Appendix 22
As audit committee chair, I consider the key role of the committee to be in providing oversight and reassurance to the board, specifically with regard to the integrity of the company’s financial reporting, audit arrangements, risk management and internal control processes and governance framework.
Fundamentaltothisroleisthecommittee’saccesstobothinformationandlocalmanagement.I believethepresentationsandreportsreceivedduringtheyearfrommanagementandtheauditor have been sufficient, reliable and timely; and have enabled the committee to fulfil effectively its responsibilities.Committeemeetingsarealwaysattendedbythechieffinancialofficer,chiefrisk
officer,headofgroupinternalaudit,andoftenbythechiefexecutiveandchairman.Individualmanagers join meetings for specific topics, e.g. treasury or business continuity planning. In total, 13 different managersattendedoneormoremeetingsduringtheyear.InDecember,thecommitteemetwith
the company’s chief information officer and director of digital strategy to discuss our approach to technology risk management, including cyber security.The committee will continue to operate in this mannerduringthenextfinancialyear,andisplanningtomeetlocalmanagementinatleasttworegular committeemeetings.
Also fundamental to the role of the committee is its relationship with both the internal and external auditors.Thecommitteehasahealthyinteractionwithinternalandexternalauditorsandbothhavedirect accesstothecommitteetoraiseanymatterofconcernandtoreportontheresultsofworkdirectedby thecommittee.Boththeexternalauditorandtheheadofinternalauditattendallourregularcommittee meetingsandmeetprivatelywiththeauditcommittee,intheabsenceofmanagement,whenrequired.
Mr. Blue
Audit Committee Chair
The members
Theboardhasreviewedtheauditcommittee’scompositionduringtheyearandissatisfiedthatthe committee’s members have the broad commercial knowledge and extensive business leadership experience, having held between them various roles in major business, government, financial management, treasury and financial function supervision and that this constitutes a broad and suitable mix of business and financial experience necessary to fulfil effectively the committee’s responsibilities.TheboardhasdeterminedthatMr.Pinkandtheauditcommitteechairman,Mr.
Blue, are the designated ‘financial experts’ and have relevant expertise in accounting and auditing andrelevantfinancialexpertise.BotharefellowsoftheInstituteofRegisteredAccountantsMr.Blue also serves as audit committee chairman for XYZ and ABC NV/SA. The qualifications and relevant experience of the other committee members are detailed on page XX. The committee as a whole hassufficientrelevantexpertiseinaccounting,auditingandfinanceandhasanunderstandingofthe followingareas:
—theprinciplesof,anddevelopmentsin,financialreportingincludingtheapplicable accountingstandards;
—keyaspectsofthecompany’soperationsincludingcorporatepoliciesandthegroup’sinternal controlenvironment;
—matterswhichmayinfluencethepresentationofaccountsandkeyfigures;
—theprinciplesof,anddevelopmentsin,law,sector-specificlawsandotherrelevant corporatelegislation;
—theroleofinternalandexternalauditingandriskmanagement;and
—theregulatoryframeworkforthegroup’sbusinesses.
Auditcommitteeappointmentsareforamaximumperiodoffouryearsafterwhichtheyaresubject toannualreview,andcanbere-appointedsolongastheycontinuetobeindependent.
Committee members / MeetingsEligible to attend / Attended
Mr. Blue / 4 / 4
Mr. Pink* / 3 / 3
Mr. White / 4 / 4
Mr. Orange / 4 / 4
* Mr. Pink joined the committee on DAY MONTHYEAR
Our role
Thecommitteehaswrittentermsofreferencewhichclearlysetoutitsauthorityandduties.Theseare reviewedannuallyandareavailableonourwebsite.
Corporate reporting: We review the published financial results; the Annual Report and other publishedinformationforstatutoryandregulatorycomplianceandreportourviewstotheboardto assistinitsapprovaloftheresultsannouncementsandtheannualreport.
