Appointment and replacement of Directors
It is the policy of the Board that all Directors wishing to continue in office will stand for election or re-election each year at the AGM, in accordance with Provision B.7.1 of the UK Corporate Governance Code.
The Articles of Association allow the Board to appoint a new Director at any time; however the Articles state that the new Director will only hold office until the next AGM, at which point he or she must stand for election or vacate the office.
The Nomination Committee, and the Board as a whole, has reviewed the performance and contribution of Bill Halbert, Graham Holden, Tony Illsley, Paul Simpson and Martin Towers and has no hesitation in proposing the re-appointment of each of these Board members. Kevin Walsh has indicated his intention to retire from the Board during the summer of 2014 and therefore will not stand for re-election at the AGM.
The Articles of Association state also that the Company may remove a Director by ordinary resolution with special notice before the expiration of their period of office. There have been no Directors removed from office during the year.
The two Non-Executive Directors and the Non-Executive Chairman, are considered to be independent in relation to the criteria set out in Provision B.1.1 of the UK Corporate Governance Code and the National Association of Pension Funds (NAPF) Corporate Governance Voting Policy and Guidelines.
The Board reviews the independence of the Non-Executive Directors each year, taking into account the length of tenure, relationships and circumstances as well as considering the behaviour of each Director at Board meetings and whether or not they contribute to unbiased and independent debate. All of the Non-Executive Directors and the Non-Executive Chairman were independent upon appointment and the Board believes that all three remain wholly independent.
Commitments of the Chairman
During the year under review, Bill Halbert worked full-time for the Company as Executive Chairman. He also sat on the boards of a number of smaller private limited companies but these did not require a significant time commitment and he managed successfully these commitments alongside his role at KCOM Group. His commitments have not changed significantly in the year.
From 1 April 2014, Graham Holden was appointed as Non-Executive Chairman. Graham currently has no other significant commitments.
The combined roles of Chairman and Chief Executive
From July 2009 to the end of March 2014, Bill Halbert held the role of Executive Chairman, combining the roles of Chairman and Chief Executive. Given the particular circumstances of the Group in 2009, the decision to combine the two roles was taken with the support of our largest shareholders, to provide strong leadership through a period of transformation for the business. This transformation continued through the economic downturn and, in both 2011 and 2012, consultation with our largest shareholders indicated that there was strong support for Bill to continue in his dual role.
The combined role was reviewed regularly by the Nomination Committee and during the year it was agreed that the Group had progressed beyond the specific circumstances requiring the dual role and that therefore it was the right thing for the Group to split the role once again, to ensure compliance with best practice. Therefore from 1 April 2014 the roles of Chairman and Chief Executive have been separated, with Bill becoming the Chief Executive and Graham Holden, previously one of our Non-Executive Directors, becoming Non-Executive Chairman.
Having a combined Executive Chairman role is in breach of Provision A.2.1 of the UK Corporate Governance Code. The main principle of the Code, which is supported by Provision A.2.1, is ‘There should be a clear division of responsibilities at the head of the Company between the running of the Board and the executive responsibility for the running of the Company’s business. No one individual should have unfettered powers of decision.’ To ensure that we complied with this principle while the dual role was in operation, we had the following measures in place throughout:
- we had a strong Board, including experienced Non-Executive Directors. Our Senior Independent Director, Tony Illsley, along with the Executive Chairman and the other Non-Executive Directors, was responsible for ensuring that there was a culture of openness, debate and challenge among the Board members. Also, Tony Illsley and the other Non-Executive Directors were always available to any shareholders who requested a meeting or wanted to voice concerns, although no such meetings were requested;
- we had an equal number of Executive and Non-Executive Directors on the Board and a clear schedule of Matters Reserved for the Board so that no single group or individual was able to dominate decision-making;
- the Company Secretary, along with the Executive Chairman, was responsible for ensuring that there was the right flow of information to the Board and that the Board agenda covered all of the topics that the Board should be considering;
- each of our four operating brands has its own Managing Director, separate from the Executive Chairman, who all had access to the other Executive Directors and, along with other members of senior management, met with the Non-Executive Directors on a regular basis to enable information to be exchanged first hand and to provide the Non-Executive Directors with greater insight and understanding of Group operations outside of the boardroom; and
- our Executive Chairman received training on his responsibilities as an Executive Director and as the Chairman of the Board and was careful to ensure that he did not perform one role at the expense of the other. The Senior Independent Director supported him in this and acted as a sounding board for the Executive Chairman when required.
