Introduction

In managing the affairs of The Crown Estate, the Board of Commissioners (the board) is committed to business integrity, high ethical values and professionalism across all its activities – all in accordance with the organisation's core values of commercialism, integrity and stewardship. As an essential part of this commitment, the board recognises the importance of high standards of governance and has in place a corporate framework document setting out the basis on which The Crown Estate operates and the formal structure for decision–making.

The Combined Code on Corporate Governance (the combined code) issued by the Financial Reporting Council is widely acknowledged as representing best practice in governance. Although The Crown Estate is not obliged to comply with the requirements of the combined code, its board nevertheless supports the principles and provisions set out in the code and, inasmuch as they are applicable to the circumstances of The Crown Estate, seeks to comply with the code where this is appropriate.

This report provides information on The Crown Estate, including the statutory position of The Crown Estate Commissioners (the board). It also describes the board's approach towards governance of The Crown Estate and, to the extent possible, how The Crown Estate has applied the principles set out in the combined code. Adherence to best practice in corporate governance is kept under regular review.

Statutory Position of The Crown Estate and The Crown Estate Commissioners (the Board)

The Crown Estate Act 1961 was enacted by Parliament in pursuance of the recommendations of the Report of the Committee on Crown Lands which visualised the role of The Crown Estate Commissioners as analogous to that of trustees of a trust fund. The Act charged the Commissioners with the management of The Crown Estate.

The Crown Estate may be traced back to the reign of King Edward the Confessor and, until the accession of King George III, the Sovereign received its rents, profits and expenses. However since 1760, the annual surplus, after deducting management costs, has been surrendered by the Sovereign to Parliament to help meet the costs of civil government. In return, the Sovereign receives the civil list and the Government meets other official expenditure incurred in support of the Sovereign.

The duties of the Commissioners are to maintain The Crown Estate as an estate in land (with such cash or investments as may be required for the discharge of their functions) and to maintain and enhance its value and the return obtained from it, but with due regard to the requirements of good management. By the Civil List Act 1952 the net income from The Crown Estate, after defraying costs of collection and management, is required to be paid into the Exchequer and made part of the Consolidated Fund (general government revenues).

The Commissioners have authority to do on behalf of the Crown in relation to The Crown Estate all such acts as belong to the Crown's right of ownership, subject only to the detailed restrictions set out in the Act. The Commissioners must comply with such directions, as to the discharge of their functions under the Act, as may be given to them by the Chancellor of the Exchequer and the Secretary of State for Scotland. The Commissioners submit annually to the Treasury a forecast of their activities in a corporate plan covering the following and two ensuing years.

The Crown Estate is not the property of the Government, nor is it the Sovereign's private estate. It is part of the hereditary possessions of the Sovereign in right of the Crown.

The Crown Estate Commissioners are a statutory corporation; they are not a company for the purposes of the Companies Act.

The Crown Estate may not hold assets other than in land, gilts or cash. Investment in equities or outside the United Kingdom is not permitted.

The Crown Estate has no general powers to borrow, either for capital purposes or for working balances, and there is thus no external indebtedness in the balance sheet.

Under the Crown Estate Act 1961 (First Schedule, paragraph 5) monies are provided by Parliament (Resource Finance) towards the cost of the Commissioners' salaries and the expense of their office.

Composition of the Board

At 31 March 2007 the board comprised eight members: a Chairman (who is non–executive), Chief Executive and six non–executive members. The composition of the board is defined by the Crown Estate Act 1961.

The board is satisfied that no individual, or group of individuals, is or has been in a position to dominate the board's decision–making. It is of the view that collectively board members provide an appropriate balance of skills, experience and qualities and that, as currently constituted, the board has strong independent and diverse characteristics.

Brief biographies of each of the current members are set out on the board members page.

The Role of the Board

The role of the board is to maintain and enhance the value of The Crown Estate and the return obtained from it, having due regard to the requirements of good management. To achieve this, the board's responsibilities include:

• setting objectives, policies and strategies;
• monitoring long–term development of the organisation in the light of the political, economic and social environments in which it operates;
• controlling and monitoring the financial state and performance of The Crown Estate;
• approving major expenditure and transactions including acquisitions, disposals and joint ventures;
• ensuring a system of controls (financial and otherwise) is in place; and
• ensuring adequate succession and remuneration arrangements are in place.

