Audit, Compliance & Risk Committee Report

The following Directors served as members of the Audit, Compliance & Risk Committee (the ‘Committee’) during the year:

Members of the Committee are chosen from amongst the Non-Executive Directors of the Company and are selected on the basis of their knowledge and experience of financial matters, financial reporting, risk management and internal control. Each of the members of the Committee has been determined by the Board to be an Independent Non-Executive Director for the purposes of the 2010 Governance Code. Each member also satisfies the NASDAQ rules regarding the independence of members of the Committee. Committee members hold office for an initial period of two years, subject to continuing as a Director of the Company. Thereafter they may hold office for such duration as determined by the Board. Details of the fees paid to members of the Committee are set out in the Directors’ remuneration report.

The Board is satisfied that Mr Kappler, who is a fellow of the Chartered Institute of Management Accountants and who was Chief Financial Officer of the Cadbury Schweppes group from 1995 until his retirement in April 2004, has relevant financial experience. The Board has also determined that Mr Kappler is the Committee’s financial expert for the purposes of the Sarbanes-Oxley Act 2002.

Role of the Committee

The Committee’s terms of reference include all matters indicated by Disclosure and Transparency Rule 7.1 and the 2010 Governance Code. The terms of reference of the Committee are available on Shire’s website. The key responsibilities of the Committee under its terms of reference are to:

• monitor the integrity of the financial statements of the Group, including its annual and quarterly reports, preliminary results announcements and any other Shire announcement relating to the Group’s financial performance;
• ensure clarity of disclosure in financial reporting and the presentation of a balanced and understandable assessment of the Group’s financial position;
• have the primary responsibility for making a recommendation (to be put to shareholders for approval at the AGM) in relation to the appointment, re-appointment, removal and remuneration of the external auditors and to assess, at least annually, the objectivity and independence of the external auditors;
• review and discuss issues and recommendations arising from the external audit and any matters the external auditors may wish to discuss;
• set and apply a formal policy in relation to the provision of non-audit services by the external auditors with a view to preserving the external auditors’ independence and objectivity;
• review and assess the annual internal audit program, consider the findings of internal audit reviews and management’s response to them;
• review at least annually the design and effectiveness of the Group’s internal control and risk management systems;
• review the Group’s strategy for the management of the key corporate and financial risks of the Group including treasury, taxation and insurance;
• review procedures for the receipt and treatment of complaints received by the Group regarding accounting, internal accounting controls or auditing matters;
• review with the Chief Compliance and Risk Officer arrangements for the confidential, anonymous submission by employees of concerns regarding matters which could have a material impact on the Group, and to ensure these arrangements allow proportionate and independent investigation of such matters and appropriate follow up action;
• review the findings of major internal investigations and management’s response to material inquiries received from regulators or governmental agencies; and
• review the Group’s procedures for detecting fraud and to review the investigation and remediation of any alleged or suspected fraud.

The Chairman of the Committee briefs the Board at each of its meetings on the matters considered by the Committee, including those items where it considers that action is required. The terms of reference of the Committee give it authority to investigate any activity within its terms of reference and to be responsible for the resolution of disagreements between management and the external auditors regarding the Group’s financial reporting. The Committee is also authorized to seek any information it requires from any employee of the Group in order to perform its duties and to call any employee to be questioned at a meeting of the Committee.

Approval of audit and non-audit services provided by the external auditors

The Committee has adopted formal policies and procedures in relation to the provision of audit and non-audit services by the external auditors. The principal purpose of these policies and procedures is to ensure that the independence of the external auditors is not impaired.

The policies, which are in compliance with the Sarbanes-Oxley Act 2002, prohibit the provision of certain non-audit services to the Group by the external auditors, including:

• bookkeeping or other services related to the accounting records or financial statements of the Group;
• design and implementation of financial information systems;
• appraisal or valuation services, fairness opinions or contribution-in-kind reports;
• actuarial or internal audit out-sourcing services;
• legal services and expert services unrelated to the audit;
• management functions or human resource services; and
• broker, dealer, investment advisor or investment banking services.