Board length of service
|Graham Holden||27 November 2007|
|Bill Halbert||1 September 2006|
|Paul Simpson||24 May 2004|
|Kevin Walsh||24 May 2004|
|Tony Illsley||2 June 2009|
|Martin Towers||2 June 2009|
UK Corporate Governance Code
Apart from the exception noted above, the Board considers that it has complied with all the detailed provisions of the UK Corporate Governance Code throughout the year ended 31 March 2014.
Since 1 April 2014, following Graham Holden’s appointment as Chairman of the Board, there are currently two Non-Executive Directors and three Executive Directors which is in breach of provision B.1.2 of the code, which requires at least half of the Board excluding the Chairman to be independent Non-Executive Directors. The Board is actively seeking a new Non-Executive Director to correct this imbalance. In addition, Kevin Walsh has chosen not to stand for re-election at the AGM which will reduce the number of Executive Directors to two. In addition, provision C.3.1 of the code requires the Audit Committee membership to be made up of at least three independent Non-Executive Directors. Since 1 April 2014 the Group has therefore been in breach of this requirement, but will rectify this when the new Non-Executive Director is appointed to the Board.
The Board as a whole is committed entirely to the principle of achieving and maintaining a high standard of corporate governance. The UK Corporate Governance Code is available on the Financial Reporting Council website at www.frc.org.uk.
How the Board operates
The Board has eight scheduled meetings a year, with other adhoc meetings held as needed. During the year, the Board met 10 times. The two additional meetings were specifically held to review the details of a significant sales contract and to review progress in relation to a large-scale internal project. Attendance at the meetings during the year is shown in the table below. Five of the meetings were preceded the evening before by an informal meeting, allowing more time to debate issues in depth.
At each meeting the Board considers all aspects of Group performance, including past performance and the future long-term success and strategic aims of the Group.
The Board agenda is set each month by the Chairman with input from the Executive Directors and the Company Secretary. In addition, any of the Non-Executive Directors can request a matter to be added to the agenda at any time.
The Board receives reports each month on financial performance, people matters, investor relations, governance, compliance and risk. These reports are circulated every month, regardless of whether or not a Board meeting is scheduled. There are also regular updates on key projects and strategic programmes and regular reports on health, safety and environmental matters and other areas of corporate responsibility.
Board meetings are held at various KCOM Group sites throughout the year and the Board seeks to regularly meet with senior management from the four brands to gain further insight into the day-to-day operation of the business and the key risks and opportunities facing each part of the business.
There is a schedule of Matters Reserved for the Board which is reviewed and updated each year. This schedule requires that specific matters relating to budgets, strategy, performance against objectives, financial reporting, internal controls, communications, remuneration and governance, along with any proposed changes to business operations or the structure and capital of the Company, are referred to the Board for consideration and approval.
The Board reviews also contractual clauses escalated to the Board through our contracting risk framework and business cases escalated in accordance with our Group-wide delegations of authority.
The Board considers the role of the Company Secretary to be pivotal in ensuring that the Group and the Board has the right governance in place and that Board processes follow best practice. Our Company Secretary, Kathy Smith, was appointed to the role in 2010 and has been with the Group for over eight years. She is a Chartered Accountant and Graduate member of the Institute of Chartered Secretaries and Administrators.
The Company Secretary meets with each of the Directors individually as necessary to discuss governance-related matters and provides a governance report to the Board on a monthly basis. The Directors are able also to obtain independent professional advice at the Group’s expense whenever necessary.
Attendance at Board meetings
|Director||Number of meetings||Out of possible|
* Chairman for the year under review.
Balance of Executive and Non-Executive Directors (as at 31 March)
Senior management team by gender, excluding Directors (as at 31 March)
The balance of the Board
The Nomination Committee is responsible for reviewing the balance of the Board to ensure that it continues to meet the current and future requirements of the Group.
There is a Board Appointments policy in place, which sets out the procedure that will be followed in the event of a Board vacancy being identified, along with the approach of the Board to diversity.
