7 Final report on Ernst & Young’s review of investment management at Norges Bank

Norges Bank Supervisory Council’s letter of 13 December 2007 to the Ministry of Finance

1 Introduction

We refer to the letter of 18 September 2007 from the Ministry of Finance with the enclosed final report on Ernst & Young’s review of investment management at Norges Bank.

The Executive Board´s draft reply dated 6 December 2007 concerning the same matter was discussed at the Supervisory Council’s meeting on 13 December and the following decisions were taken:

• The Supervisory Council approves the draft letter dated 13.12.2007 from the Supervisory Council to the Ministry of Finance concerning the final report on Ernst & Young’s review of investment management at Norges Bank.

• - The Supervisory Council has taken note of the Executive Board’s draft letter of 06.12.2007 to the Ministry of Finance concerning the same matter. The Supervisory Council requests that it be kept informed about the Executive Board’s further work based on the report.

In this letter, the Supervisory Council will comment on matters that are directly related to its responsibilities.

The Supervisory Council supervises the Bank’s activities and ensures that the rules governing the operations of the Bank are observed, cf. Section 5 of the Norges Bank Act. The Supervisory Council has, in pace with developments at the Bank, placed considerable and increasing emphasis on the supervision of the investment management activities at Norges Bank. The supervision includes, inter alia, a review of the Executive Board’s minutes of meetings and consideration of issues presented by the Executive Board, including the budget, quarterly and annual accounts and matters dealing with strategy, organisation, management and control. Considerable emphasis has also been placed on developing the expertise of the Supervisory Council through seminars, study tours and supplementary reports in connection with the presentation of issues. The day-to-day supervision of the Bank is largely exercised by, inter alia, Central Bank Audit, and the Supervisory Council follows up their activity by approving the audit plan, the budget and by discussing Central Bank Audit’s reports and statements.

2 Audit arrangements at Norges Bank have been changed and strengthened

In order to meet the challenges relating to the Bank’s investment management activities, the Supervisory Council and the Executive Board initiated a process in 2005 aimed at evaluating the audit arrangements at Norges Bank.

With regard to this, please refer to a separate paragraph in the Supervisory Council’s statement of 15.02.2007 pursuant to Section 3 of the Norges Bank Act, concerning the

Executive Board’s meeting minutes and supervision of the Bank’s operations in 2006:

“Ongoing changes in the Bank’s organisation of control and audit arrangements:

Pursuant to the Norges Bank Act, the Supervisory Council organises the Bank’s auditing and appoints the Central Bank Auditor. The Executive Board has not had its own auditing resources but has based decisions on the work conducted by Central Bank Audit.

Norges Bank has undergone substantial changes in recent years and is facing considerable challenges, not least as a result of its tasks relating to the management of the Government Pension Fund – Global. These tasks entail considerable challenges for the Bank’s governing bodies relating to control and supervision of these activities. At the same time, interest has increased and expectations are higher in society with regard to corporate governance and control.

Against this background, the Executive Board and the Supervisory Council have assessed in tandem important aspects of the Bank’s control and audit arrangements within the framework of the Norges Bank Act. As a result of these assessments, the Executive Board, in consultation with the Supervisory Council, established an Audit Committee in 2006 and approved the establishment of an internal audit unit. At the same time, the Supervisory Council approved a new strategy for Central Bank Audit which involves developing it to become the Bank’s statutory (external) auditor. In order to enhance Central Bank Audit’s expertise, particularly in relation to investment management, cooperation with an international auditing company will be established.

The approved changes will be put into operation in the course of 2007. In the opinion of the Supervisory Council, this will contribute to strengthening the control and supervision arrangements of both the Supervisory Council and the Executive Board, not least in relation to investment management. The changes also involve an adaptation to internationally recognised principles of corporate governance and control.

Please refer to the discussion in the Report of the Executive Board.”

The changes in the Bank’s audit arrangements have contributed to clarifying the division of responsibilities for auditing at Norges Bank. The Supervisory Council believes that the Executive Board’s establishment of the Audit Committee and the internal audit unit will strengthen the Executive Board’s systematic management and control of the Bank. It is clearer that Central Bank Audit, as the Bank’s statutory auditor, is the Supervisory Council"s body which conducts financial audits and supervision of the Executive Board"s activities on behalf of the Supervisory Council. Adjustments have been made in Central Bank Audit’s instructions in relation to this.

At its meeting on 26 April 2007, the Supervisory Council decided to enter into an agreement with Deloitte AS concerning cooperation with Central Bank Audit. Deloitte is one of the leading auditing firms in Norway and internationally, with extensive audit and advisory services in the area of investment management. The cooperation has been organised as a joint audit and also presupposes the continuation of solid expertise and capacity in Central Bank Audit. In general, this means a considerable increase of auditing resources in relation to financial revision of investment management, including access to top international expertise in this field.

Pursuant to the management agreement between Norges Bank and the Ministry of Finance on the management of the Government Pension Fund – Global, Central Bank Audit makes a statement concerning Norges Bank’s quarterly and annual reports on the management of the Fund. Similarly, annual audit statements have been provided to the Supervisory Council concerning the overall investment management at NBIM, and from 2007 these statements will be adapted to the collaboration with Deloitte. The auditing statement primarily covers financial reporting and involves no explicit statement concerning internal control. However, the audit work largely involves a review and evaluation of operative processes, systems and internal control procedures which are of importance for accounting and financial reporting at Norges Bank and at the external service provider.

One of the recommendations in the Ernst & Young report is to develop and adapt Central Bank Audit’s independent statement concerning the Bank’s internal control so that it complies with auditing standard «SAS 70”. This will be a considerable extension of Central Bank Audit"s and the collaborative partner"s remit, cf. the comments in the previous paragraph. In general, the Supervisory Council is positive to this and supports the Executive Board’s view of evaluating the possibility of a development in this direction.

3 Roles and responsibility and the Supervisory Council’s access to expertise

One of the recommendations from Ernst & Young is a clarification of roles and responsibilities for the various bodies with regard to determination, monitoring and reporting of risk. In addition, they emphasise that each body should have access to adequate and independent expertise in the area of international investment management.

In general, the division of responsibility between the Executive Board and the Supervisory Council complies with the Norges Bank Act and is described in more detail in the two bodies’ rules of procedure. Norges Bank’s management of the Government Pension Fund – Global is a very important social responsibility which is not evident in the Norges Bank Act and which involves many interests and authorities. The Supervisory Council wants the roles and responsibilities to be clearly defined, both internally and externally. The Supervisory Council supports the Executive Board’s view that there should be an evaluation of the need for a clearer definition of the responsibilities, documentation and reporting of the Bank’s governing bodies.

With regard to the suggestion that the Supervisory Council should have access to adequate and independent expertise in the area of international investment management, we wish to point out that Central Bank Audit, in addition to financial auditing, also performs supervision on behalf of the Supervisory Council. In order to strengthen Central Bank Audit’s access to resources and expertise, particularly in relation to investment management, a cooperative agreement has, as previously mentioned, been entered into with Deloitte AS. This cooperation relates primarily to financial audits but also provides the Supervisory Council and Central Bank Audit effective access to international resources and adequate expertise in relation to the supervisory tasks, in addition to the expertise which is available in Central Bank Audit in this area. In addition, the Supervisory Council will regularly evaluate the need to engage other external expertise.

4 Follow-up of other recommendations in the Ernst & Young report

As part of its supervision, the Supervisory Council will follow the Executive Board’s further work based on the report.

Yours sincerely

Norges Bank’s Supervisory Council

Mary Kvidal

Chairman