To find the section you want, click on it in the list below.
- Introduction and Statement of Compliance
- The Board
- Directors' indemnity and insurance
- Audit committee
- Remuneration committee
- Nominations committee
- Relations with shareholders
- Risk and internal control
- Going concern
- Statement of directors' responsibilities
- Directors' Responsibility Statement
The Board is dependent on the Audit Committee to review the Group's internal financial controls, to assess the work and independence of the external auditor, the effectiveness of the internal audit function and risk management processes, and to ensure integrity of the financial reporting. As such it is crucial that the Committee conducts itself in an informed and efficient way. This Report of the Audit Committee provides an overview of the make-up of the Committee and the matters it considered during the year.
Role of the Chairman of the Committee
As Chairman of the Audit Committee I have ultimate responsibility for approving the Committee's agenda, ensuring that key audit issues are reported to the Board in an effective and timely manner and maintaining key relationships with the Group's senior management, Head of Risk and Internal Audit, the Company Secretary and senior representatives of the external auditors.
I have been a member of the Audit Committee since my appointment as a non-executive director in October 2006 and have chaired the Committee since March 2007. I am a qualified chartered accountant and Chief Financial Officer at Aggreko plc and as such the Board considers that I have the requisite recent and relevant financial experience to satisfy Provision C.3.1 of the UK Corporate Governance Code. The Board also considers that I have the commercial, financial and audit experience necessary to address any complex accounting, audit and risk issues which may arise.
In compliance with the Code and the Committee's terms of reference, during the year the Audit Committee comprised wholly of independent non-executive directors: Angus Cockburn, Michael Wemms, Tiffany Hall, and Mark Allen. The quorum for business is two members. Subject to successful annual re-election to the Board as provided by the UK Corporate Governance Code, appointments to the Audit Committee are for a period of three years and are extendable by two additional three year periods. An induction programme is provided for new Audit Committee members as part of the wider induction to the Board.
We review membership of the Committee as part of the review of Board effectiveness. This year's review concluded that the current mix of financial and commercial experience of the Audit Committee, and that of its advisors, is such that the Committee can effectively exercise its responsibilities to the Group in relation to risk and controls. The Committee is permitted by its terms of reference to obtain independent external advice at the Group's expense.
The Audit Committee's terms of reference include all matters indicated by Disclosure and Transparency Rule 7.1 and the Code. A new iteration of the Committee's terms of reference was approved at our meeting in November 2012 which had been updated in line with the FRC's revised version of the UK Corporate Governance Code and its Guidance on Audit Committees both published in September 2012.
The Audit Committee met three times during 2012. Our agenda is predominately linked to events in the Group's financial calendar but, as in previous years, we sought to ensure the agenda in 2012 was as fresh and relevant as possible incorporating elements of training and professional development for the Committee as well as reviewing specific areas of the business where appropriate. The agenda is ultimately approved by me as the Committee Chairman but each Committee member retains right to require reports on matters of interest in addition to the annually recurring items.
The Chairman of the Board along with the Chief Executive, Finance Director, the Head of Risk and Internal Audit, representatives from the Finance function and senior representatives of the external auditors are regularly invited to attend all or part of meeting as and when appropriate. The Audit Committee reserves the right to request any non-members to withdraw from any meeting.
Summary of the role of the Audit Committee
The Audit Committee is responsible for ensuring that the Group's financial systems provide accurate and up-to-date information, that the Group's published financial statements represent a true and fair reflection of this position and for ensuring the effectiveness and rigorousness of the internal control framework on behalf of the Board.
Specifically, the Audit Committee is responsible for:
- monitoring the integrity of the financial statements of the Group and any formal announcements relating to the Group's financial performance and reviewing significant financial reporting judgements contained therein;
- reviewing the Group's internal financial controls and the Group's internal control systems;
- reviewing the Group's risk management processes and systems (although the Board as a whole remains responsible for overseeing the overall risk profile of the business);
- ensuring that information flows from the senior management and external auditors are such that the information the Committee receives is complete, accurate, timely and robust;
- monitoring and reviewing the effectiveness of the Group's internal audit function;
- making recommendations to the Board in relation to the appointment of the external auditor and approving the remuneration and terms of engagement of the external auditor;
- reviewing and monitoring the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; and
- developing and implementing a policy on the engagement of the external auditor to supply nonaudit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm.
We are also responsible for reporting to the Board, identifying any matters in respect of which action or improvement is needed, making recommendations as to the steps to be taken and monitoring the effectiveness of any resulting activity.
Overview of the actions taken by the Audit Committee to discharge its duties
During the year, the Committee discharged its responsibilities through the following activities:
and External Audit
and External Audit
|Internal Audit and
We invite senior management from the business to come and talk about the financial controls in their business areas. During 2012, the Finance Directors of the two divisions made presentations on the control environments in their areas.
As in previous years, experts from Deloitte were invited to update the Committee on recent developments in the areas of governance, accounting and reporting. All members of the Committee are members of the Deloitte Academy which provides in depth updates on financial and reporting matters.