The key principle set out in the policy is that the Board will seek always to appoint on merit, in line with the current and foreseeable future requirements of the Group. The Board recognises the benefits of diversity of all types, including gender diversity, and will aim always to develop the diversity of the Board, while remaining true to the key principle of appointing on merit. The Board is currently actively seeking a new independent Non-Executive Director and has specifically requested that there should be female candidates on the shortlist. The Board has committed to appoint at least one female director to the Board by the time of the AGM in 2015, whether it is through this next appointment or an additional future appointment.
The Board Appointments policy states also that the Nomination Committee will ensure that it only uses executive search firms that have signed up to the voluntary Code of Conduct addressing gender diversity and best practice, that female applicants are given the same consideration and opportunity as male applicants and that gender diversity is considered specifically when drawing up a list of potential candidates.
In addition, through the Board Appointments policy, the Board has committed to:
- continue to seek to identify and develop the talented individuals in the Group, regardless of gender;
- review regularly the proportion of women at each level in the organisation to ensure that equal opportunities are being presented to individuals at every level; and
- ensure always that there is a confidential way in which concerns can be raised without fear of repercussion if anyone, regardless of gender, has a concern about the opportunities available to them.
While we do not have currently any female representation on the Group’s Board of Directors, 35 per cent of our senior management team is female. This is broadly comparable with the proportion of women across the Group as a whole, which sits at 37 per cent.
Training and development
The Board receives monthly updates on governance-related matters and more formal training where appropriate. Potential training needs are discussed as part of individual performance evaluation, plus each Director is given the opportunity to flag any additional training requirements which they may have identified as part of the annual Board evaluation process.
For the previous 10 years the Board has undertaken a formal internal process to evaluate the effectiveness of its own performance, as well as that of its various Committees. Following the admission of the Group back into the FTSE 350 in September 2011, the Board wishes to comply with the requirements of the UK Corporate Governance Code to perform an externally facilitated evaluation in 2014. Given the changes to the Board that were announced in November 2013, which came into effect on 1 April 2014, it was decided to delay this external review until the new Board structure was in place. The review is therefore currently underway and is being facilitated by Independent Audit Limited, who do not provide any other services to the Group.
In addition to the evaluation process, the Executive Chairman met with each Board member individually during the year to discuss their own performance and the Non-Executive Directors met separately to discuss the performance of the Executive Chairman. The feedback from this meeting was then passed on to the Executive Chairman by the Senior Independent Director. The individual evaluation process will continue under the new Chairman, with feedback to the Non-Executive Chairman again being provided by the Senior Independent Director.
The Non-Executive Directors have regular dialogue with each other concerning Board matters and the Executive Chairman met with the Non-Executive Directors, without the other Directors present, at regular intervals during the year. The Non-Executive Directors also met formally during the year without any of the Executive Directors present to discuss matters, including the performance of the Executive Chairman.
In 2013 the areas of focus that were identified through the Board evaluation process were:
|Area identified||What have we done?|
|Succession planning at both a Board and senior management level.||Succession planning at a Board level has been much discussed during the year as a result of the Board changes that have been announced. At a senior management level there has also been a greater focus and it has been agreed that this will be a regular area for Board discussion in the future.|
|Future brand strategy in relation to changing customer requirements as a result of developing technology.||There have been regular brand strategy updates provided to the Board throughout the year, including presentations from each of the brand Managing Directors. Future customer requirements are frequently discussed, as well as new developments in technology.|
Attendance at Committee meetings
|Director||Number of meetings||Out of possible|
|Martin Towers (Chairman)||3||3|
|Director||Number of meetings||Out of possible|
|Tony Illsley (Chairman)||4||4|
|Director||Number of meetings||Out of possible|
|Graham Holden (Chairman)||3||3|
The Board has established and delegated specific responsibilities to the following Committees. Each Committee reports back to the Board after each meeting and minutes of Committee meetings are circulated to all Board members, where appropriate, to ensure that the whole Board is aware of the matters considered by the Committees.
The membership and attendance at Committee meetings during the year is shown in the table above. Details of the role of the Audit Committee are given below. From 1 April 2014 Graham Holden stepped down from the Audit Committee. The Board is currently actively seeking a new independent Non-Executive Director, who will join the Audit Committee on appointment.
The membership and attendance at Committee meetings during the year is shown in the table above.
