Pdf
Committee membershipNo. of meetings 2018: 6Main committee responsibilities
DirectorAttendance
  • Encourage and safeguard the highest standards of integrity, financial reporting, financial risk management and internal controls.
  • Monitor the integrity of the financial statements including annual and half-yearly reports, trading updates and any other formal announcements relating to its financial performance. Review and report to the Board on significant financial reporting issues and judgements.
  • Review the content of the Annual Report and advise the Board whether, taken as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
  • Monitor and review the adequacy and effectiveness of the Company's internal financial control and risk management systems including the robust assessment of principal risks.
  • Oversee the relationship with the external auditor including consideration of fees, audit scope, terms of engagement, setting policy for the provision of non-audit services to make recommendations to the Board, subject to the approval by shareholders, on the appointment, reappointment or removal of the external auditor.
  • Monitor and review the effectiveness of the Company's internal audit function.
  • Review the adequacy and security of the Company's arrangements for its employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters.
I.B. Duncan6
E. Lindqvist6
P. Larmon6
L. Chahbazi (appointed 1 January 2018)6

Introduction & Objective

The Committee continues to focus on the integrity of Bodycote's financial reporting, risk management and internal controls and on the quality of the external and internal audit processes. The Committee will continue to keep its activities under review as the regulatory environment changes. Its objective is to provide effective governance over the Group's reporting, including the adequacy of related disclosures, the management and oversight of the Group's systems of internal control, financial risks and the performance of internal audit as well as the appointment and evaluation of the external auditor.

Committee Membership & Meetings

The members of the Audit Committee are all independent Non-Executive directors. Their biographical details are shown in the Board of Directors section and their remuneration in the Board report on remuneration. The Group Company Secretary is the secretary to the Audit Committee.

I.B. Duncan is Chairman of the Audit Committee. As a Chartered Accountant with strong experience in senior finance roles including Chairman of several other listed company audit committees. The Board considers that I.B. Duncan has recent and relevant financial, accounting and sector experience required to Chair the Committee.

All members of the Committee have significant and widespread experience in both executive and non-executive capacities of multinational industrial companies and are considered to have competencies relevant to their duties.

The Audit Committee met six times during 2018 and in March 2019: all members attended all meetings. The Committee Chairman also invited the Board Chair, Group Chief Executive, Chief Financial Officer, Group Financial Controller and Group Head of Risk (who is responsible for internal audit) to attend all regular meetings. Other executives from the Group were also invited, as appropriate, to attend meetings to provide a deeper level of insight into key issues. The Committee Chairman also invited the external auditor, Deloitte LLP ('Deloitte'), to every meeting with the exception of one meeting relating to the appointment of the new auditor. As part of the process of working with the Board to carry out its responsibilities and to maximise effectiveness, meetings of the Committee generally take place just prior to Board meetings.

I.B. Duncan also held preparatory meetings separately with Deloitte, the Group CFO, the Group Financial Controller and the Group Head of Risk prior to Committee meetings to review their reports and discuss issues in detail. Deloitte, the Group Head of Risk and the internal auditors (Ernst & Young LLP) met with the Audit Committee without the executives present.

Main activities of the Committee during the year

The Committee is responsible for reviewing the half year results and the Annual Report and Accounts before recommending them to the Board for approval.

At its meetings, the Committee focused on the following main areas:

Financial reporting

The primary recurring role of the Committee in relation to financial reporting has been to review, with management and the external auditor, the appropriateness and integrity of the interim and Annual Report and Financial Statements concentrating on, amongst other matters:

  • the quality and acceptability of accounting policies and practices including interpretation of reporting standards and the adoption of policies;
  • the application and impact of significant judgements, accounting estimates and matters where there was significant discussion with the external auditor;
  • the clarity of disclosures and compliance with Financial Reporting Standards;
  • the key points of disclosure and presentation to ensure the adequacy, clarity and completeness in the Annual Report and Financial Statements;
  • whether the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's strategy, business model and performance;
  • reviewing with both management and Deloitte to ensure audit scoping was appropriate and that Deloitte had applied the necessary level of professional scepticism in performing their work; and
  • reviewing various materials to support the statements on risk management and internal control and related disclosures made in the Annual Report and Financial Statements on this matter.

