Steve crummett Chairman of the audit committee
As Audit Committee Chair, I am pleased to present the Audit Committee's report for the year ended 30 April 2018. This report details the work of the Committee over the past year, fulfilling our responsibilities to provide effective governance over the Group's financial activities. Our role is to assist the Board in carrying out its oversight responsibilities in relation to financial reporting, internal controls and risk management, as well as maintaining an appropriate relationship with the external auditor.
The Committee met three times during the year, and discussions included the following key items:
- risk assurance
- treasury, including foreign currency hedging
- accounting policies
- financial results
- carrying value of Goodwill
- Alternative performance measures and the treatment of Special items
- Revenue recognition
- engagement and review of external auditor
- review of audit and non-audit services and fees
- review of reimbursed expenses
- Audit Committee terms of reference
- cyber risk, data protection and disaster recovery procedures
- taxation, including the published Tax Strategy
- Going concern review
- Viability review
- Whistleblowing policy
Key developments in accounting, corporate reporting and taxation
The Audit Committee is responsible for reviewing, on behalf of the Board, the Group's financial and reporting practices and disclosures, reviewing the integrity of the financial statements, the Group's system of internal controls, the work of the external auditors and the Group's compliance with financial policies, laws and regulations. The Audit Committee's terms of reference may be obtained from the Company's website.
The annual and half-yearly financial reports are reviewed by the Committee through a process which includes discussion with the Chief Financial Officer and the external auditors. The external auditors prepare reports to the Committee on significant accounting policies and issues and judgements applied in the preparation of the financial reports. The Audit Committee gives its recommendation to the Board concerning the adoption and publication of all financial reports to shareholders.
In addition to the Board, the Audit Committee has conducted its annual review of the system of internal controls based on a review of significant risks identified, internal reviews, external audits and reports from management.
We provided support to the Board with regard to the 2016 Corporate Governance Code, including assessment of risk appetite and the statement on the Group's viability. We reviewed the longer term assessment of the viability of the Group, including its financial and operational position and the potential impact of the principal risks and uncertainties. The Viability statement is included in the Corporate Governance Report.
Financial reporting and significant financial matters
In carrying out its duties, the Committee is required to assess whether suitable accounting policies have been adopted and to challenge the robustness of significant management judgements reflected in the financial results. This process involves reviewing relevant papers prepared by management in support of the policies adopted and judgements made. These papers are discussed with management and the external auditors. In addition, the Committee reviews the year end report to the Audit Committee from the external auditors based upon its work performed and findings from the annual audit.
The Committee reviews and considers pre issuance the Group's financial statements, being the 2018 Annual Report and the half year results to 31 October 2017, with particular reference to the statements being fair, balanced and understandable.
During the year, the Committee considered the following key financial and internal control matters in relation to the Group's financial statements and disclosures, with input from management and the external auditor. The significant accounting issues considered by the Committee during the year were areas where management was required to use significant judgement. These issues are listed below:
Carrying value of Goodwill
The value of goodwill is supported by a value in use model prepared by management. This is based on cash flows extracted from the Group's budget and strategic plan, which have both been approved by the Board. The Committee debated the performance of the operating segments, considered the cash flow models in the Group's strategic plan, and evaluated sensitivities in relation to that plan. The Committee concurred with management's conclusion that the carrying value of goodwill was fully supported.
Alternative performance measures and the treatment of Special items and their presentation in the consolidated financial statements
Special items have been separately disclosed within the Group's consolidated financial statements. The Committee has reviewed papers prepared by management showing how these costs have been identified and calculated. It has challenged both the quantum of the charge and its presentation in the consolidated income statement and is satisfied that these costs have been treated appropriately. The Committee specifically evaluated the appropriateness of the treatment of those items relating to the Aesica acquisition and considered the adequacy of the related disclosures.
The Group's policy for revenue recognition is set out in note 1 to the financial statements. Management prepares a paper for the Committee setting out any key judgements applied in respect of revenue recognition and in the accounting for major manufacturing contracts or material amendments to contracts where significant judgements have been applied. The Committee has reviewed the papers presented and challenged management on the judgements applied, ensuring they are in line with the Group's policy.
Auditor independence and effectiveness
The Audit Committee last conducted a tender process in 2015 and KPMG LLP was subsequently appointed as the Group's auditor in November 2015.
The Committee had discussions with the external auditor on audit planning, fees, accounting policies, audit findings and internal control. The external auditor attended all of this year's Committee meetings. The Committee assessed the effectiveness of the external audit through the review of audit plans, reports and conclusions and through discussions with management (both with and without the external auditor present) and the external auditor (both with and without management present). The Committee was satisfied that the audit was effective. In addition, the Chairman of the Audit Committee meets with the audit partner outside formal meetings. The Committee is satisfied that KPMG continued to possess the skills and experience required to fulfil its duties effectively and efficiently during the financial year.
The Committee undertakes a comprehensive assessment of auditor performance following the year-end audit, scoring their performance and effectiveness and including taking on board feedback from management. The Committee was satisfied with the auditor's performance in respect of the external audit and review undertaken in respect of the financial year ended 30 April 2018.
In accordance with its policy on non-audit services provided by the Company's auditor, the Committee reviews and approves the award of any such work. The Audit Committee refers to the Board for approval of any non-audit services where the fees for such work may represent a significant proportion of the annual audit fee.
The following non-audit services were provided by KPMG LLP during the year:
- An agreed upon procedures engagement delivering an auditor's certificate as required for a RGF EU grant claim for safeguarding jobs at Cramlington
KPMG LLP have confirmed they have applied appropriate safeguards in respect of any threat to their independence and objectively arising from the provision of the above non-audit services.
Details of non-audit services provided to the Company by the external auditor are shown in note 3 to the financial statements.
The Audit Committee has from time to time considered the requirement for a separate dedicated internal audit function and determined that the scale and nature of the Group's operations are sufficiently large and complex that such a dedicated resource is required. A dedicated Group resource is in place which continues to support internal audit activities. This is being supplemented as and where appropriate through the engagement of internal audit services from suitably qualified external providers. The Audit Committee keeps this under review.
During the year, the Audit Committee reviewed and approved the internal procedures whereby employees can raise concerns about possible financial or other irregularities. The Whistleblowing (Public Disclosure) policy gives guidance on the type of matters that staff may wish to disclose, and a means of doing so via an independent organisation in the event that any staff member feels that he or she cannot make a disclosure via the usual management channels.
The Group is committed to the highest standards of openness, integrity and accountability and the prevention of bribery and corruption. As noted above, the Group operates a whistleblowing policy so that employees can report confidentially any matter giving rise to concerns about the operation of the Group's business.
CHAIRMAN OF THE AUDIT COMMITTEE
13 June 2018