From 1 April 2014 Tony Illsley stepped down as Chairman of the Nomination Committee and Graham Holden has been appointed as Committee Chairman in his place. Tony will continue as a committee member going forward, alongside Martin Towers.
The Nomination Committee meets as often as required and is responsible for reviewing the structure, size and composition of the Board and ensuring that the balance of skills, knowledge and experience of the Board is right for the Group, both in terms of the current challenges and opportunities facing the Group and the skills and expertise that are expected to be needed on the Board in the future. The approach of the Nomination Committee to diversity on the Board is noted above.
When Board vacancies arise, the Nomination Committee is responsible for preparing a description of the role and capabilities required for a particular appointment and then identifying and nominating candidates for the approval of the Board. In order to identify suitable candidates the Committee uses open advertising or the services of external advisors to facilitate the search, where appropriate.
The Board is currently seeking a new Non-Executive Director and appointed CTPartners as the executive search firm to lead the search. The Nomination Committee provided the criteria for the required candidate to CTPartners and specifically requested that there should be female candidates on the shortlist. CTPartners does not provide any other services to the Group.
During the year, the decision was taken to appoint Graham Holden as Chairman of the Board. This was a recommendation to the Board from the Nomination Committee, following consultations with our largest shareholders and detailed discussions relating to the skills and experience required from the Chairman.
It was decided following these discussions, and taking into account his existing experience of the Group, that Graham was the best candidate for the role and that an external search would therefore not be beneficial for the Group.
The Committee is responsible also for considering succession planning for the Directors and for key senior management across the Group, although this is a matter considered also by the full Board.
The Nomination Committee reviews annually the time required from each of the Directors to perform their role effectively. Following this review in the year, the Committee is satisfied that each of the Directors has committed sufficient time during the year to fulfil their duties as Directors of the Company.
The Committee reviews the re-appointment of all of the Directors standing for re-election at the AGM, giving regard to their performance and ability to continue to contribute to the requirements of the Board. The Nomination Committee then makes recommendations to the Board on whether each Director should be put forward for re-election.
The Committee’s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the ICSA Guidance on Terms of Reference for Nomination Committees. Copies of the Terms of Reference are available from the Company Secretary and are on our website, www.kcomplc.com.
The membership and attendance at Committee meetings during the year is shown in the table above. The report of the Remuneration Committee and details of its role are given in the Remuneration report.
Relations with shareholders
We place a great deal of importance on communicating with our shareholders and understanding their views. Our Chief Executive and Chief Financial Officer meet regularly with our institutional shareholders to discuss the strategy, performance and governance of the Company and to obtain feedback. During the year, meetings have been held with 26 such shareholders. There are also general presentations following the half year and final results announcements each year.
Feedback from meetings with shareholders is included as part of the monthly report to the Board and discussed at each Board meeting, along with details of any analyst reports, to ensure that each of our Directors has a clear understanding of the views of our shareholders. Our Non-Executive Directors and Non-Executive Chairman are available to meet face-to-face with our institutional shareholders if requested to do so, although no such requests have been received during the year.
A large number of our individual shareholders live in the Hull and East Yorkshire region and, as a Group; we are very much involved in local life in the area. More information about our community activities is on the Corporate responsibility pages. We believe that being a part of local life enables us to learn more about our local shareholders and the issues that matter to them.
We consider our AGM to be an important means of communication between our shareholders and Directors. All of our Directors are available at the AGM to answer questions and we seek to encourage shareholder participation by inviting questions in advance.
We use electronic voting at our AGM each year. The results of voting, including the proxy votes lodged, are shown to shareholders in the meeting and are made available subsequently on our website.
All of our Company announcements are published on our website, www.kcomplc.com, together with presentation materials and financial reports, so that all of our shareholders can keep up to date with our news.
Business model and key performance indicators
Proposal to re-appoint the external auditors
PricewaterhouseCoopers LLP have advised of their willingness to continue in office and have confirmed their continued independence. Following consideration of the relationship with the external auditors, as described below, the Audit Committee has recommended to the Board that PricewaterhouseCoopers LLP are re-appointed and a resolution to re-appoint them will be proposed at the AGM. They have provided an independent audit opinion on these accounts which can be found in the Independent auditors' report.
Powers of the Directors
The business of the Company is managed by the Directors, who may exercise all the powers of the Company, subject to the provisions of the Articles of Association, relevant statutes and any special resolution of the Company.
