The Purpose of the Audit Committee
The Audit Committee is appointed by the Board and is established to monitor the integrity of financial information and to provide assurance to the Board that the Group’s internal financial controls and risk management systems are appropriate and regularly reviewed. Its terms of reference are agreed annually by the Board and are set out on the website.
The Audit Committee continues to focus on ensuring that the Group’s systems and controls are operating effectively and are evolving in line with the Group’s growth.A fuller insight into the role, activities and composition of the Audit Committee is provided below.
Role of the Audit Committee
The main duties of the Audit Committee include but are not limited to the following:
- to ensure that the financial statements of the Group are fair, balanced and understandable;
- consider annually whether there is a need for an internal audit function;
- review the Group’s internal financial controls and risk management systems;
- develop and implement policy on the engagement of the external auditor;
- make recommendations to the Board in relation to the external auditors regarding approval of their remuneration, terms of engagement, appointment, re-appointment or removal;
- review and monitor the external auditors independence and objectivity and effectiveness of the audit process;
- to report to the Board on how it has discharged its responsibilities;
- monitor the Group’s whistleblowing procedures to ensure that appropriate arrangements are in place for employees to be able to raise confidence matters of possible impropriety, with suitable subsequent follow-up action; and
- ensure director’s expenses are of a reasonable business nature and authorized appropriately.
In the FY14, the Audit Committee fulfilled its duties under its terms of reference and discharged its responsibilities primarily by:
- reviewing the Groups draft half-yearly and full year results prior to Board approval;
- focussing specifically on the accounting associated with the acquisitions of Posedge and Kisel;
- reviewing the draft Interim Management Statements during the year;
- assessing the external auditors’ independence and objectivity;
- reviewing the external auditor’s plan for the audit of the Group’s financial statements, which include key areas of scope of work, terms of engagement and fees;
- reviewing the external auditor’s report on the results of their year-end audit;
- reviewing the structure of the Group following the acquisitions of the past few years;
- reviewing the Group’s arrangements for the security and patent protection of its intellectual property;
- reviewing the Group’s system to identify and manage risk;
- reviewing the effectiveness of the Group’s internal risks over financial reporting; and
- reviewing and updating the Audit Committee’s terms of reference.
The Composition of the Audit Committee
The composition of the Audit Committee consists exclusively of independent non-executive directors.
The Audit Committee comprised the following directors:
- David Anderson (Chairman)
- Kate Rock
- Gilles Delfassy
The Audit Committee meets at least five times in any financial year. The primary purpose of the meetings is to plan the annual audit process, to discuss the changes required in financial reporting, to review the half-year accounts and to review the full year accounts. Other matters were dealt with as necessary.
The external auditors KPMG, the Chairman of the Board, the Chief Executive, the Chief Financial Officer and key members of the Group finance team are also invited to attend meetings.
In accordance with UK Corporate Governance Code provision C.3.1 the Board should satisfy itself that at least one member of the Audit Committee has recent and relevant financial experience. The Board has considered this requirement and, taking into account the financial background of the Chairman of the Audit Committee, David Anderson, it is satisfied that this requirement has been met and that the Audit Committee has sufficient experience to fulfil its obligations in an effective manner.
Significant issues that the Audit Committee considered in relation to the financial statements
The Audit Committee have considered and review the key accounting judgements underlying the preparation of the financial statements focussing specifically on:
|Issue||Description||Work performed by Audit Committee|
|Revenue recognition including non-cash revenue||Revenue recognized is determined by percentage of completion, achievement of milestones and schedule of invoicing. Some contracts are signed in exchange for equity in the customer’s business rather than cash.||The Audit Committee has satisfied itself with the internal procedures performed by management to ensure revenue is recognized appropriately and in accordance with applicable standards.|
|Valuation of goodwill||Goodwill increased in FY14 with acquisitions. Goodwill is material to the Group and require impairment reviews regularly.||The Audit Committee has reviewed the accounting associated with the acquisitions and considered any need for impairment at the end of FY14 based on current factors.|
|Issue||Description||Work performed by Audit Committee|
|Valuation and classification of investments||The Group continues to hold strategic investments, required to be considered for correct accounting treatment as a trade investment, and impairment regularly.||The Audit Committee has considered the classifications and any need for impairment at the end of FY14 based on current factors.|
|Valuation of inventory||The Pure division holds significant stock balances at the end of FY14.||The Audit Committee has satisfied itself with the internal procedures performed by management to ensure stock provisioning at the end of FY14 is appropriate.|
|Accounting for income tax including deferred taxation||There remains some complexity in the tax structure of the Group and the accounting for income tax and recognition of deferred tax losses.||The Audit Committee has reviewed the findings of the specialists engaged to perform our tax work.|
|Recoverability of debtors||The nature of the Group’s business means that the Group continues to hold significant debtors at any point.||The Audit Committee has satisfied itself with management’s regular assessment of outstanding debtors and how they manage the relationship with those outstanding debtors as required.|
|Accounting for share based payments||Share based payments is a complex and technical area which we engage specialists to assist in calculating the fair values to attribute to the awards granted.||The Audit Committee has reviewed the findings of the specialists engaged to perform the current year share based payment work.|
|Disclosures in the annual report||The Group acknowledges that there have been significant changes to the disclosure requirements of the annual report in 2014 with changes directed by The Companies Act 2006 Regulation 2013, The UK Corporate Governance Code 2012 and the Department for Business, Innovation and Skills.||The Audit Committee is in regular dialogue with management and the external auditors over the disclosures presented in the annual report and makes recommendations for changes where appropriate.|
Risk management and internal control
The Audit Committee have conducted a review of the effectiveness of the Group’s risk management and internal control systems as part of the annual risk review. A Board discussion took place on the assessment of risk and concluded that although the Audit Committee had a key role in the monitoring of risk management the prime responsibility for risk management remained with the Board and not with the Audit Committee.