External audit: We recommend the appointment and re-appointment of the external auditors and consider their resignation or dismissal, recommending to the board appropriate action to appoint newauditors.Aspartofthisprocess,weassesstheperformanceoftheexternalauditorsannually byseekingviewsontheirperformancefromkeystakeholdersacrossthegroup.Wealsodiscuss withtheauditorsthescopeoftheirauditsbeforetheycommence,reviewtheresultsandconsider theformalreportsoftheauditorsandreporttheresultsofthosereviewstotheboard.
As a result of regulatory requirements, or to ensure efficiency and quality of delivery, it may be necessarytoemploytheexternalauditorsforcertainnon-auditservices.Inordertosafeguardthe independenceandobjectivityoftheexternalauditors,theauditcommitteehasdeterminedpolicies as to what non-audit services can be provided by the external auditors and the approval process related tothem.
Internalaudit:Wereviewinternalauditanditsrelationshipwiththeexternalauditors,includingplans andperformance.Additionallywemonitor,reviewandreportonriskmanagementprocessesand thestandards of risk management and internal control, including the processes and procedures for ensuringthatmaterialbusinessrisks,includingrisksrelatingtoITsecurity,fraudandrelatedmatters,
areproperlyidentifiedandmanaged.Onbehalfoftheboard,wereviewthegroup’sriskprofile,endorse a programme of testing of the risk mitigations and controls that underpin the group’s assessment of residualriskandreviewthegroup’scurrentriskexposureandcapabilitytoidentifynewrisks.
Internal controls and risks: We review the process relating to the identification and evaluation of significant risks; and the design and operation of internal controls. We also receive reports on the processes for dealing with complaints received by the company regarding accounting, internal accounting controls or auditing matters.This includes the confidential, anonymous submission by employeesofconcernsregardingquestionableaccountingorauditingmatters,ensuringarrangements areinplacefortheproportionate,independentinvestigationandappropriatefollowupofsuchmatters.
AuditCommitteeCharter:Ourtermsofreferencearereviewedannuallyanddrivetheworkcarried out by the committee. After the last review, the terms of reference were amended to formally acknowledgethecommittee’sroleinadvisingtheboardonwhetherappropriateprocesses
are in place to ensure the annual report and accounts, taken as a whole, are fair, balanced and understandableandprovidetheinformationnecessaryforshareholderstoassessthecompany’s performance,businessmodelandstrategy.
The committee has unrestricted access to company documents and information – as well as to employees of the company and the external auditors – and may take independent professional adviceonanymatterscoveredbyitstermsofreferenceatthecompany’sexpense.Duringtheyear, the only independent professional advice sought by the committee was the regular presentations fromexternalsectorspecialistsincludinganindependenteconomist.Thecommitteeengagesuch specialiststoguardagainstasymmetricinformationrisk.
The committee’s effectiveness is reviewed on an annual basis as part of the board’s performance evaluationprocess(seepageXX)andthecommitteeconfirmsthatithasfulfilleditsresponsibilities underitstermsofreference.
What we have done
Theauditcommitteemetfourtimesduringtheyearandhasanagendalinkedtoeventsinthe group’sfinancialcalendar.Thechartbelowshowshowthecommitteeallocateditstime.
Where we spent our time
At every meeting, the committee considered reports on the activities of the group internal audit function,includingtheresultsofinternalaudits,riskreviews,projectassurancereviewsandfraudand whistle-blowingreports.