Delegated Authorities

The board has a formal schedule of matters reserved for its decision which include:

• approving the annual report and accounts;
• approving the annual budget and strategic plan;
• agreeing capital expenditure or disposals over £20 million;
• agreeing investment strategy; and
• granting or varying authority levels for board committees and the Chief Executive.

Certain matters are delegated to committees of the board and these are described in the terms of reference of the committees in question. The terms of reference of the audit committee, corporate responsibility committee, remuneration committee and Scottish committee are summarised later in this report. Other issues are delegated to executive committees which include the management board (including investment and strategy matters), stock selection committee and communications group.

Subject to these matters, the board delegates authority for the management of The Crown Estate's business to the relevant directors and heads of department. The senior management team is responsible for the delivery of financial and qualitative targets and objectives as agreed annually as part of the business planning process. A formal set of financial delegations is in place for both revenue and capital expenditure.

The Management Board as at 31 March 2007 Consisted of:

• Roger Bright, Chief Executive
• Christopher Bourchier, Director of Rural Estate
• Giles Clarke, Director of Investment Strategy & Asset Management
• Martin Gravestock, Director of Corporate Operations
• Rob Hastings, Director of Marine Estate
• Vivienne King, Head of Legal
  (appointment commenced 1 April 2006)
• John Lelliott, Director of Finance & Information Systems

Chairman of the main board Ian Grant is responsible for chairing the board and overseeing the official business of The Crown Estate. His duties include managing the business of the board, ensuring its effective operation, keeping under review the general progress and long–term development of The Crown Estate, representing The Crown Estate to its various stakeholders and the general public, chairing the selection panel for the appointment of board members, and undertaking the annual appraisal of non–executive board members.

Chief Executive

Roger Bright is responsible for directing and promoting the profitable operation and enhancement of The Crown Estate. His duties include responsibility for the development of The Crown Estate and its effective operation, strategic planning, ensuring implementation of objectives, policies and strategies approved by the board, including corporate responsibility targets and objectives, being responsible for public relations and acting as HM Treasury's appointed Accounting Officer for The Crown Estate.

The Non–Executive Members

The non–executive members are Sir Donald Curry, Hugh Duberly, Jenefer Greenwood, Martin Moore, Dinah Nichols, Ronald Spinney (appointment expired 31 December 2006), and Christopher Bartram (appointed 1 January 2007). The board reviews annually the independence of each of its non–executive members to ensure that they bring an objective viewpoint and none of the factors implying a lack of independence set out in the combined code applies. None of the non–executive members has (to his or her knowledge) any conflict of interest which has not been disclosed to the board.

The board considers annually the commitments of the non–executives and is satisfied that each of the non–executive members commits sufficient time to the fulfilment of his or her duties as a Crown Estate Commissioner.

During the financial year Hugh Duberly was nominated as senior independent director on the board.

Each of the non–executive board members has a formal letter of appointment. This letter was reviewed during the year and new letters issued recording current best practice in this area. All board members' appointments are held by virtue of a Royal Warrant for a fixed term of years.

The position of board secretary was held during 2006/07 by Martin Gravestock, Director of Corporate Operations. In addition to other executive duties, the board secretary's responsibilities include supporting and advising the Chairman, ensuring that all board procedures are followed, ensuring good information flow to board members, acting as secretary to the selection panel for new board appointments, and facilitating the induction of new board members upon appointment. All board members, including the non–executives, have access to the advice and services of the board secretary.

Appointments Process

Board members are formally appointed as Crown Estate Commissioners and are selected in accordance with the Government's general principles for public appointments. The appointment process is compliant with the principles set down in the Nolan Committee's report on Standards in Public Life. In practice, initial appointments are made for a period of four years with a further potential renewal for a second period of four years. There is a presumption against further renewal but in any event a maximum 10 year appointment period applies.

