“The Committee is responsible for providing independent scrutiny of the Group's financial and non-financial performance, internal control process and external Auditors.”
Committee Membership and Meetings
The four Members of the Committee are Independent Non-Executive Directors. Nick Hewson is Chairman of the Committee and is a Fellow of the Institute of Chartered Accountants in England and Wales. Biographies of the Members of the Committee can be found on pages 62 to 63.
The Board believes that Nick Hewson has the requisite financial qualifications and experience to chair the Committee and the balance of the Committee has the appropriate level of experience to fulfil its Terms of Reference and the requirements of the Code.
Vanda Murray joined as a Member of the Committee following her appointment to the Board on 1 August 2017. Liz Peace retired as a Member of the Board and the Committee with effect from 31 August 2017.
The Group Finance Director and Finance Director – Group Services attend meetings by invitation and both were present at all the meetings in the year ended 30 June 2018. The external Auditors, PricewaterhouseCoopers LLP (“PwC”), and the Chief Information Officer who had the responsibility for Internal Audit of the Company, were also in attendance at all meetings.
Table of Attendance
|Name||Role||Attendance at Meetings|
|Sir Michael Lyons||Member||3/3|
*There were no meetings held between 1 July 2017 and 31 August 2017, being the date which Liz Peace retired as a Member of the Committee
The Committee met three times in the year ended 30 June 2018 and a summary of the principal activities of the Committee are listed below.
Detailed papers and information were circulated sufficiently in advance of meetings to allow proper consideration of the matters for discussion. The Committee has also had the opportunity to meet separately with the external Auditors and Internal Audit following the final audit and the review of the year ended 30 June 2018 financial statements. No matters of concern were raised within these discussions. The Committee Chairman also met with the Engagement Partner of the external Auditors and the Chief Information Officer to discuss Internal Audit matters. The Group Company Secretary acts as Secretary to the Committee.
Responsibilities and Terms of Reference
The key responsibilities of the Committee are:
- monitoring the timeliness and integrity of the financial statements of the accompanying reports to the shareholders and Corporate Governance Statements including reviewing the findings of external Auditors;
- reviewing and monitoring the effectiveness of systems for internal control, financial reporting and risk management having regard to the long-term prospects and viability of the Company;
- reviewing and overseeing the effectiveness of Internal Audit;
- making recommendations to the Board in relation to the appointment and removal of external Auditors and approving the remuneration and terms of engagement;
- determining the criteria used in order to assess the quality of the external audit and reporting on any significant issues considered in relation to the financial statements;
- reviewing and monitoring the external Audit process and independent activity of the Auditors as well as the nature and scope of the external Audit and its effectiveness;
- reviewing the Company’s procedures for detecting fraud and the adequacy of its systems and controls for the prevention of bribery;
- reviewing the Company’s procedures for data management and cyber resilience;
- reviewing the Company’s procedures and controls for the prevention of tax evasion and the facilitation of tax evasion; and
- reviewing the Company’s procedures for raising concerns.
The Committee’s Terms of Reference are available on the Company’s website.
Audit Committee Reporting on Significant Issues
The primary areas of judgement and estimation uncertainty which were considered by the Committee and how these were addressed is set out below.
The Group Finance Director and Finance Director – Group Services attend meetings by invitation to answer any questions the Committee may have. The Committee also annually reviews the internal controls that are in place and reviews the findings of PwC’s testing of controls and processes for estimating as well as the adequacy of disclosures that management propose to be made in financial statements.
Valuation of Inventory
The Committee receives a paper prepared by management at each reporting date outlining the approach taken by management to assess the net realisable value of inventories together with details of sites with significant areas of judgement and any forward land against which provisions have been made.
Defined Benefit Pension Scheme Valuation
The Committee receives details of the IAS 19R – Employee Benefits valuations carried out at each reporting date for management by the actuary who advises the Company and the underlying assumptions. A sensitivity analysis is also provided for its consideration. The Committee also receives details of the triennial independent scheme valuation report prepared by the Scheme Actuary and reviews key judgement areas made including relevant actuarial advice that has been received. In addition the Committee also reviews PwC’s report benchmarking pension actuarial assumptions. The Scheme was in surplus as at 30 June 2018.
Main Activities During the Year
The Committee followed a programme which is structured around the annual reporting cycle and received reports from Internal Audit, the external Audit and management.
