The Committee's aim is to ensure high standards of corporate and regulatory reporting, an appropriate control environment, risk management and compliance.
Jonathan Nicholls Chairman of the Audit Committee
Purpose and aim
The purpose of the Audit Committee (“the Committee”) is to make recommendations on the reporting, control, risk management and compliance aspects of the Directors’ and the Group’s responsibilities, providing independent monitoring, guidance and challenge to Executive Management in these areas.
Through this process the Committee’s aim is to ensure high standards of corporate and regulatory reporting, an appropriate control environment, risk management and compliance. The Committee believes that excellence in these areas enhances the effectiveness and reduces the risks of the business.
- The accounting policies applied in and the integrity of the Group’s accounts;
- The effectiveness of the internal control and risk management systems;
- Whistleblowing procedures;
- The effectiveness of the Group’s outsourced Internal Audit function; and
- The appointment, independence, remuneration and effectiveness of the Group’s external Auditor.
The Audit Committee’s Terms of Reference are available on the Company’s website (www.sigplc.com).
On behalf of the Board I am pleased to present the Audit Committee Report for 2014.
KPMG LLP was appointed as the Group’s outsourced Internal Audit function with effect from 1 January 2014, and this has provided a fresh focus on key areas of risk and control.
KPMG’s Internal Control Review undertaken in December 2014 supports the view that the Group has an effective system of internal financial control. Management action continues to be taken to improve controls and bring efficiencies across the business. A focus this year has been on IT, and in particular the implementation of the new ERP system in the UK. Whilst this has brought challenges in the short-term, it will bring significant improvements to the control environment over the longer-term. Additionally, we have created a new role this year of Chief Information Officer, giving greater attention to IT strategy and controls across the Group. IT will continue to be a key area of focus in 2015.
The Committee has again considered the issue of external Auditor rotation and, although continuing to keep this under review, currently intends to next tender the Audit in 2018. Further detail is provided in this Report.
Chairman of the Audit Committee
11 March 2015
Audit Committee membership
Throughout 2014, the Committee comprised the four independent Non-Executive Directors of the Company.
|CHAIRMAN OF THE COMMITTEE||MEMBERS|
|Mr. J. C. Nicholls||Mrs J. E. Ashdown, Mr. M. Ewell|
Mr. C. V. Geoghegan
The Board considers that each member of the Committee is independent within the definition set out in the Code. The combined relevant commercial and financial knowledge and experience of the Committee members satisfies compliance with the Code provision C.3.1.
Audit Committee Structure
The Committee operates under Terms of Reference which can be found on the Company’s website. They are reviewed annually by the Committee, including comparison against the UK Corporate Governance Code (“the Code”), and changes are recommended to the Board for approval.
The Committee has in its Terms of Reference the power to engage outside advisors and to obtain its own independent external advice at the Company’s expense, should it be deemed necessary. During 2014 no member of the Committee, nor the Committee collectively, found it necessary to obtain such separate advice beyond the advice that is directly provided to the Committee by the external Auditor, Deloitte LLP or from KPMG LLP who operate the Group’s outsourced Internal Audit function.
As part of Corporate Governance the Committee reviews its own performance annually and considers where improvements can be made. The Committee reviewed its own performance in December 2014 and the results of this review were reported to the Board.
The Chairman of the Committee reports to the subsequent meeting of the Board on the key issues covered by the Committee, identifying any matters on which it considers that action or improvement is needed, and makes recommendations on the steps to be taken.
The Committee meets regularly throughout the year, with five meetings being held during 2014. Its agenda is linked to events in the Company’s financial calendar.
Attendance by individual members of the Committee is disclosed in the Corporate Governance. The Committee Chairman regularly invites senior Company executives to attend meetings of the Committee to discuss or present specific items, and in particular the Group Finance Director, Mr. D.G. Robertson, attended all five of the meetings in 2014. The external Auditor attended meetings of the Committee on four occasions and has direct access to the Committee Chairman. The external Auditor meets periodically with members of the Committee without the Chairman of the Board and the Executive Directors being present. KPMG LLP, who provides an outsourced Internal Audit function for the Group, is invited to meetings to present its reports. The Committee also meets with KPMG without the Executive Directors being present, and the Committee Chairman meets regularly with KPMG outside of the formal meetings.
