Chairman's introduction

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We think public reporting should focus on the issues that management regard as important and the measures they use to run their businesses. Reporting should be factual and unvarnished – a concept we encapsulate in the phrase 'telling it like it is'.

The EU's recently adopted 8th Directive introduces an obligation for transparency reporting with effect from 2008. We are publishing our Transparency Report on a voluntary basis ahead of that date.

All of the information contained in this report, with the exception of the list of public interest entities, can be found in our 2007 Annual Report. A list of our public interest entities can be accessed below

Kieran Poynter, Chairman

Legal structure, ownership and network arrangements

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PricewaterhouseCoopers LLP is a limited liability partnership. It is wholly owned by its members, who are commonly referred to as partners.

PricewaterhouseCoopers LLP, along with other firms across the world, is a member of PricewaterhouseCoopers International Limited, a company limited by guarantee registered in England. Each member firm is legally separate, locally owned and locally managed.

This legal structure gives each member firm the flexibility and autonomy to respond quickly and effectively to local conditions in its marketplace. It also reflects the fact that regulatory authorities in most countries grant the right to practise accountancy to nationally-based firms in which locally qualified professionals have at least majority ownership and control.

When they become members of PricewaterhouseCoopers International Limited and join the global network, member firms acquire the right to use the PricewaterhouseCoopers name and gain ready access to the network’s shared resources, methodologies, knowledge and expertise. In return, each firm commits to abide by a set of common policies and maintain agreed quality standards.

The global PricewaterhouseCoopers network creates a platform on which member firms share knowledge, skills and resources in order to deliver services of consistently high quality to clients across the world. In every country, PwC member firms are supported by shared methodologies, knowledge bases and technology, and by access to highly specialist expertise and thought leadership.

Governance structure

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UK Management Board

Managing the firm

PricewaterhouseCoopers LLP is a limited liability partnership. It is wholly owned by its members, who are commonly referred to as partners.

The Management Board

The Management Board is responsible for developing and implementing the policies, strategy, direction and management of the firm. It is chaired by Kieran Poynter, whose second term of office runs for three years from July 2005. The Chairman appoints the other Management Board members, all of whom are partners in the firm.

Each board member has responsibility and accountability for a specific aspect of our business. Every year, the Management Board sets and communicates its strategic priorities, which are cascaded into a business planning process. The contribution of each part of the firm is defined and monitored through balanced scorecard reporting.

The Management Board holds one main monthly meeting, but also conducts formal business at additional meetings as necessary.

Our client-facing activities are managed through a 'matrix' structure with three main elements: Lines of Service, Geography and Industries. Line of Service Leaders are accountable for resourcing and profitability, while Regional Chairmen and Industry Leaders co-ordinate our market activities.

The Supervisory Board

The Supervisory Board, which is independent of the Management Board, is elected by the partners, usually for a term of three years. Its meetings are held monthly and are attended by the Chairman, as an ex officio member. The current Supervisory Board was elected on 1 January 2007 and is chaired by Gerry Lagerberg.

The Supervisory Board provides the Chairman with guidance on matters of actual or potential concern to the partners. It is also responsible for approving the Annual Report, for the admission of new partners, for overseeing the process of electing the Chairman and for checking that our policies on partners’ remuneration are being properly applied.

The Senior Management Remuneration Committee is a sub-committee of the Supervisory Board. It sets the Chairman's profit share and approves his recommendations for the profit shares of the other Management Board members.

The Audit Committee (previously known as the Audit, Risk and Independence Committee) is a sub-committee of the Supervisory Board that has responsibility for reviewing the policies and processes for identifying, assessing and managing risks within the firm. It oversees the management of those risks, including financial control, compliance and independence. It also reviews the firm's financial statements and considers the scope, results and effectiveness of internal and external audit, including reviewing the external auditors' independence and their non-audit services and fees. The Managing Partner – Operations and Finance, together with the internal and external auditors, attend the committee's meetings by invitation. It met five times in the year ended 30 June 2007 (2006: seven times).

Description of internal quality control system and statement on effectiveness

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Maintaining quality

Our approach to quality is supported by our Code of Conduct, which embodies our core values of excellence, teamwork and leadership. The key elements enabling us to maintain our reputation for delivering consistently high quality services include the following:

Quality people: The quality of our work is determined largely by the quality of our people. Consequently, we aim to recruit, develop and retain the best and brightest. We employ rigorous procedures to ensure that our recruits are capable of performing to the high standards that we – and our clients – demand.