Reports from management were reviewed on significant matters, including litigation, accounting, treasury and tax matters and also reports from the external auditor on the outcome of their work.

The Committee reviewed and examined the half year and Annual Report and Financial Statements. Taken as a whole, in the light of their knowledge of the Group and its performance, the outcome of the activities described above and based on robust discussion with both management and the external auditor, the Committee has concluded that it is fair, balanced, consistent and understandable and provides the information necessary for shareholders to assess the Group's strategy, business model, position and performance, and reported to the Board accordingly.

During the year, the Group corresponded with the Financial Reporting Council (FRC) in respect of certain 2017 Annual Report disclosures. The comments received have been appropriately addressed and the FRC has closed all of its enquiries.

In addition to these matters, the Committee considered the following significant issues impacting the financial statements:

Areas of focus

The areas of focus considered by the Committee in relation to the 2018 Annual Report included the following:

  • Leases. The Committee reviewed progress toward the adoption of IFRS 16 'Leases'. The Committee oversaw the implementation of a new control process designed to ensure that Leases are accounted for and disclosed properly in the financial statements.
  • Impairment of assets. The Committee reviewed and challenged the future forecast underlying the value in use calculation, and the assumptions, particularly the discount rate and growth factors, used in the discounted cash flow calculations for each cash generating unit, the sensitivity analysis applied and the projected future cash flows used to support the carrying values of the assets. Details of sensitivity analysis applied to key assumptions used in the impairment review as well as conclusions are set out in< note 9 to the Financial Statements.
  • Restructuring, reorganisation and environmental provisions. The Committee received reports, including from professional advisers, and challenged the basis and completeness of the assumptions used to calculate the provisions and the appropriateness of disclosures in the Report. The Committee discussed with management the key judgements behind provisions, taking note of the range of possible outcomes, and agreed with their recommendations.
  • Going concern and viability statement. The Committee challenged the validity of the going concern assumption and viability statement used in the preparation of the Annual Report, in particular considering the Group's forecast for profits and cash generation, its liquidity position, available borrowing facilities and covenant compliance. Sensitivity analysis was undertaken to understand the impact of changes to key variables. The Committee also examined potential impacts that the UK Brexit may have on the above considerations and concluded that no material impact is expected.

The following are considered as key sources of estimation uncertainty in the financial statement notes:

  • Taxation. A number of judgements are involved in calculating tax provisions and the level of deferred tax assets to be recognised. The Committee has focused on understanding and challenging the Group's critical tax risks and management's assessment and valuation of these risks. The Committee has supported enhanced transparency over the Group's tax risks and strategy in external reporting. Key risks, notably in the European Commission's State Aid enquiry, UK Brexit implications and internal cross border funding arrangements, have been reviewed and challenged including management's forecast of the future taxable profits of the relevant businesses.
  • Retirement benefits schemes. Management took external professional advice in determining pension liabilities. The Committee reviewed and agreed the methods, assumptions used, and benchmarks, particularly in respect of inflation, the discount rate, life expectancy and the application of IFRIC 14 to the UK pension scheme, considering current norms and the sensitivity of the reported liability to changes in the assumptions. The Committee agreed the treatment and the corresponding disclosures on these matters. See note 29 of the financial statements.

External audit

The Committee is responsible for managing the relationship with the Group's external auditor on behalf of the Board.

The Committee reviews and makes recommendations with regard to the reappointment of the external auditor each year. In making these recommendations the Committee considers auditor effectiveness and independence, partner rotation and any other factors which may impact the external auditor's reappointment. Deloitte has been the Group's external auditor for 17 years.

