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The Board has overall responsibility for the Group's systems of internal control and risk management and for reviewing their effectiveness.  These systems, which have been in place for 2008 and to the date of approval of the report and accounts involve: the identification, evaluation and management of key risks through a Risk Committee which reports to the Board annually; and business reviews by the Board of each of the business units. There is a Group Finance Manual which financial control standards which are adhered to by the businesses, and the Internal Audit function and the external auditors report to the Audit Committee on the effectiveness of these controls. The Audit Committee also reviews reports on compliance with accounting standards; appropriate accounting policies and practises and any changes to these; accounting and reporting issues; going concern assumptions; and anti fraud programmes and controls. It also reviews the risk management process.  These systems are reviewed annually by the Board.  Whilst not providing absolute assurance against material misstatements or loss, these systems are designed to identify and manage those risks that could adversely impact the achievement of the Group's objectives.

The Risk Committee is comprised of the executive directors and the executive officers of the Group and is chaired by the Chief Executive. As an integral part of planning and review, management at each of the business units identify the risks involved in their business, the probability of those risks occurring, the impact if they do occur and the actions being taken to manage and mitigate those risks. Areas of potential major impact are reported to the Risk Committee for review at its meetings, which are held twice a year.

The annual Group Risk Report of the Risk Committee to the Board details all principal risks categorised by potential financial impact on profit and share price. The most significant Group risks are reported to the Board quarterly, and will include new key or significantly increased risks along with actions put in place to mitigate such risks. The principle risk are detailed in “Risk Factors” to be found on pages 22 to 26 of the Annual Report 2008.

In 2008, the effectiveness of the Business Units’ systems to identify and manage material risk were evaluated and the findings reported to the Audit Committee. No material weaknesses were identified in these systems.

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a – 15(f) and 15d – 15(f) under the Securities Exchange Act of 1934.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In accordance with the requirement in the US under s404 of the Sarbanes-Oxley Act management has assessed the effectiveness of the Group’s internal control over financial reporting as at 31 December 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organisations of the Treadway Commission in Internal Control-Integrated Framework. Based on its assessment, management has concluded and hereby reports that, as at 31 December 2008, the Group’s internal control over financial reporting is effective based on those criteria.

Ernst & Young LLP, an independent registered public accounting firm, has issued an audit report on the Group’s internal control over financial reporting as of 31 December 2008. This report appears on page 79 of the Annual Report for 2008.

There has been no change in the Group’s internal control over financial reporting during the period covered by the 2008 Annual Report that has materially affected, or is reasonably likely to materially affect, the Group’s internal control over financial reporting.

The Disclosures Committee is chaired by the Chief Executive and comprises the Chief Financial Officer and the Group Director of Corporate Affairs. The secretary is the Company Secretary. The Committee meets as required and approves the release of all major communications to investors, to the UK Listing Authority and the London and New York stock exchanges.

The Chief Executive and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Group’s disclosure controls and procedures as at 31 December 2008. Based upon, and as of the date of, that evaluation, the Chief Executive and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

The Code of Business Principles, which includes the Group’s whistleblowing policy, is available on www.smith-nephew.com/sustainability2008 and is available on request, apply to all directors, officers and employees. Any breaches of the Code are reported to the Company Secretary who is obliged to raise the issue with the Chief Executive or Chairman and the Audit Committee. During 2008 and up until 11 March 2009 no waivers have been put in place nor any amendments made to the Code.

In 2008, the Ethics and Compliance Committee approved a Code of Conduct and Business Principles and was issued to the majority of employees in January 2009. The Code sets out the basic legal and ethical principles for carrying out business and applies both to employees and those who act on the Company’s behalf. It is in two parts. The first part sets out in detail how persons covered by the Code are expected to ethically interact with healthcare professionals and government officials. The second part, which is to be issued later in 2009 will cover the broader issues of ethics and compliance throughout the business and will include an updated version of the Code of Business Principles. A copy of the Code can be found at http://compliance.smith-nephew.com

The new Code of Conduct and Business Principles includes a revised whistle blowing policy which now enables persons in the majority of jurisdictions where the Company operates to contact the Company anonymously through an independent provider, Silent Whistle. This procedure has been in place in the US throughout 2008. all calls and contacts are investigated and the appropriate action taken when necessary.

The Board of Directors has adopted a Code of Ethics for senior financial officers, which is available at www.smith-nephew.com/sustainability2008 and is available on request. It applies to the Chief Executive, the Chief Financial Officer, Group Financial Officer and the Group’s senior financial officers. There have been no waivers to any of the Code’s provisions nor any amendments made to the Code during 2008 or up until 11 March 2009.

