"During the year, we have scrutinised the appropriateness of the Group's system of internal controls and risk management processes, along with the internal and external audit processes."
Toby Hayward Chairman of the audit committee
The primary function of the committee is to assist the board in fulfilling its oversight responsibilities. This includes reviewing the financial reports and other financial information before publication. The committee assists the board in achieving its obligations under the Code in areas of risk management and internal control, focusing particularly on areas of compliance with legal requirements, accounting standards and the Listing Rules, and ensuring that an effective system of internal financial and non-financial controls is maintained.
The committee also reviews the accounting and financial reporting processes, along with reviewing the roles of and effectiveness of the external auditor. The ultimate responsibility for reviewing and approving the annual report remains with the board.
The responsibility of the committee principally falls into the following areas:
- To monitor the integrity of the financial statements and formal announcements and to review significant financial reporting judgements.
- To review the Group's internal financial controls.
- To make recommendations to the board in relation to the appointment and removal of the external auditor and to approve its remuneration and its terms of engagement.
- To review the nature of non-audit services supplied and non-audit fees relative to the audit fee.
- To provide independent oversight over the external audit process through agreeing the suitability of the scope and approach of the external auditor's work, assessing its objectivity in undertaking its work and monitoring its independence taking into account relevant UK professional regulatory requirements and the auditor's period in office and compensation.
- To oversee the effectiveness of the internal audit process.
- To oversee the effectiveness of the external audit process particularly with regard to the quality and cost-effectiveness of the auditor's work.
- To report to the board how it has discharged its responsibilities.
Activities of the committee
- Reviewed and discussed with the external auditor the key accounting considerations and judgements reflected in the Group's interim results for the period ended 30 September 2013.
- Reviewed and agreed significant accounting risks and principal business risks for the year ended 31 March 2014.
- Reviewed and agreed the external auditor's audit planning report in advance of the audit for the year ended 31 March 2014.
- Discussed the report received from the external auditor regarding the audit of the results for the year ended 31 March 2014. This report included the key accounting considerations and judgements reflected in the Group's year-end results, comments on findings on internal control and a statement on independence and objectivity.
- Reviewed the need for an internal audit function and approved KPMG's appointment as the Group's internal auditor.
- Reviewed the internal audit plan and internal audit reports prepared by KPMG covering various aspects of the Group's operations, controls and processes.
- Reviewed the Group's risk register.
- Reviewed progress in the development of a Group finance manual including the formalisation of Group accounting policies.
- Reviewed and approved external audit fees for the year ended 31 March 2014.
- Reviewed the effectiveness of the external audit process.
- Reviewed the need for an audit tender process.
The committee has considered the annual report in the context of the new 'fair, balanced and understandable' statement and is in a position to report to the board that the 2014 annual report taken as a whole is fair, balanced and understandable on the basis that the description of the business agrees with their own understanding, the discussion of performance properly reflects the events of the year and that there is a clear and well-articulated link between all areas of disclosure.
Risk management and internal control
The committee is responsible for reviewing the design and effectiveness of the Group's system of internal control. The committee is also responsible for reviewing the adequacy and effectiveness of the Group's ongoing risk management systems and processes.
Taking into account the processes that have been designed and implemented during the year ended 31 March 2014, the board, with the advice of the committee, has reviewed the internal control systems and risk management processes. Further steps are being undertaken to embed internal control and risk management further into the operations of the Group and to deal with areas of improvement which are brought to the attention of management and the board.
Further details of the Group's internal control process are set out in the corporate governance report.
Further details of the Group's principal risks and uncertainties are set out in the how the business manages risk section.
In conjunction with management, the committee reviewed the need for an internal audit function. A number of options were considered including the establishment of an in-house internal audit department, outsourced arrangements and co-sourced arrangements. After considering several providers, KPMG was engaged.
Financial reporting and significant financial issues
The committee assesses whether suitable accounting policies have been adopted and whether management has made appropriate estimates and judgements. The committee reviews accounting papers prepared by management which provide details on the main financial reporting judgements. For example, during the year the committee reviewed the significant contract judgements made by management and the judgemental areas of the carrying values of goodwill and the Indian joint venture.
The committee also reviews reports by the external auditor on the full year and half year results which highlight any issues associated with the work undertaken on the audit.
