The Group Finance Director and the Chief Information Officer attend meetings by invitation and both were present at all the meetings in the year ended 30 June 2019. The external Auditors, PricewaterhouseCoopers LLP (“PwC”), and the Finance Director - Group Services, who had the responsibility for Internal Audit of the Company, were also in attendance at all meetings.

Table of Attendance

*Debbie Hewitt attended the meeting which was held prior to her retirement as a Member of the Committee.

The Committee met four times in the year ended 30 June 2019 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 2019 financial statements. No matters of concern were raised within these discussions. The Committee Chairman met with the Engagement Partner of the external Auditors. He also met with the Finance Director - Group Services to discuss Internal Audit matters. The 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 and accompanying reports to the shareholders and Corporate Governance Statements including reviewing the findings of the 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;
• monitoring the timeliness of the tender process for the external Auditors, considering what is in the best interests of the members of the Company, and facilitating the tendering process at least every ten years;
• making recommendations to the Board in relation to the appointment and removal of the 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 external 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 (redrowplc.co.uk).

Audit Committee Reporting on Significant Issues

The primary areas of judgement and estimation uncertainty which were considered and challenged by the Committee and how these were addressed are set out below in the paragraphs titled (i) Valuation of inventory and (ii) Defined benefit pension scheme valuation.

The Group Finance Director and Finance Director – Group Services are available to attend meetings 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 the external Auditors' testing of controls and processes for estimating as well as the adequacy of disclosures that management propose to be made in financial statements.

(i) 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.

(ii) 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 the external Auditors' report benchmarking pension actuarial assumptions. The Scheme was in surplus as at 30 June 2019.

The Committee concluded that appropriate judgements had been applied in determining the estimates and that adequate disclosures had been made.

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:

Audit Independence

PwC were appointed as the Company's external Auditors in 1999 following their merger with Coopers & Lybrand who were appointed in 1987. The current Audit Partner from PwC, Arif Ahmad, commenced his tenure following the conclusion of the audit of the year ended 30 June 2015.

Due to the length of time that PwC have been the Company’s external Auditor, and in recognition of the Order of the Competition and Markets Authority in relation to FTSE 350 companies which would require the Company to change its statutory auditor for the June 2020 audit, the Committee considered that it was prudent to undertake a tender of the external Audit in 2018 so as to be able to implement the proposed changes well before 2020.

In mid-2018, the Company commenced a formal tender process for the appointment of the new external Auditors. The tender process was supervised by the Audit Committee, which made a recommendation to the Board on the appointment of the replacement external Auditors.

Following the conclusion of the tender process, the Company announced on 9 November 2018 that the Board had approved the proposed appointment of KPMG LLP as the Company’s external Auditor for the financial year commencing 1 July 2019. The appointment remains subject to approval by shareholders at the Annual General Meeting to be held on 6 November 2019 and should the resolution be passed, the appointment will take effect from the conclusion of that meeting. Other than providing internal audit services to Marshalls plc, of which Vanda Murray is appointed as Chair, KPMG LLP has no connection to the members of the Committee.

PwC were reappointed as the external Auditors by shareholders at the 2018 Annual General Meeting and will resign as Auditor at the conclusion of the 2019 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 Auditors' 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 Auditors' 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 have the Company purchased liability insurance for them.

Non-audit services provided by the external Auditors during the year ended 30 June 2019 comprised audit related assurance services, in the form of an independent review of the half-yearly statements and taxation compliance services in the form of iXBRL tagging.

All non-audit service fees for the work undertaken in the financial year were approved by the Committee in line with the above formal policy. As a result of this policy and additional discussions with the external Auditors, the Committee is satisfied that the independence of PwC was not compromised because of this additional work.

Details of fees paid to PwC for audit and non-audit purposes are disclosed on page 103.

Internal Controls

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 Company Secretary, Regional Chief Executives, Group Human Resources Director, Group Customer and Marketing 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 the meetings of the Board, Executive Management Team and divisional boards. 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 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 30 June 2019. The internal controls extended to the financial reporting process and the preparation of consolidated financial statements. The basis for the preparation of consolidated financial statements has been undertaken in accordance with the Company’s Accounting policies as set out on pages 98 to 102.

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.

Risk Register

The Group formally reviews its prioritised Risk Register every year and more often as necessary. 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.

Insurance

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 the external Auditors 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 in place a 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.

Whistleblowing

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 allows concerns to be raised anonymously and includes a non-retaliation policy whereby all concerns raised in good faith will be protected, as will those against whom claims are made which turn out to be unfounded.

The policy contains the contact details of the Company Secretary and Senior Independent Director and also includes an independent reporting hotline where independent and confidential advice can be provided on whistleblowing matters.

During the year, the Company Secretary reported to the Committee on any alleged or suspected wrongdoings reported through the whistleblowing procedures or otherwise. All such incidents in the year were investigated and disciplinary action was taken against the relevant employees where warranted.

The Whistleblowing Policy is formally reviewed and approved each year by the Committee. During the year, there were no changes made to the policy.

Bribery Act

Following the introduction of the Bribery Act 2010 the Company put in place a formal policy on bribery and corruption for all employees to strictly adhere to. The 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. There were no changes made to the policy during the year.

The policy contains the definition of bribery and corruption, providing examples of how this could work in the context of the Company's industry and also offering guidance as to what would be considered acceptable behaviour. The policy deals with all matters of bribery and corruption and clarifies the Company’s strict approach to any form of facilitation payment or conflict of interest.

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 the Company's internal e-learning facility, each employee will be required to complete a mandatory compliance test which reminds each employee of their obligations.

Each division across the Group maintains its own Gift Register whereby all gifts received over the relevant threshold must be recorded. Gift authorisation forms must be formally approved and retained by each division. Regular reviews of the Gift Register are undertaken in order to detect any potential issues arising under The Bribery Act. A combined Group-wide register is provided to the Committee to allow risk assessments to be carried out by the Committee.

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 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 is formally reviewed and approved each year by the Committee. There were no changes made to the policy during the year.

Performance Evaluation

During the year, Independent Audit carried out an evaluation of the Audit Committee.

Having discussed the objectives of the evaluation with the Executive Chairman and Company Secretary, Independent Audit produced a questionnaire bespoke to the Audit Committee. The Members of the Committee, as well as those people who regularly attend the Committee meetings by invitation, were invited to participate in the evaluation.

A report was presented to the Members of the Audit Committee by Independent Audit. The findings of the evaluation were discussed and the Committee was found to be effective, concluding that it had fulfilled its remit and had in place appropriate Terms of Reference.

The evaluation highlighted that the Committee was particularly strong in actively supporting the external Auditor through guidance and making sure they have the right understanding. It was also agreed that the Committee maintains a clear focus and benefits from good and open discussions with a clear picture of the operation of the risk management framework.

The review found that the existing and rigorous assessment of the performance of the external Auditor might be codified and systematised so as to ensure that all aspects of the performance of the external Auditor were covered and a codified and therefore consistent record of progress could be tracked and reported. The Committee agreed to implement these recommendations to coincide with the appointment of the new Auditor.

The Company has complied with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 for the year ended 30 June 2019.

NICK HEWSON

Chairman of the Audit Committee

4 September 2019