The committee also monitored the company’s financial reporting, internal controls and risk managementproceduresandconsideredanysignificantlegalclaimsandregulatoryissuesinthe contextoftheirimpactonfinancialreporting.Specifically,thecommitteeconsideredthefollowing mattersduringthecourseoftheyear:
—Thecurrentyearpreliminaryannouncementandtheannualreportandaccounts(includingthe associatedanalystbriefingsandinvestorpresentations);
—The accounting principles, policies and practices adopted in the group’s financial statements and proposedchangestothem;includingareviewofimportantaccountingissues,areasofcomplexity andsignificantfinancialreportingjudgements;
—Whethertheannualreportprovidedtheinformationnecessaryforshareholderstounderstandour business model, strategy andperformance;
—Compliance with regulatoryrequirements;
—Assessmentoftheeffectivenessofthegroup’sinternalcontrolenvironmentandreviewofthe relateddisclosureintheannualreport;
—Reappointment,remunerationandengagementletteroftheexternalauditors;
—CybersecurityandITriskmanagement;
—Therisksinherentinseniormanagementrewardandincentivearrangements;
—Reviewoftheinterimfinancialstatementsandannouncement;
—Re-approvaloftheinternalauditmandateandannualinternalauditplans;
—Reviewsoftheeffectivenessoftheauditcommittee,theexternalauditorsandtheinternal auditfunction;
—Reviewofthecommittee’stermsofreference;
—Reviewofcompanyriskreturns(includingSocial,EthicalandEnvironmentalrisks);and
—Annualreviewoftreasurypolicy.
Financial reporting
Afterdiscussionwithbothmanagementandtheexternalauditor,theauditcommitteedeterminedthat the key risks of misstatement of the group’s financial statements related to provisions for doubtful debtsandtheassessmentofgoodwillandintangibleassetsforimpairment,inthecontextofcurrent marketconditions.
Theseissueswerediscussedwithmanagementduringtheyearandwiththeauditoratthetimethe committeereviewedandagreedtheauditors’groupauditplan,whentheauditorreviewedthehalfyear interimfinancialstatementsandalsoattheconclusionoftheauditofthefinancialstatements.
Provisions for doubtful debts – As further explained in note XX to the financial statements, our approachtoestimatingbaddebtprovisionsontradereceivableswasamendedinthesecondhalfof lastyearresultinginanadditionalprovisionofEUR5million,givingtotalprovisionsatthecurrent year-endofEUR30million.Managementconfirmedtothecommitteethatthenewapproachhad
beenappliedconsistentlyduringthecurrentyearandnoneofthecommittee’sotherenquiries,northe auditor’swork,identifiedanyerrorsorinconsistenciesthatwerematerialinthecontextofthefinancial statementsasawhole.
Managementinformedthecommitteethatithadmonitoredtherecoveryofthosedebtsagainstwhich provision had been made at year-end and concluded that just EUR 0,1 million (2%) of the amounts provided has been recovered in the period. No significant amounts had subsequently become irrecoverableagainstwhichnoamountswereprovided.
The auditor explained to the committee the work they had conducted during the year, including how theirauditprocedureswerefocusedonthosebusinesseswheredebtrecoveryriskwasgreatestdueto depressedeconomicconditionsorotherreasons.Onthebasisoftheirauditwork,theauditorreported noinconsistenciesormisstatementsthatwerematerialinthecontextofthefinancialstatementsasa whole;andinourviewthissupportstheappropriatenessofourmethodology.
FurtherinformationaboutourexposuretocreditriskandthequalityofourreceivablesissetoutinnoteXX.
Impairmentofgoodwillandintangibleassets-AsmorefullyexplainedinnoteXX,thetotalcarrying amountofgoodwillandintangiblesatthecurrentyear-endwasEUR800million.Duringtheyear management assessed the carrying value of goodwill and intangible assets (including detailed calculations of Value in Use for those Cash Generating Units whose recoverable amount is not significantlygreaterthanitscarryingamount)toensurethecarryingvaluesaresupportedbyfuture discountedcashflows.ThisresultedinanimpairmentofEUR50millionwithrespecttooneCash GeneratingUnit1.
The auditor explained the results of their review of the estimate of Value in Use, including their challenge of management’s underlying cash flow projections, the key growth assumptions and discountrates.Onthebasisoftheirauditwork,noadditionalimpairmentsthatwerematerialinthe contextofthefinancialstatementsasawholewereidentifiedbytheauditor.