The external auditor is required to change the lead partner every five years and other partners periodically in order to protect independence and objectivity and provide fresh challenge to the Group. Mr M. Mullins has been lead partner since 2015.

At the May and October meetings Deloitte presented their audit plans for the interim review and year-end audit respectively. The Committee considered and challenged both the scope and materiality to be applied to the Group audit and its components. The Committee considered carefully the scope in respect of smaller and more remote locations and noted that the majority of local audits are undertaken by Deloitte.

During the year, the Committee initiated a tender process to change the Group's external auditor from 2019. See below for more information on the tender process.

Assessment of Effectiveness

The Committee has adopted a formal framework for the review of the effectiveness of the external audit process and audit quality which includes the following aspects:

  • assessment of the engagement partner, other partners and the audit team;
  • audit approach and scope, including identification of risk areas;
  • execution of the audit;
  • interaction with management;
  • communication with and support to the Audit Committee;
  • insights, management letter points, added value and reports; and
  • independence, objectivity and scepticism.

An assessment questionnaire was completed by each member of the Committee, the Chief Financial Officer and other senior finance executives. The feedback from the process is considered by the Audit Committee and provided to the external auditor and management. The full formal questionnaire is completed every three years with key areas being completed every year.

The Committee assessed the effectiveness of management in the external audit process by considering timely identification and resolution of areas of accounting judgement, the quality and timeliness of papers analysing those judgements and other documents provided for review by the external auditor and the Committee.

The Committee considered the FRC Audit Quality Review Team report on Deloitte LLP dated June 2018. If the audit is selected for quality review, the Committee understands that any resulting reports will be sent to the Committee by the FRC. After considering the above matters, the Committee felt that the external audit had been effective.

Appointment of New Auditor

During the year, the Committee initiated a tender process to change the Group's external auditor from 2019. The tender was designed to be transparent, effective and efficient and give each participating firm an equal opportunity to successfully tender. 

The tender process was supervised by the Committee, who made a formal recommendation to the Board on the external auditor appointment. To support them in this process, a Tender Panel was identified which included senior members of the Group's management and finance team.

The following process was followed:

  • Five audit firms were invited to tender for the audit and related services and submit a final proposal document.
  • Assurance was sought that each firm would be capable of being independent in the time frame required by applicable law or regulation before being appointed auditor. Due diligence activities conducted as part of the tender included a review of this independence.
  • Following evaluation of resources, expertise, quality control and audit approach to deliver a high quality audit service to the Group, two audit firms submitted written proposals and gave oral presentations to senior members of the management and finance team which were evaluated.
  • Objective criteria were established to ensure thorough and consistent process was followed when assessing the tender proposals. The criteria were weighted to take account of the relative importance to the overall outcome and included understanding of Bodycote's business, markets, operations and geographic scope. A broad range of factors were identified under each criterion to assist with the assessment process. These included approach to ensuring overall audit quality, experience and fit with Bodycote (the lead partner, team and the firm), the firm's international coverage and its alignment to Bodycote, the approach to managing the audit and working with other assurance providers, the value provided from the audit, the approach to transition, the approach to innovation and technology, and the performance of each firm during the proposal process. All the internal stakeholders involved were invited to rank/score each tender against each of these criteria to assist in the evaluation process.
  • Both audit firms also provided Committee members with their written proposals and made oral presentations for the Committee to appraise. The Committee evaluated these proposals and presentations and considered both to be acceptable having both demonstrated they have the technical capabilities and people to deliver a high quality audit. This was subsequently presented to the Board. Further discussion between Committee members indicated an aligned preference to PwC as best suited and able to most easily effect the audit transition with the least disruption and impact on our business.

The Committee endorsed sharing its recommendation with the Board, together with the recommendation that a resolution be put to shareholders at the next AGM, proposing the appointment of PwC as Bodycote's external auditor from 2019.