The Articles of Association give the Directors the power to authorise conflicts of interest in relation to transactions or arrangements with the Company, in accordance with the Companies Act 2006. Conflicts of interest are a standing agenda item at Board meetings and each Director proposes any potential conflicts for consideration as soon as they become aware of them. The Director with the potential conflict is excluded from the vote to authorise the transaction or arrangement.
Any conflicts that are authorised are then logged on a register, along with details of any specific terms imposed upon authorisation. Internal controls are in place to ensure that transactions or arrangements which may lead to a potential conflict of interest are conducted on an arm’s length basis.
Managing risk effectively is key to everything that we do.
We believe that by understanding and anticipating our risks we can manage them properly; we therefore do not seek to eliminate risk but instead we take considered risks where necessary to help the business remain competitive and to achieve our objectives.
Risk management is built into all our processes. We also have a Risk team, which has specific responsibility for health, safety, environmental and legal risks, internal audit, insurance, governance and all matters relating to standards and compliance.
We recognise that our internal control systems can provide only reasonable and not absolute assurance against material misstatement or loss.
Risk management framework
We have a risk management framework in place to help us to formally identify, assess, measure, manage and monitor our key risks. We define key risks to be anything that may prevent us from meeting our objectives. The framework has been developed in accordance with guidance from the Financial Reporting Council and provides us with a single picture of the threats and uncertainties we face. This enables the Board and senior management to make appropriate decisions to manage the key risks.
Risk management responsibilities
The Board has overall responsibility for deciding the acceptable level of risk that the Group may take to achieve its objectives. It is responsible also for ensuring that the Group maintains sound internal control and risk management systems, as well as reviewing the effectiveness of those systems. In order to do this, the Board receives regular reports from senior management, the Internal Audit team and the external auditors, via the Audit Committee, on the effectiveness of the systems of internal control and risk management. The Board is satisfied that the systems are embedded within the day-to-day activities of the business and cover all material controls, including financial, operational and compliance controls and that the Group continues to be compliant with the provisions of the UK Corporate Governance Code relating to internal control.
The Risk Committee consists of senior management representatives from across the Group and meets bi-monthly to consider all types of risk. External advisors and subject-matter experts from within the Group are invited to attend the meetings as and when appropriate to provide insight or expertise on particular risk topics.
The Committee is responsible for reviewing progress in mitigating risks and discussing and agreeing actions relating to any new risks that have been identified. The Committee prepares a report for the Board after each meeting.
The Audit Committee is a sub-committee of the Board and is responsible for reviewing all aspects of the financial reporting of the Group and all aspects of internal control. In doing so, the Committee represents the interests of the shareholders of the Group in relation to the integrity of information and the effectiveness of the audit processes in place.
The Audit Committee during the year under review has consisted of the three Non-Executive Directors. Further information on the membership and meeting attendance is above. From 1 April 2014 Graham Holden was appointed to the role of Non-Executive Chairman and consequently stepped down from the Audit Committee, in accordance with the requirements of the UK Corporate Governance Code. The Board is currently seeking an additional Non-Executive Director and, when appointed, the new Non-Executive Director will become a member of the Audit Committee.
The Committee is chaired by Martin Towers, who has significant recent financial experience. He is a fellow of the Institute of Chartered Accountants in England and Wales and has held a number of senior finance roles, including working as Group Finance Director at Kelda Group PLC until 2008. The Board considers therefore that he has the relevant financial experience to fulfil the role of Chairman of the Audit Committee.
Committee meetings are also attended by the Executive Directors, the Group Financial Controller, the Company Secretary, the Head of Internal Audit and representatives from the external auditors. The external auditors meet also with individual members of the Audit Committee during the year, without the other attendees present. The Head of Internal Audit also meets separately with the Chairman of the Audit Committee without the other attendees present.
There were three meetings held in the year; in June, November and March. The June meeting was used to review the year end external audit and year end financial reporting, the November meeting to consider the half year review and financial reporting and the March meeting to consider the planning for the year end.