The Committee addressed the following key agenda items during the year:
|January 2014||March 2014||July 2014||August 2014||December 2014|
Review of Internal Audit report
Consideration of IT controls review report
Management of the internal audit handover from EY to KPMG
Review of 2014 Internal Audit programme
Internal Audit update
Review of Going Concern basis of accounting
Goodwill and intangible assets impairment review
Internal controls review
Review of 2013 audit process and results, and discussion of significant accounting matters
Review of the 2013 external Auditor report
Review of the 2013 Annual Report (including fair, balanced and understandable requirement) and Preliminary Results Announcement
2014 interim review - planning considerations
Review of the 2014-16 Internal Audit plan
Review of Internal Audit reports on internal controls and integration of acquisitions
Review of the Committee’s Terms of Reference
Review of whistleblowing and non-audit services policies
Review of 2014 interim results
Goodwill and intangible assets impairment review
Review of Going Concern basis of accounting
Review of the external Auditor’s interim work and report
Discussion of the 2013 Annual Report compared to best and emerging practice
Assessment of performance of external Auditor
Review of internal control report
Consideration of the risk management review process
Review of the 2014 Internal Audit report and status of recommendations made
Review of the Internal Audit interim report on implementation of the new UK ERP system
Review of audit pre-close accounting and reporting issues
Review of year end external audit planning report
Agreement of 2014 audit fee and review of Auditor independence
Financial Reporting and Significant Accounting Matters
The Committee considered the following financial reporting and key accounting issues with regard to the financial statements:
Implementation of UK ERP system
During the year the Group continued its phased implementation of its new UK ERP system. All administrative back offices went live during the year and the branch roll-out has commenced. In light of the hybrid nature of the underlying systems, Deloitte adopted a more substantive approach to their audit testing. The Committee satisfied itself that the enhanced procedures enabled the audit to be properly carried out at no loss of rigour.
Recognition and measurement of supplier rebate income
The Committee examined the procedures and controls in place to ensure that the reporting, reviewing and accounting for supplier rebate income is properly managed and that supplier rebates are recognised appropriately in the Group financial statements.
Carrying value of goodwill and intangible assets
The carrying value of goodwill is systematically reviewed at each mid-year point and at year end. A consistent methodology is applied to the individual cash generating units, taking account of market outlook, risk-adjusted discounted future cash flows, sensitivities, and other factors which may have a bearing on impairment considerations.
Disclosure of “Other items”
The Committee gave careful consideration to the judgments made in the separate disclosure of “Other items”. In particular, the Committee sought to ensure that the treatment followed consistent principles and that reporting in the Annual Accounts is suitably clear and understandable.
Recognition and measurement of trade receivables
Methodologies and judgments applied in establishing provisions for trade receivables were examined to ensure consistent application and appropriateness to the trading position of the Group.
Read more about our Critical Accounting Judgments and Key Sources of Estimation Uncertainty
Read more about our Statement of Significant Accounting Policies
Oversight of Internal Audit
The Internal Audit function provides independent assurance to senior management and the Board of the adequacy and effectiveness of SIG’s risk management framework. Internal Audit forms an independent and objective assessment as to whether: risks have been adequately identified; adequate internal controls are in place to manage those risks; and those controls are working effectively. The results of all assignments have been reported to the Audit Committee during the year. Areas of weakness that were identified during the year prompted a detailed action plan and a follow-up audit check to establish that actions had been completed. No significant failings or weaknesses were identified during the year which had a material effect on the Company’s financial performance.
The Audit Committee notes that the Company operates a Control Self Assessment (“CSA”) internal control process to support the internal audit process. This process is summarised in the Corporate Governance Report.