Having undertaken this tender process in 2018 (in respect of the 2019 audit), PwC's appointment as Bodycote's external auditor meets the relevant requirements and recommendations relating to the tenure of appointment set out in The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 (the 'Order'), Regulation (EU) No. 537/2014 and the FRC's revised Ethical Standard June 2016. The Group complies with the provisions of the 'Statutory Audit Services for Large Companies Market Investigation Order 2014'.

Non-audit services

The external auditor may be invited to provide services where their position as auditor renders them best placed to undertake the work. Financial due diligence, taxation, internal audit, and actuarial services are not typically contracted to the external auditor. No contracts in excess of £20,000 can be awarded to the external auditor without prior approval from the Committee Chairman or, in his absence, another member of the Committee. Non-audit fees paid to the auditor are shown in note 3 and amounted to 11% (2017: 12%) of the audit fee.

Independence

The independence of the external auditor has been confirmed by Deloitte every half year and was last confirmed in March 2019. The Committee considered Deloitte's presentation and confirmed that it considered the auditor to be independent.

Internal audit

The internal audit plan for 2018 was presented to the Committee in October 2017. The plan takes account of the Group's strategic objectives and risks and provides the degree of coverage deemed appropriate by the Committee. The Committee reviewed and accepted the plan following discussions and challenge as to the scope and areas of focus. At each regular meeting the Group Head of Risk presented a report to the Committee on the status of internal audit plan, points arising from audits completed and follow up action plans to address areas of weakness. The status of these actions is monitored closely by the Committee until they are completed. The Committee also received reports on actual or suspected frauds and thefts by third parties and employees. None had any material financial impact on the Group and, where necessary, systems and procedures were altered to minimise the risk of recurrence.

The Group Head of Risk provides independent assurance over the key financial processes and controls in operation across the Group. The Group has engaged Ernst & Young LLP ('EY') to provide certain internal audit services.

Additional assurance has been obtained through a control self-assessment. Internal auditors have received self-certification from every plant and shared service centre that internal controls have been complied with and noting any non-compliance. A summary of results was presented to the Committee. The accuracy of returns is monitored by internal audit by verification visits to a random sample of sites.

The effectiveness of internal audit is reviewed and discussed annually with the Group Head of Risk and the EY engagement partner. An assessment questionnaire was completed by each member of the Committee, the Chief Financial Officer and other senior finance executives. The views of senior operational management have also been canvassed. The review takes into account the views of directors and senior management on matters such as independence, proficiency, resourcing and audit strategy, planning and methodology. On the appointment of a new engagement partner the Committee assesses the experience and expertise of the partner and other senior staff members. Audit quality is assured through a detailed review of each report being carried out by the Group Head of Risk, and a summary of each report's findings being reviewed by the Audit Committee. The review confirmed that the internal audit function was independent and objective and remained an effective element of the Group's corporate governance framework.

Risk management

The Committee monitored the effectiveness of the Group's risk management and internal control systems through updates at each meeting from the Group Head of Risk who has responsibility for developing the Group's risk management and internal controls framework.

The Committee reviewed changes to the principal risks and mitigating actions identified by management. The Committee also received regular reports on issues raised via the Open Door Line (an external independent service where employees may report matters of concern) and assessed both how such calls are dealt with and whether there was any indication of material risk. During 2018 there were 18 Open Door cases, all of which were investigated and closed during the year, with appropriate action taken where necessary.

Internal control

At each meeting the Committee considered and challenged reports from the internal auditors on the effectiveness of internal controls. The Committee also performed an annual review of the Group's internal control processes and considers the system to be effective and in accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting as issued by the FRC (September 2014).

Committee evaluation

The Committee's activities formed part of an internal review of Board effectiveness which was undertaken in September and October 2018 and approved by the Board in December 2018. There were no material deficiencies noted in the review and directors indicated a high level of satisfaction with the work of the Committee. Based on this, and as a result of the work done during the year, the Committee has concluded that it has acted in accordance with its terms of reference and carried out its responsibilities effectively.

On behalf of the Audit Committee:

I.B. Duncan
Chairman of the Audit Committee
8 March 2019