The principal activities undertaken were as follows:
A review of the full year 2017 results including the Annual Report and a report from the external Auditors;
|Consideration of the Group risk assessment process, viability statement and a going concern review;|
An update on cyber security and attaining Cyber Essentials Plus; and
|A review of the Company's policies and procedures to ensure compliance with the General Data Protection Regulation 2018.|
|February 2018||A review of the 2018 half-yearly accounts and going concern including a report from the external Auditors;|
|A review of the Terms of Reference of the Committee;|
|A review of the proposed external Audit strategy for 2018 and associated fees;|
|A review of the effectiveness of the external Audit process;|
|A review of the independence and objectivity of the external Auditors;|
|A review of the Committee’s effectiveness;|
|A further update on cyber security; and|
|A report on the changes made to ensure that the Company would be compliant under the General Data Protection Regulation 2018.|
|June 2018||A review of the appropriateness of the Group’s accounting policies;|
|A review of the Risk Register;|
|A review of the Group’s Whistleblowing Policy;|
|A review of the Group’s Anti-Bribery Policy;|
|The adoption of the Group’s Anti-Facilitation of Tax Evasion Policy;|
|A review of internal controls across the whole business;|
|An update on Internal Audit, its strategy and a review of the Internal Audit timetable for 2019;|
|A review on the independence and objectivity of the external Auditors;|
|Further discussions regarding the future tendering of the external Audit in compliance with the Order of the Competition and Markets Authority.|
|Undertook a Performance Evaluation of the Committee; and|
|An update on cyber security and compliance with the General Data Protection Regulation 2018.|
|September 2018||A review of the full year 2018 results, including the Annual Report and a report from the external Auditors;|
|Consideration of the Group risk assessment process, viability statement and a going concern review; and|
|Tender process for the appointment of new Auditors, strategy and timetable discussed and agreed.|
PwC were appointed Auditors in 1999 following their merger with Coopers & Lybrand who were appointed in 1987. The current Audit Partner from PwC commenced his tenure following the conclusion of the year ended 30 June 2015 audit.
Whilst the Company is satisfied that the auditors remain independent, it recognises the Order of the Competition and Markets Authority in relation to FTSE 350 companies which will require the Company to change its statutory auditor for the June 2020 audit at the latest.
Due to the length of time that PwC have been the Company’s Auditors, the Committee considers that it is in the best interests of the Company to undertake a tender of the external Audit. As a result, the Committee has had further discussions regarding its future policy, strategy and timing for tendering of the external Audit.
The Company has commenced a tender process for the appointment of new Auditors. The tender process will be supervised by the Committee, who will then make a recommendation to the Board on the appointment of the replacement Auditor. Following the appointment, an announcement will be made.
In the meantime, the Company will be proposing the re-appointment of its current Auditor at the 2018 Annual General meeting.
The Committee confirms that there were no contractual obligations that acted to restrict the Committee’s choice of external Auditors.
The Committee has a formal policy in respect of the work of the external Auditors. The purpose of this policy is to ensure that the Auditor’s objectivity and independence is maintained by ensuring both that the nature of any non-audit work undertaken and the level of fees paid does not compromise the Auditor’s position.
Appointments in respect of non-audit work require the prior approval of the Committee within an established budget. In addition, no work can be undertaken by the external Auditors in any area where there is any identifiable risk that the work of an individual within the external Audit firm or the external Audit firm generally could conflict or compromise the quality, objectivity or independence of any audit or compliance work undertaken for the Group.
The external Auditors are not indemnified by the Company nor has the Company purchased liability insurance for them.
Details of fees paid to PwC for audit and non-audit purposes are disclosed on page 119.
The Board of Directors recognises its overall responsibility for the Group’s system of internal control and for monitoring its effectiveness. There is an ongoing process for identifying, evaluating and managing significant risks. However, in reviewing the effectiveness of internal control, any internal control system can only provide reasonable but not absolute assurance against material misstatement or loss.
Key business activities, including finance, land acquisition, product design, and procurement and information technology are controlled by the Executive Directors. All activity is organised within a defined structure with formal lines of responsibility, designated authority levels and a structured reporting framework. A formalised reporting structure is established within the Group. The Executive Directors, the Group Company Secretary, Regional Chief Executives, Group Human Resources Director, Group Sales and Marketing Director, Group Communications Director and Group Development Director (“the Executive Management Team”) meet monthly to discuss the Group’s key issues, risks and opportunities. The divisions also hold monthly board meetings which are attended on a rotational basis by the Executive Directors.
The key features of the Group’s internal controls are as follows:
- defined authorisation levels exist over key areas such as land purchase, the placing of orders and contracts and staff recruitment;
- a comprehensive prioritised Risk Register which is regularly reviewed and presented to the Audit Committee;
- the Group’s management information systems provide weekly updates on key statistics and information in respect of sales and production and the content of these weekly reports is regularly reviewed to ensure it remains appropriate;
- the Group has an in-house Health and Safety department and places great emphasis on the importance of health and safety and environment management. The department works closely with the divisions to ensure that training is provided to employees and subcontractors. Best practice is shared and appropriate actions are taken to comply with health and safety best practice and legislation throughout the organisation;
- the Board requires each Director in its operating divisions to complete an annual statement on Corporate Governance and related party transactions. The statement is designed to provide assurance that Group policies and procedures are being implemented and complied with in all material respects;
- in addition, key functional Directors complete a Principal Controls Self-Assessment Questionnaire which is reviewed by the Board to assist in improvements in the control framework;
- a weekly business report (WBR) comprising sales funnel information, gross margins and order book is produced for the Group, each division and each site and circulated across the Group;
- a monthly reporting pack is circulated in advance and reviewed at each of the Main, Executive and divisional Board meetings. Annual budgets are set, with actual performance compared against the annual budget;
- preparation and regular updates of Strategic Plans;
- a policy and procedures manual which covers all the significant aspects of the Group’s operations and describes the systems and controls that are to be applied; and
- daily statements of a reconciled cash position identifying significant payments are prepared, rolling cash flow forecasts are prepared and forecast banking covenant compliance are tested.