InrespectoftheEUR200millionofgoodwillrelatedtoCashGeneratingUnit1,management’s estimatedValueinUseofEUR150millionisbasedongrowthassumptionsandadiscountrate of15%.AsexplainedinnoteXX,thisresultedinanimpairmentofEUR50millionwhichhasbeen recognisedinthecurrentyear.
Management concluded that the growth rate and appropriate discount rate were significant judgementsandhaveexplainedthosejudgementsinthenotestothefinancialstatements.Based onthegrowthrateused,theauditorconsideredthatadiscountratebetween14%and23%would beappropriateforsimilarbusinesses.Basedontheirwork,theauditordidnotidentifyanyfurther impairmentandagreedthatitwasappropriateforthefinancialstatementstodisclosethegrowth anddiscountratesaskeyassumptionsandtoprovideappropriatesensitivityanalysisinrespectof them.ThisissetoutonpageXX.
With regard to the EUR 150 million of goodwill related to our Spanish business, management’s estimated Value in Use was EUR 153 million.This was also based on growth assumptions and a discount rate of 15%.The calculation was reviewed by the auditor and, though the headroom is small,inthelightofourinformeddiscussionsnoprovisionhasbeenrecognisedinthecurrentyear. ThekeyassumptionsandsensitivityanalysisissetoutonpageXX.
Misstatements–Managementconfirmedtothecommitteethattheywerenotawareofanymaterial misstatementsorimmaterialmisstatementsmadeintentionallytoachieveaparticularpresentation. Theauditorsreportedtothecommitteethemisstatementsthattheyhadfoundinthecourseoftheir workandnomaterialamountsremainunadjusted.Thecommitteeconfirmsthatitissatisfiedthatthe auditorshavefulfilledtheirresponsibilitieswithdiligenceandprofessionalscepticism.
Afterreviewingthepresentationsandreportsfrommanagementandconsultingwherenecessary with the auditors, the audit committee is satisfied that the financial statements appropriately addressthecriticaljudgementsandkeyestimates(bothinrespecttotheamountsreportedandthe disclosures).Thecommitteeisalsosatisfiedthatthesignificantassumptionsusedfordetermining thevalueofassetsandliabilitieshavebeenappropriatelyscrutinised,challengedandaresufficiently robust.
External audit
Theauditcommitteeisresponsibleforthedevelopment,implementationandmonitoringofpolicies and procedures on the use of the external auditors for non-audit services, in accordance with professionalandregulatoryrequirements.Thesepoliciesarekeptunderreviewtomeettheobjective of ensuring that the group benefits in a cost-effective manner from the cumulative knowledge and experience of its auditors whilst also ensuring that the auditors maintain the necessary degree of independenceandobjectivity.
Typically, the committee will approve the use of the external auditors to provide: accounting adviceandtraining;employeebenefitplanaudits;corporateresponsibility,ITandotherassurance services; due diligence in respect of acquisitions and disposals; certain specified tax services including tax compliance, tax planning and related implementation advice; and certain other services when it is in the best interests of the company to do so and they can be undertaken withoutjeopardisingauditorindependence.
The company has a policy that any recruits hired directly from the external auditors must be pre- approvedbythegroupHRdirector,andthegroupfinancedirectororgroupfinancialcontroller.Recruits intoseniorpositionsmustbeapprovedbytheauditcommittee.
Theauditcommitteehasformallyreviewedtheindependenceofitsauditorandtheauditorhad providedaletterconfirmingthattheybelievetheyremainindependentwithinthemeaningofthe regulationsonthismatterandtheirprofessionalstandards.