The Crown Estate is required to operate to the highest standards of prudence, probity and professional competence. board members are selected to provide collectively an appropriate balance of skills, experience and qualities, and minimal conflicts of interest with their outside activities. The potential pool is therefore relatively small, but all new appointments are publicly advertised and wide soundings with relevant outside bodies (including the Public Appointments Unit) are undertaken before a short list is drawn up.

The selection panel (comprising a representative from HM Treasury, an independent member agreed with HM Treasury and up to two existing board members including the Chairman) supervises the process, interviews candidates against the detailed written requirements of the post and agrees its recommendation. The Chairman makes recommendations for re–appointments with a presumption against second extensions. Appointments are made by Her Majesty The Queen on the advice of the Prime Minister. Special arrangements apply for appointments to the role of Chairman or Chief Executive, within the Government's principles.

Current Terms of Office

Board member	Date of most recent appointment	Date of expiry	Length of service as at 31 March 2007
Ian Grant (Chairman) *	01/10/2006	31/12/2009	4 years
Roger Bright (Chief Executive)	01/09/2005	31/09/2009	6 years
Christopher Bartram**	01/01/2007	31/12/2010	3 months
Sir Donald Curry	01/01/2004	31/12/2007	7 years
Hugh Duberly	01/01/2006	31/12/2009	5 years
Jenefer Greenwood	01/01/2004	31/12/2007	3 years
Martin Moore	22/04/2006	31/12/2010	5 years
Dinah Nichols	16/01/2007	31/12/2010	4 years
Ronald Spinney***	01/01/2003	31/12/2006	7 years
*Formerly a non–executive board member. **Christopher Bartram's appointment commenced on 1 January 2007. ***Ronald Spinney's appointment expired on 31 December 2006. Three re–appointments were made during the year to 31 March 2007.

Succession Planning

Board members' appointments and re–appointments are staggered to allow the managed transition of the board's business as non–executive board members become ineligible for re–appointment.

In addition to scheduled board meetings, each year the board attends a special meeting which takes place over two days at which broad strategy, external factors and the direction of the business is discussed in depth. This year's meeting was held in Inverness.

Board Meetings

The board held eight scheduled meetings of the main board during the year ending 31 March 2007. As well as meetings in London the board also met in Windsor and Inverness. In addition there were four meetings of the audit committee, two meetings of the corporate responsibility committee, two meetings of the remuneration committee, and three of the Scottish committee.

Information Flow

Board members receive a regular and controlled flow of information relevant to the fulfilment of their duties. For example, details of portfolio valuations and performance against external benchmarks, financial information particularly directed at revenue performance, and various market and research information and presentations.

Board papers encompass regular reports from the Chief Executive, Director of Finance and Information Systems and others on a planned basis. Formal minutes of all board meetings are circulated to board members. Between board meetings other information is circulated as necessary to keep board members informed on relevant issues, and outside of formal meetings the board may be asked to make decisions 'out of committee'. Board members have access to up–to–date corporate and market information as required.

Board Processes

All key procedures and policies affecting the board are maintained and operated by the board secretary.

Liability

Board members are indemnified against any personal civil liability which is incurred in proper execution of their board functions provided that the board member has acted honestly, reasonably, in good faith and without negligence.

Board Effectiveness

Board Performance Evaluation

During the last financial year, the Chairman carried out an annual appraisal with each of the non–executive board members. These evaluations were conducted against the background of a comprehensive check list which ensured that there was opportunity to gain assurances or comments in respect of areas which required action. The evaluation included the perspective of the non–executive board member (covering the view from his/her position and from the board), and the Chairman's assessment points.

Also during the year the board reviewed the performance of the relationship between themselves, the Chairman and the Chief Executive. In this matter the board considered the relationship and communication to be positive and that there were no issues to be addressed.

Induction

All new board members receive a full, formal and tailored induction on joining the board. The process is overseen by the board secretary. This involves the provision of necessary background information, briefing by key management personnel and implementing training where appropriate.

Board Committees

The board has established a number of both non–executive and executive committees and ensures that each committee is provided with sufficient resources to enable it to undertake its duties.

