Committee Membership and Meetings

There are four Members of the Committee, each of which are Independent Non-Executive Directors, with myself, the Senior Independent Director, being Chair of the Committee. The other Members of the Committee during the 2020 financial year were Sir Michael Lyons, Vanda Murray and Nicky Dulieu. The Company Secretary acts as Secretary to the Committee.

The Board is satisfied that there is the requisite recent and relevant financial experience on the Committee (in line with Provision 24 of the Code) and that there is sufficient competence in accounting and auditing (in line with DTRs 7.1.1A) due to the following:

• I, as Chairman of the Committee, am a Fellow of the Institute of Chartered Accountants in England and Wales; and
• Nicky Dulieu, as a Member of the Committee, has held various strategic and financial roles within a FTSE 250 company over a 23-year period.

The qualifications, skills and experience of each Committee Member can be found on pages 50 to 51.

As noted above, Nicky Dulieu joined as a Member of the Board and the Committee on 6 November 2019.

To enable the Committee to provide robust challenge of the reports submitted to the Committee, regular attendees at the meetings during the year included the Group Finance Director, Finance Director - Group Services (who has the responsibility for the Company’s internal audit), Chief Information Officer (who has the responsibility for IT, including cyber security and systems accounts) and KPMG LLP as the external auditor.

The Committee met three times during the year and details of the meeting attendance can be seen in the table below. A summary of the principal activities of the Committee is provided below.

Table of Attendance

* Nicky Dulieu was appointed as a Member of the Committee on 6 November 2019 and attended all meetings that were held from 6 November 2019 to the end of the 2020 financial year.

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 function following the final audit and the review of the 52 weeks ended 28 June 2020 financial statements. The Committee Chairman met with the Engagement Partner of the external auditors, as well as the Finance Director – Group Services to discuss internal audit matters.

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 any significant financial reporting judgements containing therein and the findings of the external auditors;
• monitoring and reviewing any formal announcements relating to the Company’s financial performance;
• reviewing and monitoring the effectiveness of systems for internal control, financial reporting and risk management, covering all material controls (including financial, operational and compliance controls), having regard to the long-term prospects and viability of the Company;
• providing advice to the Board upon request on whether the annual report and accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company’s position, performance, business model and strategy;
• 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 and monitoring the external auditor’s independence and objectivity;
• monitoring and reviewing the policy on the engagement of the external auditors to supply non-audit services, taking into consideration the impact this may have on independence;
• ensuring that the internal and external audit functions remain independent and effective through formal and transparent review;
• 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;
• reviewing the Company’s procedures for raising concerns; and
• reporting to the Board on how the Committee has discharged its responsibilities.
  
  

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:

(i) Valuation of Inventory

The Committee receives a report prepared by management at each reporting date outlining the approach taken by management to assess the net realisable value of inventories together and cost of sales, 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 28 June 2020.

(iii) going concern

Annually, management conducts a detailed going concern review, considering liquidity and banking covenant compliance. The Committee has challenged forecast cash flows and the assumptions applied to derive the cash flows and availability of finance from existing facilities. The Committee has challenged the various risks associated with the COVID-19 pandemic and the UK’s departure from the European Union that have been assumed as part of this review. The cash flow forecasts evidence that the Group has adequate levels of liquidity from its committed facilities and complies with all banking covenants for at least 12 months from 15 September 2020. The Committee therefore considers that it is appropriate to continue to adopt a going concern basis in the preparation of the financial statements.

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.

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:

External Auditors

Following the conclusion of the tender process led by the Committee, the Company announced on 9 November 2018 that the Board had approved the proposed appointment of KPMG LLP as the Company’s external auditors for the financial year commencing 1 July 2019. There were a number of factors contributing to this proposal, including KPMG LLP’s audit experience, particularly with other entities of a similar size to the Company, as well as their knowledge, reliability and approach to quality assurance and independence. The appointment was subsequently approved by shareholders at the 2019 Annual General Meeting, whereby 99.76% of votes were cast in favour of the resolution, with the appointment taking effect from 6 November 2019.

The tenure of the current Audit Partner from KPMG LLP, Nick Plumb, commenced from the financial year commencing 1 July 2019.

Provision of Non-Audit Services by 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 has the Company purchased liability insurance for them.

Non-audit services provided by the external auditors during the 2020 financial year comprised audit related assurance services, in the form of an independent review of the half-yearly statements. The Committee concluded that the provision of such services was appropriate given that they were closely related to the work performed in the external audit process and, for reason of effectiveness and efficiency, it was considered advantageous to engage the external auditors due to their knowledge and expertise.

The Committee, in line with the above formal policy, approved all non-audit service fees for the work undertaken in the financial year. The provision of such services was in line with the FRC’s Revised Ethical Standard 2019. As a result of this policy and additional discussions with the external auditors, the Committee is satisfied that the independence of KPMG LLP was not compromised because of this additional work. Details of fees paid to KPMG LLP for audit and non-audit purposes are disclosed on page 137.