Tofulfilitsresponsibilityregardingtheindependenceoftheexternalauditors,theaudit committeereviewed:
—changesintheauditplanforthecurrentyear;
—areportfromtheexternalauditorsdescribingtheirarrangementstoidentify,reportandmanage anyconflictsofinterest;and
—theextentofnon-auditservicesprovidedbytheexternalauditors.
To assess the effectiveness of the external auditors, the committee reviewed:
—theexternalauditors’fulfilmentoftheagreedauditplanandvariationsfromit;
—reportshighlightingthemajorissuesthataroseduringthecourseoftheaudit;and
—feedbackfromthebusinessesevaluatingtheperformanceofeachassignedauditteam.
Theauditcommitteeholdsprivatemeetingswiththeexternalauditorsaftereachcommitteemeeting toreviewkeyissueswithintheirsphereofinterestandresponsibility.
To fulfil its responsibility for oversight of the external audit process, the audit committee reviewed:
—theterms,areasofresponsibility,associateddutiesandscopeoftheauditassetoutintheexternal auditors’engagementletterfortheforthcomingyear;
—theexternalauditors’overallworkplanfortheforthcomingyear;
—theexternalauditors’feeproposal;
—themajorissuesthataroseduringthecourseoftheauditandtheirresolution;
—keyaccountingandauditjudgementsandestimates;
—thelevelsoferrorsidentifiedduringtheaudit;and
—recommendationsmadebytheexternalauditorsintheirmanagementlettersandtheadequacyof management’sresponse.
The auditor periodically changes its audit partners at a group, divisional and country level in accordance with professional and regulatory standards in order to protect independence and objectivity and provide
fresh challenge to the business. Such changes are carefully planned to ensure that the group benefits from staff continuity without incurring undue risk or inefficiency.
Mr. Brown completed his six-year term as lead audit partner, as specified by auditing standards, at the conclusion of the audit last year. His successor, Ms. Black, will continue as lead audit partner.
ThetotalfeespaidtotheauditorforthecurrentfinancialyearwereEUR1millionofwhichEUR0,1 millionrelatedtonon-auditwork.Furtherdetailsofauditandnon-auditfeesaresetoutonpagexx.
Internal audit
The audit committee assists the board in fulfilling its responsibilities relating to the adequacy of the resourcing and plans of internal audit.To fulfil these duties, the committee reviewed:
—internalaudit’sreportinglinesandaccesstothecommitteeandallmembersoftheboard;
—internalaudit’splansanditsachievementoftheplannedactivity;
—theresultsofkeyauditsandothersignificantfindings,theadequacyofmanagement’sresponse andthetimelinessofresolution;
—statisticsonstaffnumbers,qualificationsandexperienceandtimeliness ofreporting;
—thelevelandnatureofnon-auditactivityperformedbyinternalaudit;and
—changessincethelastannualassessmentinthenatureandextentofsignificantfinancialrisksand thegroup’sabilitytorespondtochangesinitsbusinessandtheexternalenvironment.
The key areas of internal audit focus during the year were our strategy setting process and governance procedures, whistle-blowing arrangements, accounts payable and receivable, project velodrome, regulatory compliance, data security and fraud risk.
The key control issues identified by internal audit during the year concerned our procedures to embed our anti bribery and corruption policies in the Far East and our IT data protection controls in our US operation.Thecommitteeissatisfiedthatnolosshasoccurredasaresultofthesecontrolweaknesses andthatmanagementhastakenappropriateactiontoaddresstheseissuesin
a timely fashion (see page XX).
Internal controls and risks
Infulfillingitsresponsibilitiesrelatingtotheadequacyandeffectivenessoftheinternalcontrolandrisk managementsystems,thecommitteereviewed:
—theexternalauditors’managementlettersandauditcommitteereports;
—internalauditreportsonkeyauditareasandsignificantdeficienciesinthefinancialcontrol environment;
—inconjunctionwiththeremunerationcommittee,theremunerationstructuresandincentivesfor seniorexecutives;
—reportsonthesystemsofinternalfinancialcontrolsandriskmanagement;and
—reportsonfraudperpetratedagainstthegroup.