A summary of the role and terms of reference of the four board committees (audit, corporate responsibility, remuneration and Scottish committee) is given below. The terms of reference of these committees are available on request.

In addition to these four board committees, three other executive committees operate with specific authority delegated by the board. First, the management board is chaired by the Chief Executive and comprises directors and heads of department. The management board considers strategic issues, significant organisational policies and reviewing investment strategy, and operates within the financial delegation of the Chief Executive. In reviewing investment strategy, the committee considers economic and property market analyses and forecasts, the overall weightings of the portfolio and the movements necessary to optimise performance. The stock selection committee considers, amongst other things, specific investment and divestment proposals, reviewing them against strategy. The third executive committee is the communications group whose duties include considering questions of PR policy and reviews and recommends an annual strategy and programme of PR activities.

There is no nominations committee as the appointment of board members is conducted in line with principles approved by the Government for public appointments.

Audit Committee

Members

The members of the committee as at 31 March 2007 consisted of:

• Martin Moore (Chairman)
• Sir Donald Curry, non–executive board member
• Christopher Bartram, non–executive board member
• Secretary to the Audit Committee, Martin Gravestock, Director of Corporate Operations.
• Ronald Spinney was a member and Chairman of the committee until 31 December 2006, when his appointment expired.

The Chairman of the board believes that the financial knowledge and experience of the Audit Committee meet the needs of the business. The Chairman of the board and the audit committee has the authority to appoint specialist advisers as necessary.

Meetings are held three times a year. The following executives ordinarily attend meetings: the Chief Executive, the Director of Investment and Asset Management, the Director of Finance and Information Systems and the Head of Internal Audit.

Terms of reference

The board has delegated responsibility for risk management, internal control, internal and external audit to the committee.

Specific duties include:

• reviewing the annual financial statements;
• considering the external audit appointment, the audit fee and the nature and scope of the external audit;
• reviewing reports from the external auditor;
• reviewing the risk management process;
• setting internal control policies and receiving regular reports on the effectiveness of internal control; and
• reviewing annually the scope, authority and resources of internal audit.

The committee is authorised by the board to investigate any activity or occurrence and to seek any information that it requires, including from employees.

'Whistleblowing'

A 'whistleblowing' policy is in place within the organisation. If any employee believes that they are required to act in a way which:

• is illegal, improper, or unethical;
• is in breach of a professional code;
• may involve possible maladministration, fraud or misuse of public funds; or,
• is otherwise inconsistent with the internal code, they should either raise the matter through their management line or else approach in confidence the Head of Internal Audit who has been entrusted with the duty of investigating employee concerns about illegal, improper or unethical behaviour. Employees should also draw attention to cases where:
• they believe there is evidence of irregular or improper behaviour elsewhere in the organisation, but where they have not been formally involved;
• there is evidence of criminal or unlawful activity by others; or,
• they are required to act in a way which, for them, raises a fundamental issue of conscience.

This policy has been reviewed to bring it into line with current public and private sector standards.

The Comptroller and Auditor General

The National Audit Office (NAO) acts as The Crown Estate's external auditors. The appropriate NAO Director attends meetings of the audit committee and has complete access to all financial and other information. The Chairman of the audit committee meets privately with the relevant NAO Director periodically in accordance with best practice.

Report of the committee's activities

During the year, the committee met three times (on each occasion with the external auditor in attendance) for routine business and one special meeting to consider the Internal Audit structural review, and considered all matters within the committee's terms of reference, in particular:

• external audit strategy and report;
• internal audit charter, scope and authority, programme and report;
• risk management;
• health and safety;
• annual and interim accounts and accounting policy;
• valuation;
• litigation;
• retrospective investment appraisals;
• pension scheme; and
• internal audit departmental structure.

During the last financial year Internal Audit completed a performance review of the audit committee. This review was carried out against the background of the National Audit Office: Audit Committee Self Assessment checklist and Deloitte: Audit Performance Evaluation. The review concluded that the audit committee complies substantially with best practice for public and private sector organisations. There were a small number of areas where improvements were identified and appropriate remedial actions recommended.

Remuneration Committee

The committee's membership, terms of reference and activity is described in the Remuneration Committee report.