Each meeting included agenda items relating to internal audit, financial reporting and external audit. The areas discussed under each item are noted in the table below:
|Internal audit||The internal audit agenda item focuses on the audits performed in the period, including any significant issues identified. A report setting out previous audit issues raised and the progress made to mitigate the issues is also discussed at each meeting. A review of the internal audit plan for the period to the next Audit Committee meeting also takes place.|
|Financial reporting||The Group Financial Controller talks through the key judgement areas in relation to financial reporting and sets out the decisions made and the rationale behind these. These are covered in more detail in the Performance review.|
|External audit||The representatives from PricewaterhouseCoopers LLP set out the audit approach, the key audit risks, an overview of internal controls and a view on the key audit and accounting matters, as well as how PricewaterhouseCoopers LLP ensures its continuing independence from the Group.|
Each year the Audit Committee is also responsible for:
- seeking the view of the external auditors on any accounting judgements made in the year;
- considering the consistency and appropriateness of the accounting policies adopted;
- reviewing the financial statements of the Group and the clarity of the disclosures made, although the ultimate responsibility for reviewing and approving the annual report and financial statements remains with the Board;
- reviewing the adequacy of the whistleblowing procedures in place to enable employees and third parties to raise concerns in confidence, as well as the effectiveness and independence of any investigations undertaken as a result of such concerns being raised;
- reviewing the procedures in place for the detection of fraud and the prevention of bribery across the Group; and
- overseeing the relationship with the external auditors, as noted in more detail below.
The Committee’s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the Institute of Chartered Secretaries and Administrators Guidance on Terms of Reference for Audit Committees. Copies of the Terms of Reference are available from the Company Secretary and are on our website at www.kcomplc.com.
Significant issues relating to the financial statements
The specific issues considered by the Audit Committee in the year under review, in relation to the financial statements, are shown in the table below.
|Nature of the issue||How the Committee was satisfied with the treatment adopted by management||Any changes arising from discussion by the Committee|
|Pension accounting assumptions|
Pension accounting is complex and there are a number of assumptions that have to be made, which can have a significant impact on the valuation of scheme liabilities.
This is a recurring matter.
The approach to the assumptions made was in line with previous years and the Committee was satisfied that this was satisfactory given the reasonable nature of the previous assumptions and the fact that there were no reasons identified to require a revision to these assumptions.
The assumptions were debated by the Committee.
No changes were made as the Committee concluded that it was in agreement with the treatment adopted by management.
|Capitalisation of intangible assets on internal projects|
There is a significant internal project currently ongoing to implement a new back office system. Costs relating to this are being capitalised in line with accounting standards but there have been judgements made in relation to the proportion of internal salaries that should be capitalised for this project and the recoverability of the carrying value of the asset.
This will be a recurring matter while there are significant internal projects ongoing.
The approach adopted by management in relation to the capitalisation of internal salaries was consistent with that previously adopted for other IT projects.
Management also noted that the expected benefits of the project were still believed to be in line with the original business case and therefore there was no trigger to indicate a potential impairment of the asset carrying value.
The Committee challenged the approach to the capitalisation and the proposed useful economic life and concluded that it was in agreement with the treatment adopted by management.
|Valuation of goodwill and other intangible assets|
Testing goodwill and other intangible assets for potential impairment is complex and requires a number of management estimates to be made, which inevitably require judgement.
This is a recurring matter.
A full impairment assessment was performed at the year end and this was discussed in detail by the Committee, along with the assumptions made and the sensitivities in relation to the assumptions. It was concluded that there was no indication of impairment and that the assumptions made were reasonable.
The Committee challenged the assumptions and concluded that no changes were required.
|Accounting for judgements in significant contracts|
There are a number of significant contracts in place within the Group, some of which have changed during the year. The contract changes require some management judgement in relation to how to account for the changes.
This is a matter that is specific to the year under review.
The rationale for each judgement was clearly set out to the Committee and discussed at length. It was concluded that the rationale for each was reasonable and consistent with previous years, where applicable.
The Committee discussed the rationale for each area of judgement and agreed with the rationale applied by management.
Management judgement around when costs should be treated as exceptional is always an area for review.
This is a recurring matter.
There is an established and well-defined policy in place in relation to the classification of costs as exceptional and this has not changed in the year. Management had followed this policy and therefore the Committee was satisfied with the treatment adopted by management.
No changes were made as the Committee was in agreement with the treatment adopted by management.
