the Committee

An independent evaluation of the effectiveness of the Committee was carried out by the other members of the Board and the Committee has been found to be highly effective.

Appointment of the External Auditor

In keeping with the Bank’s policy of rotating Auditors periodically, as the present Auditors, Messrs Ernst & Young had provided their services since 2006, it has now become necessary to appoint a new Auditor. Having had several rounds of discussions evaluating the highest standards required to be maintained, the Board Audit Committee has recommended to the Board of Directors that Messrs KPMG Ford, Rhodes, Thornton & Co., be appointed as the Bank’s Auditors for the financial year ending December 31, 2012 subject to the approval of the shareholders at the forthcoming Annual General Meeting.

Transition to New SLFRS

The Audit Committee reviewed presentations made to it, by the Consultants appointed by the Bank, to satisfy itself on the progress made by the Bank in its transition to the new Sri Lanka Financial Reporting Standards (SLFRS), which comes into effect from January 1, 2012.



D.S. Weerakkody
Chairman - Board Audit Committee

Colombo
February 09, 2012