Corporate Responsibility Committee

Members

The current members are:

• Roger Bright (Committee Chairman)
• Dinah Nichols, non–executive board member
• The secretary to the committee is Jane Baptist, a corporate support executive.

Meetings are held at least quarterly. The following executives ordinarily attend meetings: Director of Corporate Operations, members of the management board, and Head of Corporate Support. The committee reports to the main board particularly in relation to relevant policy statements or decisions and the achievements against objectives and targets.

Terms of Reference

The committee's main purpose is to ensure that there is an established framework in place for improving the management of the historic, environmental and social aspects of the business of The Crown Estate and that the organisation's reputation as a responsible landowner continues to be enhanced. The duties of the committee include:

• formulating policy and strategy in relation to corporate responsibility for approval by the board;
• ensuring implementation of corporate responsibility and environmental policies;
• overseeing production of the annual corporate responsibility report; and
• providing representation for The Crown Estate at external events relating to corporate responsibility.

Report of the Committee's Activities

During the year, the committee met twice and considered all matters within the committee's terms of reference, in particular:

• setting objectives and targets;
• monitoring performance;
• good management practice;
• benchmarking; and
• external consultancy and audit advice.

The work of the committee is reflected in the corporate responsibility section of the annual report and accounts.

Scottish Committee

During the last financial year the Chairman established a Scottish committee, the duties of which are set out below.

The current members are:

• Ian Grant (Committee Chairman)
• Roger Bright, Chief Executive

The secretary to the Scottish committee is Alex Adrian as a member of the Edinburgh office.

Meetings are held at least quarterly. The following executives ordinarily attend meetings: Director of Marine Estate, Director of Rural Estate, Director of Investment and Asset Management, Head of Edinburgh Office and Head of Customer Management (Rural).

Duties

The Scottish committee will:

• operate within the strategic and policy parameters established by the board and other specialist committees, including in particular the CR committee, the management board, and the communications group;
• take decisions within this framework reporting as necessary to the appropriate board or committees;
• take decisions on significant issues within the appropriate delegations affecting Scotland;
• consider any major investment or disinvestment decision affecting Scotland and report its views to the appropriate board or committee exercising higher capital delegations;
• determine the interpretation of broad policy insofar as it specifically affects The Crown Estate's interests in Scotland;
• maintain an overview on the performance of Scottish interests against quarterly and annual financial targets;
• take decisions in relation to the implementation of the communications programme for Scotland;
• consider, appraise and appoint principal outsourcing contracts in Scotland.

Report of the Committee's Activities

During the year the committee met three times and considered all matters within the committee's terms of reference, in particular:

• monitoring financial performance;
• stewardship;
• investment/disinvestment;
• communication.

Attendance at Board and Committee Meetings

Attendance by individual members at board, audit and corporate responsibility committee meetings, which they were eligible to attend, was as follows:

	Main board	Board Strategy	Audit Committee	Corporate Responsibility Committee	Remuneration Committee	Scottish Committee
Number of meetings in year	8	1	4*	2	2	3
Ian Grant	8	1	n/a	n/a	n/a	3
Roger Bright	8	1	4	2	2	3
Christopher Bartram**	2	n/a	1	n/a	n/a	n/a
Sir Donald Curry	6	1	4	n/a	n/a	n/a
Hugh Duberly	8	1	n/a	n/a	2	n/a
Jenefer Greenwood	8	1	n/a	n/a	2	n/a
Martin Moore	7	1	4	n/a	2	n/a
Dinah Nichols	7	1	n/a	2	n/a	n/a
Ronald Spinney***	5	1	2	n/a	n/a	n/a
*There were three scheduled audit committee meetings, plus one 'ad–hoc' special meeting. **Christopher Bartram's appointment commenced on 1 January 2007. ***Ronald Spinney's appointment expired on 31 December 2006.

In addition board members have taken part in formal visits to estates at Glenlivet, Ashby St Ledgers, Patshull, West of Severn, Delamere and Cauldon Low, Sunk Island and the Welsh Commons. In addition a number of visits were made to parts of the London and marine estates, including coastal areas of Scotland, as well as attendance at a number of ad–hoc seminars and events.