Other types of audit and non-audit services may be performed by the external auditors if the work is either specifically pre-approved by the Committee or the work falls within a schedule of services pre-approved by the Committee in accordance with the pre-approval policy. The Committee’s pre-approval policy covers four categories of work—audit services, audit-related services, tax services and other non audit related services. If the proposed services to be provided by the external auditors fall within a category of pre-approved services and additionally the fee for those services is below pre-approved annual and transactional limits, such services may be provided by the external auditors without specific, individual approval of these services by the Committee, provided that management does not need to exercise any discretion in determining whether a proposed service falls within one of the pre-approved categories. In all cases, the Committee is notified of any pre-approved service that is provided by the external auditors.

Any non-prohibited service proposed to be provided by the external auditors which is either not a pre-approved service, or is a pre-approved service for which fees are above the annual or transactional limits, must be approved in advance by the Chairman of the Committee, who will consider whether the independence, skills and experience of the external auditors make it a suitable supplier of the proposed service.

Committee activities

The Committee met on six occasions in 2010. The members of the Committee attended all meetings they were eligible to attend. At the invitation of the Chairman of the Committee, the Chief Executive Officer, the Chief Financial Officer, the Group Financial Controller, the Chief Compliance and Risk Officer, the Vice President of Internal Audit, the Group’s external auditors and the Chairman of the Board attended Committee meetings.

In addition, the Committee held a number of separate private meetings during the course of the year with respectively, the Group’s external auditors, the Vice President of Internal Audit and the Chief Compliance and Risk Officer, without any executive member of the Board or other member of management present. The purpose of these meetings was to facilitate open discussions between the Committee members and these persons.

During 2010, the Committee’s areas of review included:

1 Financial statements

• the financial disclosures contained in the Group’s full year (2009)  and quarterly results announcements;
• various accounting matters, including but not limited to: the application of the Group’s critical accounting policies and accounting standards in the context of the financial statement disclosures; the accounting for sales rebates for ADDERALL XR following the launch of authorized generic versions; the accounting implications of US Healthcare Reform; the accounting for the acquisition of Lexington Technology Park; the accounting for the acquisition of Movetis and other in-licenses and disposals during the year; and the accounting for various tax matters;
• a review of the questions raised by the SEC concerning Shire’s 2009 Form 10-K filing and approval of Shire’s responses. The SEC was satisfied with Shire’s responses; and
• quarterly reports from the external auditors were received by the Committee and discussed. The reports addressed the following  key areas:

– external auditors' responsibility and independence;
– significant accounting estimates and judgements made by management; and
– significant accounting policies and one-off transactions.

2 Internal financial control and risk management systems

• consideration of the key risks faced by the Group and review of the Group’s plan to mitigate such risks;
• review of the Group’s annual internal audit plan, compliance with Section 404 of the Sarbanes-Oxley Act 2002 and the effectiveness of the Group’s system of internal controls over financial reporting;
• review of the Group Treasury Policy and of any proposed changes to that policy prior to consideration by the Board;
• quarterly reports on treasury investments and foreign exchange hedging;
• annual review of the Group’s tax strategy and assessment of fiscal risk;
• quarterly reports on the results of the Group’s internal audit program;
• semi-annual review of the Group’s corporate risk schedule;
• monitoring of the Group’s whistle-blowing policy; and
• review of the Group’s arrangements for the confidential, anonymous submission by employees of concerns regarding matters which could have a material impact on the Group.

3 External auditors

• an initial review of the external auditors’ performance and effectiveness during 2010, and a final review following the completion of the 2010 audit at the February 2011 Committee meeting; and
• the objectivity and independence of the external auditors and reports from the Group’s external auditors describing all relationships between the external auditors and the Group.

The Committee has remained satisfied that neither the level of non-audit services nor the nature of the work performed by the external auditors has in any way impaired their objectivity and independence. Details of the fees paid to the external auditors are disclosed in Note 32 to the consolidated financial statements.

Following the review of the external auditors’ performance the Committee resolved to recommend that the Group submit a resolution to the 2011 AGM to re-appoint Deloitte LLP as the Group’s external auditors.

The external auditors are required to rotate the audit partners responsible for the engagement every five years. There are no contractual obligations that restrict the Company’s choice of external auditors.

4 Other matters

• review of the insurance renewal program for 2010/11;
• review of the Committee’s terms of reference and recommendation of any changes to the Board for approval; and
• the evaluation of the Committee’s performance to ensure it is operating effectively.

David Kappler
Chairman of the Audit, Compliance & Risk Committee