Throughout their time with our firm, partners and staff undergo structured training to make sure they have the skills and knowledge to provide a high quality service. This training ensures our people are alert to regulatory changes, reinforces their awareness of key compliance matters and supports the wide range of industry expertise and specialist skills available across the firm.

We regularly monitor our people's qualifications and continuing professional education to ensure that our services are delivered to clients by individuals who have the right experience and – where required – are qualified under relevant legislative and other applicable requirements.

We also monitor the motivation of our people through regular surveys and feedback from our counselling and appraisal processes. Informal guidance on career development is available through our mentoring programmes. All Lines of Service set staff retention targets and make regular reports that are monitored by the Management Board.

Sustainable culture: If our business is to enjoy continuing success, we must nurture a culture in which our people are supported, encouraged and expected to do the right thing – especially when tough decisions must be made.

Our Code of Conduct: This is embedded in our training. We also seek to combine broader management capabilities with the technical skills required for service delivery – supported by the PwC Business Diploma, which includes a three-day module on Corporate Responsibility. In addition, we support our people with our confidential whistle-blowing helpline and employee assistance programme.

Quality procedures: We have developed standard methodologies and work programmes for many of our services. These are designed to ensure that our partners and staff deliver work of the expected quality. We maintain our audit files on systems that use an internationally-applied audit framework that facilitate compliance with the relevant standards.

Consultation: Our consultative and supportive culture means that partners and members of staff are not left to take a difficult decision alone. Our people have ready access to wide informal and formal networks and technical panels that will help them reach the right solutions to difficult problems.

Quality assurance programmes: Each Line of Service runs an annual quality assurance programme, in which independent teams of partners and staff review completed engagements to assess their compliance with our quality standards and regulatory requirements. This process is also used to identify areas where partners and staff require further training or support, or where remedial action is needed.

External inspections: Each year, the Audit Inspection Unit of the UK's Professional Oversight Board, part of the Financial Reporting Council, undertakes an inspection of our audit quality. The last inspection was completed by the unit in June 2007.

Learning lessons: Our reputation for quality is high. Inevitably, given the size of our business, we do on occasion fall short of the standards we set ourselves. When this happens, we seek to discuss and resolve the issues with the client or other concerned party. We also review the matter independently for lessons learned and communicate those lessons to the relevant part of our business.

Managing risk

The Management Board takes overall responsibility for establishing systems of internal control and for reviewing and evaluating their effectiveness. The day-to-day responsibility for implementation of these systems and for ongoing monitoring of risk and the effectiveness of control rests with senior management.

These systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives or, in the case of financial controls, the risk of material misstatement in our financial statements. Accordingly, they provide only reasonable and not absolute assurance against such failure or material misstatement. The systems, which have been in place throughout the financial year and up to the date of approval of these financial statements, include:

• The Risk Council, a Management Board sub-committee, which oversees the controls put in place to identify, evaluate and manage risk.
• Our Lines of Service and our internal firm services, which maintain risk registers that document risks and the responses to them. They each carry out a risk assessment annually and report to the Risk Council on how effectively they have managed risk during the year.
• Our internal audit team, which reviews the effectiveness of the financial and operational systems and controls throughout the firm and reports to the Management Board and the Audit Committee.
• Our risk management functions, which oversee our professional services risk management systems and report to the Management Board.

Furthermore, we have procedures to assess the risks associated with new clients, including whether they meet the expected standards of integrity. As part of the annual audit cycle, we conduct risk reviews of all audit clients, and decline to act for clients that, in our opinion, fall short of our standards.

The Management Board's review of the systems of internal control has not identified any failings or weaknesses that it has determined to be significant and, therefore, no remedial actions are necessary.

Public interest entity listing

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 Public interest entities listing pdf (45 kb)

Independence practices

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Complying with regulation

Our regulatory and public interest responsibilities demand that we consistently deliver reliable and high quality work. Moreover, we are required to meet the expectations of the independent authorities that set and supervise our professional standards. Our regulatory compliance safeguards include the following:

Regulatory developments: We monitor developments in regulation that might require us to change our business model or our internal policies and procedures. We participate actively in the development of the regulatory agenda to ensure that the interests of all stakeholders are taken into account.