Throughout the year, the Committee has carried out assessments of internal control by considering documentation from the Executive Directors and the internal audit function as well as taking into consideration events since the year end. The internal controls extended to the financial reporting process and the preparation of consolidated accounts. The basis for the preparation of consolidated accounts has been undertaken in accordance with the Company’s Accounting policies as set out on pages 114 to 118.
The Committee therefore confirms that it is satisfied that the system of controls has been in operation throughout the financial year and up to the date of this report.
The Group formally reviews its prioritised Risk Register every year. The updated and reviewed Risk Register is then discussed and approved by the Committee. In addition, the Executive Management Team, through its regular meetings, reviews key areas of risk on an ongoing basis and considers whether the internal controls identified in relation to those risks remain appropriate.
The Board has appointed an experienced broker to advise on and co-ordinate all insurance matters across the Group and they liaise closely with appropriate Group personnel at Head Office and within the divisions and report directly to the Group Finance Director.
Risk Management and Internal Audit
The Group’s Risk Register defines controls as prevent or detect and identifies owners for each high level risk. Feedback on the risks and controls is actively encouraged and is facilitated by links on the Group’s intranet to ensure the risks listed remain relevant and accurate. The Register itself is regularly maintained and is reviewed by the Committee annually.
The Internal Audit strategy is discussed with PwC and discussed and agreed with the Committee. Suggested control improvements and any control weaknesses identified are followed up as appropriate. The cornerstone of the Internal Audit work undertaken is the Business Process Review, a risk-based programme that was designed, based on the Risk Register, to be carried out regularly at each division of the Group. The Business Process Review programme looks to provide assurance to the Group, by testing internal controls and reviewing specific risks, as well as seeking out best practice and sharing it across the Group and identifying business process improvements. Committee Members receive an Executive Summary of each Business Process Review report and these reports are then discussed at the next Committee meeting. In addition the Committee at its meetings reviews the progress made by the relevant division, following the completion of a Business Process Review, against the Internal Audit process.
The Company has introduced a new business planning process whereby each land transaction, following completion of the development, is tested against its original appraisal to ascertain its performance and to improve cash flow forecasting. These Post Completion Reports are provided to the Committee and are discussed at each meeting.
The Group has a widely publicised Whistleblowing Policy which enables employees and other stakeholders to raise concerns in confidence. The Committee has arranged to receive reports on all occasions when such issues are raised under this policy.
The Whistleblowing Policy is formally reviewed and approved each year by the Committee. During the year, this policy was updated to reflect changes in best practice and to incorporate reference to the new corporate criminal act of facilitating tax evasion, as referred to below.
Following the introduction of the Bribery Act 2010 the Company put in place a policy on bribery and corruption for all employees strictly to adhere to. The Group Company Secretary ensures that the policy is complied with, updates the policy, procedures and company code of practice as and when required and provides regular reports to the Committee.
The Bribery Act policy is formally reviewed and approved each year by the Committee. This policy was updated this year to reflect changes to internal procedures since the previous publication.
Training is given to all staff to highlight the various forms of bribery and all new staff attend an induction course at the commencement of their employment which includes a section relating to bribery and the implication on individuals and the Company of an act of bribery either given or received. Every year, through its internal e-learning facility, each employee will be required to complete a mandatory compliance test which reminds each employee of their obligations.
The Criminal Finances Act
Following the introduction of the Criminal Finances Act 2017 on 30 September 2017, the Company put in place a policy relating to the facilitation of tax evasion. The policy is applicable to every employee and the Employee Handbook, which is provided to each new employee, includes reference to the policy and the Group’s zero-tolerance stance on tax evasion and its facilitation. As with the Bribery Act policy, the Group Company Secretary ensures that the policy is complied with and reports to the Committee on matters falling within the policy. The Anti-Facilitation of Tax Evasion policy shall be formally reviewed and approved each year by the Committee.
The Committee completed a performance evaluation during the financial year by the members of the Committee and those who regularly attend by invitation, including the external Auditor, completing a self-assessment questionnaire and a report compiled by the Group Company Secretary from the results was presented to the Committee and discussed. The Committee was found to be effective and it was concluded that the Committee had fulfilled its remit and had in place appropriate Terms of Reference.
Chairman of the Audit Committee
3 September 2018