Auditors

The financial statements of The Crown Estate are audited by the Comptroller and Auditor General in accordance with section 2(6) of The Crown Estate Act 1961. Visit the audit certificate. No fees have been incurred in respect of non–audit services. The audit fee for work performed in the year of account was £95,000.

Statement on Disclosure of Relevant Audit Information to the Entity's Auditors.

So far as the Accounting Officer is aware there is no relevant audit information of which the entity's auditor is unaware: and the Accounting Officer has taken all the steps that he ought to have taken to make himself aware of any relevant audit information and to establish that the entity's auditors are aware of this information.

Health and Safety

Following the retirement of our in–house adviser we appointed consultants to review the arrangements for the management of health and safety across the organisation; to introduce modern, best practice throughout and to provide practical advice as required. Sypol were appointed following a competitive tender.

Following on from the review of health and safety management and practice, our policy was updated and our manual was rewritten in a more usable and practical format. Particular attention was paid to ensuring that responsibilities were made clear to all concerned.

Electronic risk assessment systems were successfully used to undertake workstation assessments and to meet the Control of Substances Hazardous to Health regulations. It is intended that all paper based documents and risk assessments will be transferred into electronic format to achieve consistency across all estates.

Both active and reactive safety monitoring has been revisited. Accident and incident reporting has increased following the delivery of health and safety awareness training to all employees and this has helped to indicate more accurate safety performance across all operations. The reporting of near misses has also increased significantly from no reported incidents in 2005/06 to 29 in 2006/07.

All near misses (an incident which did not result in injury but that had the potential to do so) are now investigated and efforts taken to both minimise recurrence and to inform relevant employees of the need to adhere to the recognised safety controls and procedures. Accidents and near misses involving members of the public have also been reported and recorded more effectively.

Programmes of safety inspections have been implemented at all locations and standards in work areas have improved accordingly. The instigation of these inspections has been very well received by both managers and employees and a definite change in perception to health and safety has been observed. This has also caused an improvement in the overall safety culture which now requires further reinforcement by implementing active site monitoring, auditing and manager/employee support in specific task related activities such as manual handling.

It is intended over the coming year to improve safety communication further both within and between the various parts of the businesses.

Statement of The Crown Estate Commissioners' and Accounting Officer's Responsibilities

The Commissioners (the board) are responsible for ensuring that The Crown Estate has in place a system of controls, financial and otherwise, and under section 2(5) of The Crown Estate Act 1961 are required to prepare a statement of accounts in the form and on the basis determined by the Treasury. The accounts are prepared on an accruals basis and must give a true and fair view of The Crown Estate's surplus, state of affairs at the year end and of its income and expenditure and cash flows for the financial year.

In preparing the accounts the Commissioners are required to:

• observe the accounts direction issued by the Treasury, including the relevant accounting and disclosure requirements, and apply suitable accounting policies on a consistent basis;
• make judgements and estimates on a reasonable basis;
• state whether applicable accounting standards have been followed, and disclose and explain any material departures in the financial statements; and
• prepare the financial statements on the going concern basis.

The Treasury has appointed the Chief Executive and Second Commissioner as the Accounting Officer for The Crown Estate. His responsibilities as Accounting Officer, including his responsibility for the propriety and regularity of the public finances and for the keeping of proper records, are set out in Government Accounting.

Statement on Internal Control

The Purpose of the System of Internal Control

The system of internal control is based on an on–going process designed to identify and prioritise the risks which threaten the achievement of The Crown Estate's policies, aims and objectives, as set out in The Crown Estate Act 1961; to evaluate the likelihood of those risks being realised and their impact should they be realised; and to manage them efficiently, effectively and economically.

It is designed to manage risk down to an acceptable level rather than to eliminate all risk of failure and can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control has been in place in The Crown Estate for the year ended 31 March 2007 and up to the date of approval of the annual report and financial statements, and accords with Treasury guidance.

Capacity to Handle Risk

The main board, audit committee, Chief Executive and management board provide leadership in risk management within The Crown Estate. The management board reviews risk as part of the on–going business planning and control cycle and its members are 'risk owners' for strategic risks, as well as for the risks that relate to those functions, projects and change programmes that they directly manage.