Theinteractionbetweenexecutiveremunerationandriskmanagementhasbeenaparticularareaof focusduringtheyearandtheauditcommitteechairman,Mr.Blue,hasregularlyattendedmeetingsof theremunerationcommitteetofamiliarisehimselfwiththeexecutiveremunerationarrangements
and how various financial and other metrics are used in the company’s incentive arrangements.The committeehasalso,inconjunctionwiththeremunerationcommittee,consideredtheappropriateness of the incentive structure and whether it contributes to increased fraud risk; and whether adequate and appropriate focus is being paid to the remuneration of officers and directors, including the appropriateuseofcorporateassets.Thecommitteehasconcludedthattheremunerationpolicies
and practices for top executives, key business unit leaders and senior finance, control and risk managementpersonnelareappropriateformaintainingarobustcontrolenvironmentconsistentwith goodstewardship.
Thegroup’swhistle-blowingpolicycontainsarrangementsforthecompanysecretarytoreceive, inconfidence,complaintsonaccounting,riskissues,internalcontrols,auditingissuesandrelated mattersforreportingtotheauditcommitteeasappropriate.
Thegroup’santi-fraudpolicyhasbeencommunicatedtoallemployeesandstatesthatallemployees havearesponsibilityforfraudpreventionanddetection.Anysuspicionoffraudshouldbereported immediatelyandwillbeinvestigatedvigorously.
A description of the group’s principal risks and uncertainties, the main features of the system of internalcontrolandtheprocessbywhichtheboardhavereviewedtheeffectivenessofthegroup’s risk management and internal control system is given on page XX.The committee confirms that appropriateactionshavebeenorarebeingtakentoremedyanysignificantfailingsorweaknesses identifiedfromthereviewingthesystemofinternalcontrol.
How we keep up to date
The committee receives regular technical updates from management, the auditors and KPMG’s Audit CommitteeInstitute,aswellasspecificorpersonaltrainingasrequired.Toguardagainstinformation biasandtobroadenthescopeoftheauditcommittee’sthinking,thecommitteealsoreceivesregular presentationsfromexternalsectorspecialistsincludinganindependenteconomist.
Committeemembersalsomeetwithlocalmanagementonanongoingbasisinordertogainabetter understandingofhowgrouppoliciesareembeddedinoperations.
The committee’s effectiveness has been reviewed as part of the board’s performance evaluation process(seepageXX).Theprocessinvolvedareviewofinformationprovidedtotheauditcommittee followedbyconfidentialinterviewswiththeauditcommitteemembers,thechairmanoftheboard, CEO,CFO,companysecretary,headofriskmanagementandbothinternalandexternalauditors.
Theoutcomeoftheevaluationhasconfirmedthattheauditcommitteehasagoodbalanceofskills, isworkingwellandcontinuestoberefreshed,withtheappointmentofMr.Pinkduringtheyear.
The committee feels well-informed and key issues are well-managed, with sufficient opportunity for
challenge and debate. However, recognising that there is always room for improvement, the process also identified a number of areas for focus in the coming year, including improving:
—thecommittee’saccesstolocalmanagement by increasing the number of presentations that will be made to the committee by operationalmanagers;
—the focus on risk management by restructuring meetingstodistinguishbetweenthe‘business as usual’ agenda and the risk management agenda. Reporting to the committee on significantriskmatterswillbeenhanced.
Furthermore, a revision to the timings of audit committee meetings to improve the timing of information flows has been implemented; however, thenumberofauditcommitteemeetingsisasubject whichthecommitteeintendstokeepunderreview.
Further questions
Mr.Blue,theauditcommitteechair,willbepresent attheannualgeneralmeetingtoanswerquestions on this report, matters within the scope of the committee’s responsibilities and any significant mattersbroughttothecommittee’sattentionbythe externalauditors.