Policy Council: This is a sub-committee of the Management Board, which was established to ensure that our key compliance policies and procedures take account of regulatory requirements and are properly embedded in our business.

Personal confirmations: We obtain confirmations of regulatory and independence compliance from all our partners and staff when they join us and at least once a year after that. All partners, directors and client-facing managers are required to record details of their investment portfolios on a database that highlights potential exceptions against a worldwide list of restricted investments. Minor infringements of these rules can result in financial or other penalties for the partner or staff member concerned, while serious breaches can result in their leaving the firm. Each year, we conduct tests, on a sample basis, to confirm compliance by partners and staff with personal independence regulations.

Non-audit services and business relationships: The lead audit engagement partner for each audit client is required – in conjunction with the client’s audit committee, where appropriate – to consider and pre-approve any non-audit services we provide to that client. This ensures that our independence and objectivity are not compromised. It is mandatory that all non-audit services to public interest audit clients go through our Authorisation for Services system, a shared system across the PwC global network. Business relationships between the firm and third parties are also reviewed to ensure they do not impair audit independence. Compliance with independence regulations is included within the annual quality assurance programmes referred to above.

Audit team rotation: For listed audit clients, we require that the audit engagement partner and the quality review partner are rotated after five years. For public interest entities other than listed companies, we typically require rotation of the engagement partner after seven years.

Financial information

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Service analysis

The Group's total turnover of £2,107m (2006: £1,980m) is shown below. Audit services grew 8% in 2007, non-audit services to audit clients declined 4% due to Sarbanes-Oxley and IFRS implementation tail-off and services to non-audit clients grew 10%.

Segment reporting

The Group is organised into and managed through three Lines of Service, Assurance, Tax and Advisory. Operating costs that are specifically attributable are allocated directly to individual segments. Transactions with other segments arise when specialists work across Lines of Service and are disclosed on a net basis. The internal rate of transfer for these transactions is set annually between the Lines of Service.

The majority of the Group's central costs are allocated under bases within documented service level agreements and other central costs are apportioned having regard to the appropriate cost driver. The unallocated profit items below consist of the gain on disposal of the Southwark Towers property asset in the current year and past service credit on defined benefit pension schemes in the prior year. Finance income, finance expense, and tax expense in corporate subsidiaries are also unallocated.

During the year the provision of public sector business advisory services was transferred from Assurance to the Advisory Line of Service. The effect on the 2006 comparatives in this report is to reduce in Assurance and increase in Advisory: Turnover of £39m, operating profit of £8m, net assets of £14m, an average of 208 employees and an average of six members.

Assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Allocated segment assets include property, plant and equipment, intangible assets and trade and other receivables. Allocated segment liabilities include trade and other payables and provisions. Unallocated items are cash and cash equivalents, corporation and deferred tax balances and retirement benefit assets and obligations. Capital expenditure comprises additions to property, plant and equipment and intangible assets.

The Group's turnover derives principally from its operations in the UK and Channel Islands. Accordingly, the Group has presented no secondary segment analysis. Further analysis of turnover by industry, client, and type of work is provided in the Client section of this annual report. During the current and previous year no single client represented more than 1.75% of turnover.

Partner remuneration

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Members' profit shares

Members are remunerated solely out of the profits of the firm and are personally responsible for funding pensions and other benefits. Final allocation of profits to members is made by the Management Board after assessing each member's contribution for the year. The Supervisory Board approves this process and oversees its application.

Each member's profit share comprises three interrelated profit-dependent components:

• responsibility income – reflecting the member's sustained contribution and responsibilities
• performance income – reflecting how a member and his/her team(s) has performed and
• equity unit income – reflecting the overall profitability of the firm.

Each member's performance income, which in the current year represents on average approximately 39% of their profit share (2006: 40%), is determined by assessing achievements against an individually-tailored balanced scorecard of objectives based on the member’s role.

Those objectives include ensuring that we deliver quality services and that we maintain our independence and integrity.

There is transparency among the members over the total income allocated to each individual.

Drawings

The overall policy for members' drawings is to distribute a proportion of the profit during the financial year, taking into account the need to maintain sufficient funds to settle members' income tax liabilities and to finance the working capital and other needs of the business.

The Management Board sets the level of members' monthly drawings and interim profit allocations, based on a percentage of their individual responsibility income.

The Supervisory Board approves this process. The final allocation and distribution of profits to individual members is made once their performance has been assessed and the annual financial statements have been approved.