As a Committee we are responsible for the development, implementation and monitoring of the Group's policy on external audit in line with relevant ethical standards and guidance. The current policy sets out the categories of nonaudit services which the external auditors will and will not be allowed to provide to the Group, subject to de minimis levels. All relevant fees proposed by the external auditors must be reported to and approved by the Audit Committee. No services were provided by the external auditor pursuant to contingent fee arrangements.
During the year, the external auditors continued to provide tax advice relating to the Group's obligations in respect of former MFI properties and its overseas subsidiaries. We reviewed the ongoing nature and cost of this work during the year. The Committee approved the continued involvement of Deloitte LLP in this regard as it was concluded they were best placed to supply such tax services in a cost effective manner due to the experience and qualifications of the individuals providing such services, their knowledge of the Group and its tax affairs and the best interests of the Group were served by engaging them.
Details of Deloitte LLP's fees for audit and non-audit work during 2012 are included in note 7 to the financial statements on page 78.
The Board recognises that the fees relating to non-audit services are in excess of the total audit fee. This is in part due to the audit related assurance review of the interim accounts (c.25% of the total non-audit fee) but in the main due to fees charged in respect of the aforementioned tax advice (c.50% of the total non-audit fee). Given the specific nature of the fees incurred, and having reviewed the safeguards Deloitte LLP has in place to protect their independence as auditors, we are satisfied this work has not impaired their independence.
The Audit Committee also has a policy in relation to the employment of former members of the external audit team, which was reviewed during the year. This policy states that, whilst the Group would not normally employ a former member of the external audit team, if appropriate, individual cases may be considered by the Chairman of the Committee and Chief Financial Officer.
We recognise that auditor independence is an essential part of the audit framework and the assurance it provides. To fulfil our responsibilities regarding the independence of the external auditors, we undertook a comprehensive review during 2012 encompassing the following:
- review of the independence of the external auditors and the arrangements which Deloitte LLP have in place to identify, report and manage conflicts of interest;
- review of the changes in key external audit staff for the current year and the arrangements for the day to day management of the audit relationship. In accordance with the ethical standards, having held office for five years the lead statutory audit partner changed in March 2012 at the end of the 2011 year end audit;
- consideration of the effectiveness of the external auditors through a review of their plan of work and the outputs arising from the audit;
- consideration of the overall extent of non-audit services provided by the external auditors, in addition to case by case approval of the provision of non-audit services as appropriate; and
- consideration of the likelihood of a withdrawal of the auditor from the market and note taken of the fact that there are no contractual obligations to restrict the choice of external auditors.
To assess the effectiveness of the external auditor, we reviewed:
- the arrangements for ensuring the external auditor's independence and objectivity;
- the external auditor's fulfilment of the agreed audit plan and any variations from the plan;
- the robustness and perceptiveness of the auditor in their handling of the key accounting and audit judgements; and
- the content of the external auditor's report on internal control.
The external audit was last tendered in 2002. This resulted in a change to the Group's external auditor, with Deloitte LLP replacing the previous incumbent audit firm. As reported above, the Audit Committee 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. Although the updated version of the Code is applicable to accounting periods beginning on or after 1 October 2012, the FRC has set out transitional arrangements which propose that tendering should normally fit the five year cycle of lead audit partner rotation. Whilst being mindful of the revised guidance of the FRC, but also taking into account the rotation of the lead audit partner and as a result of our work above, we concluded that the independence criteria under the relative standards continued to be met and accordingly it was not necessary to tender for the audit work at this time. The Committee has therefore unanimously recommended to the Board that a proposal be put to the shareholders at the Annual General Meeting that Deloitte LLP be reappointed as external auditors and that the directors be authorised to fix their remuneration. At the year end the independent auditors formally confirmed their independence and objectivity had been maintained.
We are also required to assist the Board to fulfil its responsibilities relating to the adequacy of the resourcing and plans of the Internal Audit department. During the year, we reviewed:
Internal Audit's programme of work and progress made against planned activity;
- results of key audits and other significant findings including the adequacy and timeliness of management's response;
- the level and nature of non-audit activity performed by Internal Audit; and
- staffing, reporting and effectiveness of divisional audits.
As previously stated, an independent review of the Internal Audit function was undertaken by PricewaterhouseCoopers who presented their findings to the Audit Committee during the year. Their report concluded that Internal Audit was an effective and well-led function with a well-defined remit. An external review of this function is conducted every five years.
The Group's whistleblowing policy contains arrangements for the Head of Internal Audit to receive, in confidence, complaints on accounting, risk issues, internal controls, auditing issues and related matters for reporting to the Audit Committee as appropriate. Issues raised and investigated under this policy were formally reviewed during the year. The Committee reviewed and approved the Group's whistleblowing policy during the year.
As a result of its work during the year, the Audit Committee has concluded that it has acted in accordance with its terms of reference and has ensured the independence and objectivity of the external auditors.
I will be available at the Annual General Meeting to answer any questions about the work of the Audit Committee.
Chairman of the Audit Committee
27 February 2013