Independence Assessment of External Auditors

In line with Provision 25 of the Code, the Committee monitors and reviews the independence and objectivity of the external auditors. The Committee is satisfied that KPMG LLP remain independent and objective following its assessment, taking into consideration the following:

i. Tenure of the audit firm – the 2020 financial year was the first period of KPMG LLP’s appointment as the external auditors. The Committee is aware of the requirement for it to retender the Company’s statutory audit services engagement at least every ten years, with rotation at least every twenty years. The Committee is also mindful of the Competition & Markets Authority view that companies may benefit from going out to tender every five years and, when considering the specific timing for the retender of the external auditors, the Committee shall consider which year would be in the best interests of its members. Having completed only one year of external audit services, the Committee is satisfied that the independence of KPMG LLP has not been impaired;

ii. Tenure of the audit partner – the 2020 financial year was the first period of Nick Plumb’s engagement as Audit Partner of the external auditors. The Committee is aware of the requirement for the Audit Partner of the external auditor to be rotated at least every five years. Having completed only one year as Audit Partner, the Committee is satisfied that the independence of the external auditors, and Nick Plumb as Audit Partner, has not been impaired;

iii. Connection of the audit firm to the Members of the Committee – 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; and

iv. Level of non-audit services provided to the Company – the Committee is satisfied that the level of non-audit services provided by KPMG LLP was in line with the Company’s policy and was appropriate in respect of the audit services provided and that an effective audit could be conducted, with such level in no way compromising independence.

Effectiveness Assessment of External Auditors

The performance of the external auditors is subject to regular review by the Committee, in line with Provision 25 of the Code. In its assessment of the effectiveness of the external auditors, the Committee considered the quality of the external audit processes; the knowledge and experience of the external audit team; the external audit scope and plan; the external audit communications and the external audit governance and independence. Following its assessment, the Committee is satisfied that KPMG LLP remain effective and provide rigorous challenge.

Re-Appointment of External Auditors

Following its assessment of the independence and effectiveness of the external auditors, having received the recommendation from the Committee, the Company shall be proposing the re-appointment of KPMG LLP as its external auditors at the 2020 Annual General meeting.

The Committee confirms that there were no contractual obligations that acted to restrict the Committee’s choice of external auditors.

Internal Controls

The Board 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 has been 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, principal and emerging 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 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, Safety and Environmental 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;
• key functional directors must 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 28 June 2020. 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 130 to 135.

In assessing the effectiveness of the internal audit function, the Committee is satisfied that it has the appropriate status, processes, knowledge and resources to deliver an effective internal audit and that the function has had a positive impact on the controls and governance of the Group.

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 principal and emerging 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.

INTERACTION WITH FRC

During the year the Financial Reporting Council (FRC) Corporate Review team opened and concluded its review of our 2019 Annual Report. All correspondence received and responses were discussed with the Chair of the Audit Committee on behalf of the Committee. As a result of the FRC review, we have improved the clarity of our Group disclosures in relation to Critical Accounting Judgements and Key Sources of Estimation Uncertainty, Dividend distribution accounting policy and Trade and Other Receivables notes. The nature of the FRC review is that it provides no assurance that the annual report and accounts are correct in all material respects. The FRC's role is not to verify the information but is to consider compliance with reporting requirements. 

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.

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 specifically to bribery and the implication on individuals and the Company of an act of bribery either given or received. Within the Code of Conduct, there is a specific decision-making tool which is designed to provide employees with key questions to ask themselves should they ever be faced with difficult situations which could ultimately lead to bribery or corruption. This seeks to guide them to act in a way that is in line with Company policy and prevent any form bribery taking place.

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. Within the Code of Conduct, there is a gift specific decision-making tool which employees are encouraged to use when considering whether they should accept or offer a gift or hospitality which seeks to guide them to the expected behaviours in line with our policy.

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, a formal internal evaluation of the Committee was carried out to build upon the progress made by the 2019 evaluation which was externally facilitated by Independent Audit.

After reviewing the evaluation report prepared by Independent Audit last year, a questionnaire was created and tailored, taking into consideration comments made in the previous years’ assessment as well as the current market. 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.

Following completion of the questionnaire, an anonymised effectiveness report was compiled and presented to the Members of the Committee. 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 understanding and challenging the control and risk management framework and ensuring that the external auditors have the right focus. It was also agreed that the Committee maintains a clear focus and benefits from good and open discussions and is led by a knowledgeable Chairman who promotes challenge and debate from all Members.

Compliance Statement

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 52 weeks ended 28 June 2020.

NICK HEWSON

Chairman of the Audit Committee

15 September 2020