The Audit Committee’s remit, which is set out in its terms of reference, includes responsibility for:

• monitoring the integrity of the Group’s accounts, ensuring that they meet statutory and associated legal and regulatory requirements and reviewing significant financial reporting judgements contained in them;
• monitoring announcements relating to the Group’s financial performance;
• monitoring and reviewing the effectiveness of the Group’s internal audit function;
• recommending for shareholder approval, the appointment, re-appointment and removal of the external auditors, as appropriate;
• approving the remuneration and terms of engagement of the external auditors;
• monitoring and reviewing the external auditors’ independence and the effectiveness of the audit process;
• re-approval of the external auditors to supply non-audit services;
• monitoring the effectiveness of internal financial controls and reviewing compliance with s404 of the Sarbanes-Oxley Act 2002;
• reviewing the operation of the risk management process; and
• reviewing arrangements by which staff may raise complaints against the Group regarding financial reporting of other matters.

The Group has specific policies which govern:

• the conduct of non-audit work by external auditors which prohibits the auditors from performing services which would result in the auditing of their own work, participating in activities normally undertaken by management, acting as advocate for the Group and creating a mutuality of interest between the auditors and the Group, for example being remunerated through a success fee structure. Each year, the Audit Committee pre-approves the budget for fees relating to audit and non-audit work, including taxation services, in accordance with a listing of particular services. In the event that limits for these services are expected to be exceeded or the Group wants the external auditors to perform services that have not been pre-approved, approval by the Chairman of the Audit Committee is required, together with notification to the Audit Committee of the services and the fees involved. All services provided by the independent auditors during the year were pre-approved by the Audit Committee; and
• audit partner rotation, which is in accordance with the Auditing Practices Board Ethical Standards in the UK and the SEC rules in the US. Partners and senior audit staff may not be recruited by the Group unless two years have expired since their previous involvement with the Group.

The Chief Executive, the Chief Financial Officer and other members of management and the Board attend the meetings when necessary and the external auditors have unrestricted access to the Audit Committee. The Audit Committee meets without management in attendance, when appropriate, and meets with the auditors, without management present, from time to time.

The principle activities of the Audit Committee during the year ended 31 December 2008 included:

• consideration of the quarterly, interim and preliminary results and the annual accounts;
• consideration of the Group’s compliance with s 404 of the Sarbanes-Oxley Act 2002;
• consideration of compliance with accounting standards, appropriate accounting policies and practices, accounting and reporting issues and going concern assumptions;
• a review of the Group’s approach to internal financial control, its processes, outcomes and disclosures;
• a review on the Internal Review department’s activities for the year, together with its resource requirements and findings;
• a review of ‘whistleblowing’ procedures;
• a review of the reports from the auditors, Ernst & Young LLP, on their professional and regulatory compliance in order to maintain independence and objectivity, including the rotation of partners;
• a review of the audit, audit-related, tax and other services provided by Ernst & Young LLP;
• review and the pre-approval of all services provided by the auditors during the year including all non-audit work performed by the auditors together with associated fees, to ensure that the objectivity and independence of Ernst & Young LLP as auditors of the Group was not compromised. Ernst & Young LLP only provided advisory work in respect of accounting and tax related matters;
• consideration of Ernst and Young LLP’s in-depth reports to the Committee on the scope and outcome of the annual audit and management’s response. Their reports included accounting matters, governance and control and accounting developments;
• a review of the effectiveness of the performance of Ernst & Young LLP effected by the completion of a questionnaire by the units audited within the Group and by the members of the Committee;
• recommending the re-appointment of Ernst & Young LLP as the Group’s auditors;
• confirmation that no concerns were raised with the Committee about possible improprieties in matters of financial reporting or other matters;
• reviewing the Committee’s terms of reference to ensure they reflect developments in corporate governance in the UK and the US;
• consideration of the Group’s risk management process; and
• an evaluation of its own performance during the year, effected by means of a questionnaire and individual discussions.

The Committee may obtain legal and other independent professional advice, at the Company’s expense, as it deems necessary. During the year, no such advice was sought by the Committee.

Fees for professional services provided by Ernst & Young LLP, the Group’s independent auditors in each of the last two fiscal years, in each of the following categories were:

	2008		2007
		($million)
Audit	5		4
Audit-related	-		-
Tax	3		3
Other	1		1
	9		8

Audit fees include fees associated with the annual audit and local statutory audits required internationally. In 2008 other fees related to aborted acquisition costs. In 2007, other fees related to the acquisition costs for Plus. A more detailed breakdown of audit fees may be found in Note 38 of the Notes to the Group Accounts.

In accordance with s234ZA of the Companies Act, the directors serving at the time of approving the Directors’ Report confirm that, to the best of their knowledge and belief, there is no relevant audit information of which the auditors, Ernst & Young LLP, are unaware and the directors also confirm that they have taken reasonable steps to be aware of any relevant audit information and, accordingly, to establish that the auditors are aware of such information.

Ernst & Young LLP have expressed their willingness to continue as auditors proposing their reappointment and to authorise the directors to fix their remuneration, which has been approved by the Audit Committee, will be proposed at the AGM.