- Monitor the integrity of the Group’s financial statements, including reviewing significant financial reporting judgments contained in them.
- Provide advice on whether the Annual Report and Accounts, when taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
- Oversee the relationship with the external auditor, including approval of remuneration and terms of engagement.
- Review the effectiveness of the external audit process.
- Make a recommendation to the Board on the appointment, reappointment and removal of the external auditor.
- Ensure the external audit is put to tender at least every 10 years.
- Develop and implement a policy on the supply of non-audit services by the external auditor to avoid any threat to auditor objectivity and independence.
- Review the operation and effectiveness of the Group Internal Audit function.
- Review the Company’s internal control and risk management systems and the Company’s statements on internal control and risk management.
- Review the Company’s arrangements for its employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters.
Audit Committee Report
The Audit Committee comprises four independent non-executive Directors, Jane Lodge (Chairman), Kevin Melia, John Moloney and Leslie Van de Walle. The members of the Committee have significant financial and business experience. Further biographical details regarding the members of the Audit Committee are set out on this page.
As Chairman of DCC’s Audit Committee, I am pleased to present the report of the Committee for the year ended 31 March 2014 which has been prepared by the Committee and approved by the Board.
In September 2012, the FRC issued the 2012 edition of the UK Corporate Governance Code (‘the Code’) and the Guidance on Audit Committees, which apply to DCC’s year ended 31 March 2014. The Code requires the Audit Committee, where requested by the Board, to advise 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 performance, business model and strategy. The Audit Committee is satisfied that the Annual Report meets these criteria and the work done in meeting this responsibility is set out in the table on this page.
Secondly, the Code requires the Audit Committee to report on the significant issues it has considered in relation to the financial statements and how these issues were addressed, having regard to matters communicated to it by the external auditor. The work done by the Audit Committee in meeting this responsibility is set out in the table on this page.
The Code requires all FTSE 350 companies to put the external audit out to tender at least every ten years. DCC concluded a formal audit tender process in the year ended 31 March 2012, following which PricewaterhouseCoopers ('PwC') were re-appointed as auditors to the Company. The Audit Committee has also noted that a Regulation and a Directive have been approved by the European Parliament which are intended to reform the audit market in the EU and which contain measures which would require a change of auditor after a maximum term of 10 years and the prohibition or cap of non-audit services. The Regulation and Directive are subject to ratification by the EU Council of Ministers and the Audit Committee will keep developments in this regard under close review.
One of the Audit Committee’s key responsibilities is to review the Company’s internal control and risk management systems. In addition to financial risks and controls, the Audit Committee is also responsible for the oversight of risks and controls in relation to Health, Safety and Environmental, Compliance and IT. Further details in regard to these matters is set out on this page.
The Board, the Audit Committee and Group management are fully committed to continuous improvement of financial and risk management within the Group.
The responsibilities of the Audit Committee are summarised in the table below and are set out in full in its Terms of Reference, which are available on the DCC website www.dcc.ie under Investor Relations/Corporate Governance.
On behalf of the Audit Committee
Chairman, Audit Committee
20 May 2014
Role and Responsibilities+-
Fair, Balanced and Understandable+-
The 2012 edition of the Code includes a new principle which states that the Board should present a fair, balanced and understandable assessment of the company’s position and prospects and specifically that they consider that 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 performance, business model and strategy.
At the request of the Board, the Committee considered whether the 2014 Annual Report and Accounts met the requirements.
In fulfilling this responsibility, the Committee took account of the following:
- The timetable for the Annual Report and Financial Statements was extended to ensure that there was adequate time for existing and new processes to be completed.
- The Audit Committee was briefed by PwC and Deloitte in relation to developing best practice in this area.
- Comprehensive guidance was issued to contributors of reports for inclusion in the Annual Report.
- A verification process was implemented dealing with the factual contents of the reports.
- Comprehensive reviews were undertaken at different levels in the Group to ensure consistency and overall balance.
- A comprehensive review was also undertaken by the senior management team.
- The senior management team reported to the Audit Committee on these processes and their outcomes.
After consideration, the Committee concluded that the Annual Report, taken as a whole, is fair, balanced and understandable and that it provides the necessary information for shareholders to assess performance, business model and strategy.
Financial Reporting and Significant Financial Judgements +-
The Committee assesses whether suitable accounting policies have been adopted and whether management has made appropriate estimates and judgements, obtaining support from the external auditors in making these assessments.
The Committee pays particular attention to matters it considers to be important by virtue of their impact on the Group’s results and particularly those which involve a relatively higher level of complexity, judgement or estimation by management. The following table sets out the significant issues related to the financial statements for the year ended 31 March 2014:
As set out in note 20 to the Group financial statements, the Group had goodwill of £690.0 million as at 31 March 2014. In order to satisfy itself that this balance was appropriately stated, the Committee considered the impairment reviews carried out by management. Impairment reviews are carried out annually using the carrying values of subsidiaries at 31 December and the latest three year plan information.
