The Audit Committee comprises two Independent Non-Executive Directors; Andrew Page and Robert Miller-Bakewell. John Bennett and Tracey Graham both ceased to be Committee members upon leaving the Group. The Committee has written terms of reference which are available on the Company’s website and on request from the Company Secretary. Although the Board considers that both members of the Committee have experience that is relevant to the role, during the year under review Andrew Page, who is a Chartered Accountant, was the member of the Committee specifically identified as having recent and relevant financial experience.
At its annual planning meeting in September the Committee reviews and approves plans with the Auditors including the locations to be audited as well as the scope and key areas of audit focus. At the conclusion of the audit the Committee reviews the integrity of the Group’s financial statements and the report and accounts as a whole prior to their submission to the Board. This review includes ensuring that statutory and associated legal and regulatory requirements are met as well as considering significant reporting judgements, the adoption of appropriate accounting policies and practices and compliance with accounting standards. In respect of the year under review the Committee considered the following significant issues in relation to the financial statements and in each case addressed these as indicated.
Intangible assets: This category of assets, which comprises goodwill and other intangible assets is by far the largest on the Group balance sheet. It therefore receives careful attention from the Committee which needs to be satisfied that its carrying value is appropriate. As part of its year end procedures the Group Finance function performed a detailed impairment review of other intangible assets based upon approved targets. A number of businesses that hold other intangible assets have been affected by the downturn in oil and gas markets which has in turn reduced their prospects. This review indicated that impairments totalling £20.0m were necessary. The Audit Committee considered papers prepared by the Group Finance Director that included details of the testing undertaken and the assumptions used. The Committee agreed that it was appropriate to provide this impairment charge. The Audit Committee also received reports from the Group Finance Director on the appropriateness of cash generating units for the purposes of goodwill impairment testing and on the goodwill impairment testing undertaken. The modelling performed was based on approved targets and indicated that no impairment of goodwill was required. The report explained the cash flow modelling undertaken, the assumptions used and the conclusions reached. The Committee agreed that no impairment of goodwill was necessary.
Acquisition accounting: A number of acquisitions were completed in the year and judgements are made with respect to the fair value of the net assets acquired and the consideration transferred. The Group Finance Director presented the valuation process and judgements made to the Committee. The valuation of intangibles uses a spreadsheet model that was constructed with the help of external valuation experts. Inputs to the model are obtained from the acquired entity and the assumptions used are derived from recognised sources or using previous experience.
Recoverability of trade debtors and accrued Income: The risk that trade debtors and accrued income may not be collected and therefore may be overstated in the accounts is considered by the Board at its regular meetings when it reviews business performance. The reports prepared for those meetings contain age profile information on debtors and accrued income by segment and consider specific issues in more detail as necessary. During the second half of the year in particular it became apparent that certain Energy clients were missing payment promises and that exposure to them was increasing. The Group Finance Director prepared a paper for the Audit Committee in September that considered the recoverability of trade debtors and accrued income. No provision was considered appropriate at that time, although the difficulty of collecting from some clients was noted. The situation did not improve by the year-end or thereafter. Following the year-end The Group Finance Director prepared reports for the Board and Audit Committee that considered the recoverability of trade debtors and accrued income at the year-end. The Board and Committee confirmed it appropriate to impair the carrying value of trade debtors in the Energy segment by £7.0m as at the year-end. Attempts to recover the debts will continue.
Following the review conducted by the Audit Committee and its own consideration, the Board was able to conclude that the Report and Accounts for 2015, taken as a whole, is fair, balanced and understandable as well as providing the information necessary for shareholders to assess the Group’s performance, business model and strategy. In reaching this conclusion the Board was satisfied that the Group’s performance across its segments, as well as its business model, strategy and the key risks that it faces are clearly explained in the relevant sections of the Report and Accounts.
The Audit Committee keeps the scope, cost and effectiveness of the external audit under review. The Committee reviews the effectiveness of the annual audit prior to making recommendations as to the annual re-appointment of Auditors. To facilitate this process the Group Finance Director canvasses the views of the Group’s operating companies on the conduct of the audit. He then reports this feedback to the Committee as well as the performance of the Auditors at Group level. Deloitte LLP was appointed as Group Auditors in June 2012 following a tender process. The independence of the external auditor is also reviewed each year and audit partners are rotated at least every five years. The Company’s policy is that Group auditors should remain in office for no more than ten years.
As part of its responsibility to ensure independence and objectivity the Committee has adopted a policy to determine the circumstances in which Auditors may be permitted to undertake tax compliance work for the Group. Under the terms of this policy the provision of certain services are prohibited and include those listed below:
preparation of financial statements
design and implementation of financial systems
investment advisory, broker and dealing services
general management services
The split between audit and non-audit fees for the year under review appears in note 8 on page 50. Certain limited scope compliance work undertaken by Deloitte LLP during the year was handled by teams that were separate and independent from the external audit team and were led by different senior partners. The Committee was satisfied that appropriate safeguards were in place and that the provision of these additional services by Deloitte LLP did not affect their independence as external auditor. Advisory work is undertaken by other firms.
The Committee also monitors the effectiveness of the Group’s internal financial controls and risk management processes; this included assisting the Board in conducting the review of internal controls described above. In conjunction with this exercise the Committee also reviewed the possible need to establish an internal audit function. In considering this point the Committee was cognisant of the detailed review work undertaken by members of the Group Finance Department whilst visiting various parts of the Group’s operations and that the volume of such work increased during the year. Taking account of this and its general level of confidence in the Group’s systems of internal control it concluded that the establishment of an internal audit department was not appropriate at this time but that this will be kept under regular review.
The Committee also keeps under review the means by which staff may, in confidence, raise concerns about financial improprieties relating to financial reporting, internal control or other matters. The Company’s procedure allows for any such matters to be reported to the Company Secretary who will ensure that they are properly investigated and reported to the Audit Committee and the Board. An individual raising a concern need not disclose their identity and if such identity is disclosed it will not be passed on without the consent of that individual.