The Audit Committee is responsible for overseeing the relationship with the external auditors to ensure that the external auditors continue to be independent, objective and effective in their work, as well as considering the re-appointment of the auditors each year.
PricewaterhouseCoopers LLP were appointed as auditors in 2006 following a comprehensive tender process. Following a partner rotation, the current audit partner, Ian Morrison, was appointed to the audit in 2011. Each year the Committee considers the continued independence of the external auditors and the effectiveness of the external audit process, to determine whether to recommend to the Board that the current auditors be re-appointed, also taking into consideration the desire to comply with the requirement of the UK Corporate Governance Code to tender the external audit at least every 10 years and the transitional arrangements in place in relation to this.
There are no contractual obligations in place which would restrict the choice of external auditors by the Committee.
The Audit Committee has reviewed the effectiveness of the external audit process in the year through the reports received from the external auditors and the close working of the internal audit team with the external auditors. The Committee has concluded that the external audit process was effective and is satisfied that the scope of the audit is appropriate and that significant judgements have been robustly challenged.
In addition PricewaterhouseCoopers LLP has formally confirmed its continued independence and the measures they have taken to ensure that they comply with best practice and professional and regulatory requirements in this area. The Committee believes that audit partner rotation is a significant factor in ensuring continued independence and objectivity by reducing the risk of familiarity while retaining the detailed understanding of the business which the external auditors have gained over time.
We have an ‘Engagement of External Auditors’ policy which covers the selection of firms to perform non-audit work. This policy excludes the auditors from providing certain services, such as internal audit services, litigation support, remuneration advice and legal advice services. All other non-audit work is assessed separately and is awarded to the firm considered best suited to perform the work. Any such work with a fee greater than 25 per cent of the annual audit fee must be approved by the Chairman of the Audit Committee before the external auditors may be appointed.
During the year the fee for the external audit of the Group and its subsidiaries, along with other services pursuant to legislation, was £263,000 (2013: £228,000). In addition to this, the external auditors provided services to the value of £111,000 (2013: £21,000) relating to tax advisory services and pensions-related work. In these areas the auditors were considered the most appropriate firm to perform the work.
Risk management and internal control
The Audit Committee reviews the Group’s internal controls and risk management systems through the work performed by the internal and external auditors and reports to the Board on the effectiveness of such systems. The internal control and risk management systems have not changed during the year and the Committee is satisfied that any audit issues raised by either the internal or external auditors are being adequately followed up and closed down on a timely basis.
Our Internal Audit team consists of two qualified accountants, both with a ‘Big Four’ background. The team performs financial, operational and compliance audits, assessing each potential audit area according to the risk associated with it and the level of assurance already in place; this then enables the audit to be appropriately prioritised and built into the audit plan as necessary. The audit plan is brought to each Audit Committee meeting, where it is considered and approved.
The internal auditors report to the Audit Committee at each meeting on the adequacy and effectiveness of the financial, operational and compliance controls in place across the Group. The Audit Committee is responsible for monitoring and reviewing the effectiveness of the internal audit team and does this through reviewing the internal audit reports presented to the Committee and through the Chairman of the Audit Committee meeting separately with the Head of Internal Audit outside of the Committee.
The Committee also reviews the adequacy of management responses to the audit issues raised and monitors the closure of issues on a timely basis through a regular report from the internal audit team.
The internal and external audit teams work closely together to ensure that all key risk areas are covered and that the work performed by one team feeds into the work of the other.
Financial risk management
Each part of our business produces an annual budget which is reviewed by senior management and ultimately approved by the Board. A longer-term six year plan is also in place which is updated annually and approved by the Board to enable it to have a clear longer-term view of financial projections.
We also prepare a quarterly forecast and performance against budget and quarterly forecast is monitored at monthly senior management meetings and reported to, and reviewed by, the Board each month. Further information about the financial risk management policies in place, and in particular the way in which credit risk, liquidity risk, interest rate risk and foreign currency risk are managed, is in note 26 to the accounts.
Controls around consolidation
The basis of consolidation for the financial statements is detailed in note 2 to the accounts. Strong controls are in place around the process for preparing consolidated accounts. The work of consolidation is performed by experienced, qualified accountants and a review of the consolidation forms part of the audit work performed by our external auditors.
Principal risks and uncertainties
The principal risks and uncertainties facing the Group are set out on the Risk management page of the Strategic report.