In performing their impairment reviews, management determined the recoverable amount of each cash generating unit (‘CGU’), and compared this to the carrying amount. The recoverable amount of each CGU is defined as the higher of its fair value less costs to sell and its value in use. Management uses the present value of future cash flows to determine the value in use. In calculating the value in use, management judgement is required in forecasting cash flows of CGU’s, in determining the long term growth rate and selecting an appropriate discount rate.
Management reported to the Committee that future cash flows of each CGU had been estimated based on the most up to date business forecasts and discounted using discount rates that reflected the Group’s estimated before-tax average cost of capital. Sensitivity analysis was considered on the discount rate and the long term growth rate.
The Committee constructively challenged management’s key assumptions to understand their impact on the CGU’s recoverable amounts. The Committee was satisfied that the significant assumptions used for determining the recoverable amount had been appropriately scrutinised, challenged and were sufficiently robust. A £13.9 million impairment charge was made against the carrying value of goodwill relating to three of the Group’s smaller subsidiaries. The Committee agreed with management’s results that all of the Group’s other CGU’s displayed an excess of value in use over their carrying values.
In addition, the Committee has considered a number of other judgements which have been made by management including:
Revenue recognition, provisioning for impairment of trade receivables, net exceptional items, post-employment benefits, business combinations, share based payments, provisions, deferred and contingent consideration, inventories, useful lives for property, plant and equipment and intangible assets and tax provisioning.
The Audit Committee considered a report on Going Concern, presented by the Chief Financial Officer. This report took account of the current guidance from the UK Financial Reporting Council on information relevant to a statement on going concern, the 2014/2015 budget analysis, the borrowing requirements of the Group, liability management, contingent liabilities and financial risk management.
Management confirmed to the Committee that they were not aware of any material misstatements and the auditors confirmed that they had found no material misstatement in the course of their work.
Risk Management and Internal Control +-
The Audit Committee has been delegated responsibility by the Board for the ongoing monitoring of the effectiveness of the Group’s system of risk management and internal control.
In addition to reports from Group Internal Audit, the Audit Committee also receives regular reports from the Risk Committee and the Enterprise Risk Management, Group HSE and Group Compliance functions. Further details on the Group’s risk management framework are set out in the Risk Report on this page.
The Audit Committee conducts, on behalf of the Board, an annual assessment of the operation of the Group’s system of risk management and internal control. This assessment was based on a detailed review carried out by Enterprise Risk Management and Group Internal Audit. Where areas for improvement have been identified the necessary actions in respect of the relevant control procedures have been or are being taken. This review took account of the principal business risks facing the Group, the controls in place to manage those risks (including financial, operational and compliance controls) and the procedures in place to monitor them.
The Chairman of the Audit Committee has reported to the Board on the conduct of and the findings and agreed actions from this annual assessment of risk management and internal control.
The Audit Committee oversees the relationship with the external auditor including approval of the external auditor’s fee proposals.
The Audit Committee reviewed the full external audit plan at the meeting held in November 2013 and reviewed a brief update at the meeting in April 2014, prior to the commencement of the audit. Following the audit, the Audit Committee met with the external auditor to review the findings from the audit of the Group financial statements.
The Audit Committee reviews the effectiveness of the external audit process. As part of this process, audit effectiveness questionnaires are completed by Group and subsidiary finance executives and the responses are summarised by management in a report to the Audit Committee. Based on its consideration of this report and its own interaction with the external auditors, in the form of reports and meetings, the Audit Committee concludes on the effectiveness of the external audit process and reports its conclusions to the Board.
The Audit Committee meets with the external auditors on a regular basis without the presence of management.
In accordance with its terms of reference, the Audit Committee is required to make a recommendation to the Board on the appointment, reappointment and removal of the external auditor. The Committee noted that the Company’s auditors, PwC, will continue in office in accordance with the provisions of Section 160(2) of the Companies Act, 1963 and that a resolution authorising the Directors to determine their remuneration will be put to the shareholders at the Annual General Meeting of the Company.
In accordance with the Code, the Audit Committee must ensure that the external audit is put out to tender at least once every 10 years and must oversee the tender process. A full audit tender process was concluded in 2012.
As noted in the Chairman’s Introduction, the Audit Committee is keeping developments at EU level in regard to audit tenure under close review.
The Audit Committee has a process in place to ensure that the independence of the audit is not compromised, which includes monitoring the nature and extent of services provided by the external auditor through its annual review of fees paid to the external auditor for audit and non-audit work, seeking confirmation from the external auditor that they are in compliance with relevant ethical and professional guidance and that, in their professional judgment, they are independent from the Group.