During the FY14 EY performed a review of the Group’s VAT compliance. No major compliance risks were identified, but a number of minor changes have been implemented to further strengthen the VAT compliance environment.
In addition under the Code the Audit Committee is required to monitor and review the effectiveness of internal audit activities. The Group does not have a separate internal audit function and the Audit Committee reviewed whether this was still suitable in the financial year. They concluded that the Group was still sufficiently small and that controls were sufficiently robust not to require a separate function and advised the Board of this. As the Group continues to grow the Audit Committee will continue to review the requirements for its own internal audit function.
External audit process
At the start of the audit cycle for FY14, KPMG presented their audit strategy, identifying their assessment of the key risks for the purposes of the audit and the proposed scope of their work.
KPMG reports to the Audit Committee at both the half and full-year setting out their assessment of the Group’s judgements and estimates in respect of these risks and the adequacy of the reporting. The Audit Committee meets with KPMG in private at least once a year.
The Audit Committee is satisfied that the scope of the audit is appropriate, all significant accounting judgements have been challenged robustly and the audit has been effective.
The Audit Committee is responsible for overseeing the Group’s relations with the external auditor. During FY14 the Audit Committee approved the terms of engagement and remuneration to be paid to the external auditor and agreed the scope and approach of the audit.
KPMG has been the Group’s external auditor since 1994. Whilst the Group has not formally tendered the audit since then, the Audit Committee undertakes an annual review of the independence, objectivity and effectiveness of the audit firm in considering whether to recommend the reappointment of the external auditors at the AGM each year.
The Audit Committee has been monitoring the debate on external audit tendering and has noted the changes to the UK Corporate Governance Code introduced by the FRC in September 2012 and, in particular, the requirement contained in the Guidance on Audit Committees to put the external audit contract out to tender at least every ten years. The new Code became effective for the Group on 15 September 2013. The Audit Committee has also considered the subsequent proposals of both the UK Competition Commission and the European Commission, in particular the transitional arrangements which if implemented would require KPMG to stand down in 2020. The Audit Committee will continue to monitor developments in this area.
Aside from the Commission rules above there are no contractual obligations currently restricting the current or future choice of external audit firm.
Tudor Aw was appointed as Group Audit Partner in 2010, and under the requirement to rotate this position every 5 years, is due to rotate off the Group’s audit after completing the 30 April 2015 financial year audit engagement.
Non-audit services and maintaining auditor independence
The Group currently has a policy in place for the provision of non-audit services provided by the external auditor. The policy highlights the importance of independence and objectivity and states that non-audit services can only be provided where these are guaranteed. In the financial year KPMG did not perform any non-audit work.
To fulfil its responsibility regarding the independence of the external auditor, the Audit Committee considered the auditor’s overall work plan including the role of the senior statutory auditor and key audit staff and the overall extent of non-audit services. In order to assess effectiveness the Audit Committee reviewed the arrangements to maintain auditor independence and the auditor’s fulfilment of the agreed audit plan including the proposed resources to execute the plan were consistent with the scope of the audit engagement. The Audit Committee has reviewed and is satisfied with the effectiveness and independence of the external auditor.
Reappointment of auditor
At the AGM in September 2014 the Audit Committee recommended that KPMG LLP be proposed for appointment by shareholders as the Group’s external auditor and this was approved by shareholders.
Evaluation of the work of the Audit Committee
As part of the Board evaluation by Independent Audit, which is referred to in the Corporate Governance section of the annual report, the working of the Audit Committee was reviewed. Independent Audit made various recommendations in particular addressing the level of executive attendance at meetings, the role of the Company Secretary in supporting the Committee and the number of issues which the Audit Committee needs to address. The Audit Committee found the evaluation helpful and actions have been taken to reflect the recommendations.
The Audit Committee reviews arrangements by which staff of the Group may in confidence raise concerns over possible improprieties in financial reporting or other matters.