The two significant issues considered during the year are detailed below:
- Contract valuation, revenue and profit recognition: The committee reviewed the report of the Group finance director that set out the main contract judgements associated with the Group's significant contracts. The significant areas of judgement include the timing of revenue and profit recognition, the estimation of the recoverability of contract variations and claims and the estimation of future costs to complete. The external auditor performed detailed audit procedures on revenue and profit recognition and reported the findings to the committee.
- Review of carrying value of goodwill and the investment in the Indian joint venture: The committee considered the carrying value of goodwill and the investment in the Indian joint venture and the assumptions underlying the impairment review. The judgements in relation to impairment largely relate to the assumptions underlying the identification of the Group's cash-generating units (CGUs) (for goodwill only) together with the calculation of the value in use of the business being tested for impairment, primarily the achievability of long-term business plans and macroeconomic assumptions underlying the valuation process. The impairment reviews were identified as significant risks by the external auditor, who reported the findings to the committee.
The committee was satisfied that each of the matters set out above had been fully and adequately addressed by management, appropriately tested and reviewed by the external auditor and that the disclosures made in the annual report were appropriate.
In addition, the committee has considered a number of other judgements which have been made by management, none of which had a material impact on the Group's results. These include the recoverability of deferred tax assets and the valuation of pension scheme liabilities.
The committee has responsibility for making a recommendation on the appointment, reappointment and removal of the external auditor. The committee also advises the board on the external auditor's remuneration for audit and non-audit work, independence and objectivity and discusses the nature, scope and results of the audit with them. Deloitte LLP was reappointed auditor of the Group at the AGM held in September 2013.
The effectiveness of the external audit process is dependent on appropriate risk identification at the start of the audit cycle. These significant risks are identified in the external auditor's planning report to the committee and comprise contract valuation, revenue and profit recognition and the review of the carrying value of goodwill and the investment in the Indian joint venture. Throughout the year, the committee monitored these risks and the associated work undertaken by Deloitte has been evaluated.
The effectiveness of the external audit process is currently assessed by the committee based on discussions with those involved in the process. The chairman of the audit committee also meets with the external audit partner outside the formal committee process throughout the year.
In assessing the effectiveness of the external audit process during the year, the committee reviewed the following:
- The experience, qualifications and expertise of the external auditor;
- The achievement of the agreed audit plan and the communication of any changes to the plan;
- The competence with which significant accounting and audit issues were handled and how these were communicated to the committee; and
- The external auditor's compliance with relevant regulatory, ethical and professional guidance on the rotation of audit partners.
The committee is satisfied that the audit continues to be effective and provides an appropriate independent challenge to the Group's management.
Deloitte LLP and its predecessor firms have been the external auditor of the Group since their appointment in 1983. The external auditor is required to rotate the audit partner responsible for the Group and subsidiary audits at least every five years and a new lead audit partner was appointed for the year ended 31 March 2014.
The committee has noted the recent changes to the UK corporate governance code including the provision for FTSE 350 companies to rotate the external audit contract at least every ten years. Despite this provision not being applicable to the Group given its current status outside of the FTSE 350, the committee recognises that the length of tenure of auditors is under increasing scrutiny. In view of this, and taking into account recent EU guidance that also requires listed companies to tender their audit at least every ten years, the committee intends to conduct a tender process during the course of the coming year. The successful firm will be appointed for the year ending 31 March 2016. There are no contractual obligations that restrict the choice of the external auditor.
The committee recognises that, given its knowledge of the business, there are often advantages in using the auditor to provide certain non-audit services. The committee is satisfied that the independence of the auditor has not been impaired by providing these services. Non-audit services provided by the auditor during the year ended 31 March 2014 represented corporation tax compliance advice only. The committee has a policy of limiting fees to the auditor for non-audit services to 100 per cent of the audit fee and requiring competitive tender for all work with a fee over £30,000, other than for routine tax compliance work.
There are no specific types of non-audit work from which the auditor is specifically excluded but the committee may reserve the right to insist that the auditor be excluded from tendering for work that may present a potential conflict of interest. The auditor complies with the Accounting Practices Board (APB) Ethical Standards applying to non-audit services.
In other circumstances, proposed assignments are put out to tender and decisions to award work taken on the basis of demonstrable competence and cost-effectiveness.
Details of the auditor's fees, including non-audit fees, of £307,000 paid to Deloitte LLP, are shown in note 4 to the consolidated financial statements.
Chairman of the audit committee
11 July 2014