The Audit Committee has approved a policy on the engagement of the external auditor to provide non-audit services, which provides that the external auditor is permitted to provide non-audit services that are not, or are not perceived to be, in conflict with auditor independence, providing they have the skill, competence and integrity to carry out the work and are considered to be the most appropriate to undertake such work in the best interests of the DCC Group. The policy also provides that any non-audit work which would result in the aggregate of non-audit fees paid to the external auditor exceeding 50% of annual audit fees must be approved in advance by the Chief Executive and the Chairman of the Audit Committee. Details of the amounts paid to the external auditor during the year for non-audit services are set out in note 6. A summary of audit and non-audit fees over the five year period from 2010 to 2014 inclusive, is set out below.
The Audit Committee has approved a policy on the employment of employees or former employees of the external auditor. This policy provides that the Chief Executive will consult with the Chairman of the Audit Committee prior to the appointment to a senior financial reporting position, to a senior management role or to a Company officer role of any employee or former employee of the external auditor, where such a person was a member of the external audit team in the previous two years.
Group Internal Audit+-
The Audit Committee approves the annual work programme for the Group Internal Audit function, ensures that it is adequately resourced and has appropriate standing within the Group.
External Quality Assessments (‘EQA’) by independent external consultants are conducted at least every five years to confirm compliance of the Group Internal Audit function with the International Professional Performance Framework (‘IPPF’) of the Institute of Internal Auditors’. The most recent EQA review was successfully completed by KPMG in 2011.
During the current financial year, Group Internal Audit have successfully implemented a new online audit management system, ‘Teammate’. Audit work papers, reports and corrective action plans are now electronically stored within the Teammate system. Use of this system has also been extended to Group HSE and Group Compliance functions and now provides a central platform for all related assurance activities.
An IT Standards project using the COBIT (Control Objectives for Information and related Technology) framework aimed at enhancing the IT control environment across the DCC Group was developed by Group Internal Audit and Group IT, and was completed during the current financial year. As part of this project, the Group IT policies have been enhanced, a significant number of identified corrective actions have been completed and a dedicated IT Audit Manager has been appointed to the Group Internal Audit function to enhance ongoing IT assurance activities.
The Audit Committee receives regular reports from Group Internal Audit, which include summaries of the key findings of each audit in the period.
The Audit Committee ensures co-ordination between Group Internal Audit and the external auditor.
The Head of Internal Audit has direct access to the Chairman of the Audit Committee and the Audit Committee meets with the Head of Internal Audit on a regular basis without the presence of management.
The Audit Committee is responsible for ensuring that the Group maintains suitable whistleblowing arrangements for its employees. The Committee reviewed those arrangements during the year to ensure that they continue to meet the needs of the Group as it develops into new geographies and areas of activity. The Committee has accordingly approved a number of enhancements to the Group’s existing whistleblowing arrangements, including the appointment of an independent party to whom employees can raise concerns, in their own language, if they wish to do so.
The Audit Committee comprises four independent non-executive Directors,Jane Lodge (Chairman), Kevin Melia, John Moloney and Leslie Van de Walle. Each member’s length of tenure at 31 March 2014 is set out in the table below. Biographical details for these Directors are set out on this page. The Board is satisfied that Jane Lodge has recent and relevant financial experience, as required by the Code, and that the members of the Audit Committee have an excellent mix of skills and expertise in commercial, financial and audit matters arising from the senior positions they hold or held in other organisations.
The Committee met four times during the year ended 31 March 2014 and there was full attendance by all members of the Committee.
David Byrne, the Deputy Chairman and Senior Independent Director, attends meetings of the Audit Committee when risk management matters are being considered.
The Chief Executive, Chief Financial Officer, Head of Enterprise Risk Management, Head of Internal Audit, Head of Group Sustainability, Head of Group Compliance, Chief Information Officer, other Directors and executives and representatives of the external auditor are invited to attend all or part of any meeting. The Company Secretary is the secretary to the Audit Committee.
The Committee also meets separately a number of times each year with the external auditor and with the Head of Internal Audit, without other executive management being present.
Annual Evaluation of Performance
As detailed on this page, the Board conducts an annual evaluation of its own performance and that of its Committees, Committee Chairmen and individual Directors. This process concluded that the performance of the Audit Committee and of the Chairman of the Audit Committee were satisfactory.
The Chairman of the Audit Committee reports to the Board at each meeting on the activities of the Committee.
The Chairman of the Audit Committee attends the Annual General Meeting to answer questions on the report on the Committee’s activities and matters within the scope of the Committee’s responsibilities.