Risk management is embedded within all key processes of The Crown Estate, with which all staff are familiarised during induction processes and via 'on the job' training and awareness. Project and business managers and other staff received ongoing training on risk management during 2006/07.

The Crown Estate's risk management policy and guidelines are held within its intranet, which is accessible to all staff. The risk management procedures include appropriate metrics designed to provide both support to staff in the tasks in which they are involved and consistency of results across all departments.

The responsibilties of The Crown Estate's Risk Manager were transferred from the Director of Finance and Information Systems to the Head of Internal Audit from 1 December 2006. These responsibilities include the implementation, co–ordination and monitoring of the risk management process across The Crown Estate and administration of the strategic risk register.

The Risk and Control Framework

The Crown Estate's risk framework, policy and processes are consistent with the best practices as defined in the Office of Government Commerce's Management of Risk (M_o_R): Guidance for Practitioners and with the contents of Government Accounting Chapter 21. The framework adopts the strategic programmes, projects and operational model contained within this guidance and aligns the guidance with The Crown Estate's corporate planning cycle that is well developed and embedded.

Strategic risks and their assessment are the responsibility of the management board. Programme and project risks are assessed in a hierarchy with the project monitoring committee reviewing major projects and their risks within the overall portfolio every quarter and individual project managers managing all project risks on an operational basis. This tiered structure supports The Crown Estate in identifying and managing trends across the projects and also to provide further assurance that risks are being managed in a pragmatic and efficient manner. Risks are discussed, at a minimum, on a quarterly basis at departmental team meetings or similar forums. The Risk Manager and the central risk function assist in the facilitation of this process.

Strategic 'red' risks are reviewed by the management board on a quarterly basis, by exception. The cross cutting committee review all amber risks to identify interrelated and aggregated risks. Furthermore this body has appropriate delegated authority to manage these amber risks to allow the management board to fully focus on The Crown Estate's key risks. The Risk Manager reviews departmental risks to identify links between departments and projects where the impact of one or more risks could affect others. Serious departmental risks are escalated as and when necessary firstly to the cross cutting committee and if necessary to the management board, for consideration for inclusion onto the strategic risk register.

Risk registers are held centrally in the intranet for all departments and their projects. Risk reporting, based around internal control statements (ICSs), is now an embedded and standard management process that provides additional assurance that risks are being actively managed across the whole of the organisation.

Risk appetites and tolerances are assessed and delegated by The Crown Estate management, reflecting experience and past history of effective risk management. Impact metrics and regular monitoring and review ensure that delegated approval limits are consistently applied throughout the business.

Review of Effectiveness

The Accounting Officer is responsible for reviewing the effectiveness of the system of internal control. He is advised by the audit committee which is informed by the work of the internal auditors, the executive managers (who have responsibility for the development and maintenance of the internal control framework), external consultants and the NAO, by way of comments contained in their management letter.

During 2006/07 an external review of the Internal Audit department was carried out and the recommendations implemented. A core audit team of three staff led by a Head of Internal Audit were retained. Additional resources will be provided as required via a co–sourcing arrangement. The Head of Internal Audit retired on 31 March 2007 and an interim Head of Internal Audit will be in place until a permanent replacement is appointed.

The audit committee have reviewed the effectiveness of the system of internal controls and found them to be effective other than for the two items highlighted below. Planning to ensure continuous improvement of the system will be finalised following the appointment of the new Head of Internal Audit.

Internal Control Problems

For the financial year 2006/07, the Internal Audit Assurance report shows that:

• there is an ongoing investigation of financial irregularities at a subsidiary office. Remedial action has been undertaken by the management team and a provision has been made (within current liabilities) to cover the potential loss in the 2006/07 accounts which is included within creditors and accrued charges (note 23 to the Accounts);
• during the year substantial improvements have been made to the internal control weaknesses in the corporate financial systems and processes that were identified in 2005/06. However, some weaknesses remain which will be addressed in 2007/08.

Roger Bright
Chief Executive

18 June 2007