KPMG LLP was appointed on 1 January 2014 in place of EY LLP to provide the outsourced Internal Audit function. The appointment followed a full review process which involved tenders being made by five accountancy firms leading to a shortlist of three firms from which a candidate was recommended. The process was carried out by the Group Finance Director and the Chairman of the Audit Committee who then recommended KPMG to the Audit Committee as the selected internal audit provider. Their appointment was then recommended by the Audit Committee to the Board, and was approved by the Board.
Oversight of External Auditor
The Board is aware of the need to maintain an appropriate degree of independence and objectivity on the part of the Group’s external Auditor. The external Auditor reports to the Committee on the actions taken to comply with both professional and regulatory requirements and with best practice designed to ensure its independence.
The Group has an agreed policy with regard to the provision of audit and non-audit services by the external Auditor, which was operated throughout 2014. The policy is based on the principles that they should undertake non-audit services only where they are the most appropriate and cost-effective provider of the service, and where the provision of non-audit services does not impair, or is not perceived to impair, the external Auditor’s independence and objectivity. It categorises such services as Auditor-permitted services, Auditor-excluded services and Auditor-authorised services. The policy, which can be viewed on the Company’s website (www.sigplc.com), defines the types of services falling under each category and sets out the criteria to be met and the internal approvals required prior to the commencement of any Auditor-authorised services.
The external Auditor cannot be engaged to perform any assignment where the output is then subject to their review as external Auditor. The Committee regularly reviews an analysis of all services provided by the external Auditor. The policy is reviewed annually by the Committee and is approved by the Board.
The total sum invoiced to the Group by its external Auditor for non-audit services in 2014 was £0.1m, representing the interim review (2013: £0.1m). The total sum invoiced by them for audit services in respect of the same period was £1.3m (2013: £1.4m).
The external Auditor reports to the Committee each year on the actions taken to comply with professional and regulatory requirements and best practice designed to ensure its independence, including the rotation of key members of the external audit team. Deloitte LLP has formally confirmed its independence to the Board in respect of the period covered by these financial statements.
In August 2014, the Committee undertook its annual review of the effectiveness of the external Auditors and considered the reappointment of Deloitte LLP. A questionnaire was sent to the Finance Directors of each of the Group’s operating companies, which provided the Committee with an overall view across the Group. From this questionnaire and further discussions in the meeting, the Committee is satisfied that Deloitte LLP continues to provide an effective audit service.
The Code recommends that external audits should be put out for tender every ten years.
Having previously acted as Auditor to parts of the Group since 2003, Deloitte was invited to tender for the entire Group audit in 2005 and this resulted in Deloitte being appointed as the external Auditor.
As noted previously, the Committee continues to review the performance of the external Auditor and has been satisfied with the independence, objectivity, expertise, resources and general effectiveness of Deloitte LLP, and that the Group is subjected to a rigorous audit process. The Committee does not consider it necessary to conduct a tender process for the appointment of the Company’s Auditor at this time, although the Committee will continue to keep this under review.
The current lead audit partner took over responsibility for the audit for the year ended 31 December 2013. The Committee is currently of the view that it is potentially more effective to align the tender of the external Auditor with the rotation of the current lead audit partner, which is due in 2018. The Committee will continue to keep this under review with a particular regard to regulatory developments.
The Committee recommends, and the Board agrees, that a resolution for the reappointment of Deloitte LLP as Auditor of the Company for a further year will be proposed at the forthcoming Annual General Meeting.
Fair, balanced and understandable
The Committee has reviewed the contents of this year’s Annual Report and Accounts and advised the Board that, in its view, the report is fair, balanced and understandable and provides the necessary information to enable Shareholders to assess the performance, strategy and business model of the Company.
In reaching this conclusion the Committee has considered the following:
- the preparation of the Annual Report is a collaborative process between Finance, Legal, Human Resources, Investor Relations and Communications functions within SIG, ensuring the appropriate professional input to each section. External guidance and advice is sought where appropriate;
- the coordination and project management is undertaken by a central team to ensure consistency and completeness of the document;
- an extensive review process is undertaken, both internally and through the use of external advisors; and
- a final draft is reviewed by the Audit Committee members prior to consideration by the Board.
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 Auditor.
On behalf of the Board
Chairman of the Audit Committee