Letter from the Chairman of the Audit Committee /
Dear Shareholder /
During the year we held five meetings, inviting along others as we thought necessary, including the Group Chairman, CEO and Chief Financial Officer, the external auditors, the company secretary, the Group Financial Controller and (following her appointment) the Director of Risk and Audit. We also met privately with the internal and external auditors on a number of occasions.
The Audit Committee reviews the internal control framework for the Group, which involves working with the external auditor, internal auditors and the Company’s risk committees. The Committee also reviews both internal and external reporting.
External Auditors /
The Committee is responsible for making recommendations to the Board in relation to the selection of the external auditors, for approving their terms of engagement and the scope of and materiality levels for the audit, and for monitoring both their independence and their use for non-audit services. Details of the various amounts paid to the external auditors are given in Note 5 to the financial statements.
We recommended to the Board that a tender process be held in May 2011 for the external audit, as it had been seven years since this was last undertaken. The Committee felt strongly that given our international diversity and complexity in over 80 countries, it wanted a single firm to undertake the global audit. This would be both more timely and more efficient and would ensure common standards across our many reporting entities.
As a result, a shortlist of four global audit firms, including both the incumbent Deloitte LLP and one non-Big Four firm, was drawn up. Both oral and written presentations were made to a panel comprising the CFO, the Group Financial Controller and the Audit Committee chairman, and then to a meeting of the Committee attended by the CEO and all members of the panel. Costs and quality submissions were rigorously examined. At the end of the process the Committee unanimously recommended to the Board the appointment of Ernst & Young LLP.
The Committee’s recommendation was subsequently accepted by the Board and announced on 28 June 2011.
Given that Ernst & Young LLP was appointed as auditor during the year, the appointment of a new audit partner satisfies the rotation requirements of the ICAEW policy.
We did consider the balance between fees for audit and non-audit work for the Group in the year, and concluded that the nature and extent of the non-audit fees paid to Deloitte LLP up to 16 June 2011 and to Ernst & Young LLP since then, did not present a threat to the external auditors’ independence. This will continue to be monitored as the Committee is well aware of the importance of auditor independence. We also reviewed our policy on auditors providing services beyond strict audit work, confirming that all such additional work costing over £25,000 would need specific individual approval by the CFO, with work costing over £100,000 needing approval by the chairman of the Audit Committee.
Internal Audit /
The Committee regards the Internal Audit team as a critical part of our system of internal controls. We oversaw the appointment of a new Director of Risk and Audit, Linda Chan, in July 2011. She has had extensive experience in internal audit with Tui Travel, the Automobile Association and Centrica, as well as Deloitte LLP, where she specialised in risk and internal audit services. Linda reports jointly to the Audit Committee and the Group Chief Financial Officer, and has direct contact with me at any time she wishes.
We oversaw a comprehensive review of the purpose and objectives of the internal audit function in the second half of the year. This took account of the Committee’s desire to improve further our controls, balancing risk versus enterprise, and giving coverage across the whole of our international network. The result was a number of enhancements:
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- An increase in the team from 3 to 11 people, with a dedicated IT audit team and, for the first time, 4 team members based in our regional offices
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- Improved common methodology and working practices for all units
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- Additional focus on core financial controls, the balance sheet and key operating risks inherent to our business, such as sales and collections and contracts management
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- A formal tender process to appoint a new co-sourcing partner to provide supplementary resources, specialist skills and local indigenous presence.
Since it is not practical, or desirable, for controls to be imposed solely by the centre, great store is put by business units taking responsibility for their own controls. The annual compliance self certification process was therefore reviewed and updated. We insist that the chief executive officer and chief financial officer of each entity, at regional, global and Group levels, completes an annual certificate to confirm that:
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- The Group’s policies and procedures were adhered to
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- The accounts as submitted were accurate and complete and prepared in accordance with Group accounting policies
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- There were no actual or potential breaches of laws or regulations
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- There were no known frauds
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- There were no related party transactions other than those properly disclosed
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- There were no conflicted directorships
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- All relevant information was disclosed to the auditors.
As they are not controlled by the Group, joint ventures and associates companies have their own policies and procedures, and the Group therefore places reliance on the systems of internal controls operating within our partners’ businesses.
Other actions taken to strengthen financial controls were:
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- The new Group-wide financial reporting and consolidation system was rolled out across the Group, significantly improving the reporting and consolidation process
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- A programme of testing financial controls was undertaken across the Group. Resulting recommendations are presented to business units and then regularly followed up by internal audit
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- An independent report was commissioned on a bad debt in Spain. This loss was announced at the time it came to light in February 2011. Both the recommendations and the broader implications of this report were carefully reviewed by the Audit Committee and the recommendations have now been fully implemented
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- The ‘whistle-blowing’ procedures, known as “Speak-up”, have been re-communicated and emphasised.
Risk Committees /
Following the sale of Synovate, the Group has two risk committees – for Aegis Media, chaired by the Group CEO, and for Head Office, chaired by the Group Chief Financial Officer. Both committees report to the Audit Committee. They discuss key risks faced by the Group, assess the probability and quantify the effect of those risks and review and approve risk management mitigation plans. A third risk committee was chaired by the Synovate CEO prior to the sale of Synovate.
During 2011, Aegis revised the Group risk management framework to increase focus on the major risks that the Group faces. The evaluation methodology has also been modified to place more emphasis on measuring the effect on both our reputation and financial results (see the Principal Risks & Uncertainties section).
The Audit Committee has been stressing the importance of the evaluation of risks being considered by all managers and so becoming part of how everyone works. The responsibility to manage risk sits with all employees, not just the Risk Committees.
Reporting /
The Audit Committee has been encouraging the development of internal performance reviews, and considerable progress has been achieved by the finance team.
We review the external financial statements with input from both management and external auditors. We ensure that reporting complies with accounting standards and rules. During the year, the Committee focused particularly on:
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- Significant judgemental areas, such as accruals, goodwill and taxation provisions, taking full input from the external auditors
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- Agreeing segmental reporting
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- Forward cash and debt capacity that confirmed our going concern status
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- Any changes in accounting policies and practices. There were in fact no significant changes
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- Ensuring the integrity of the Company’s financial statements by challenge and external review
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- Compliance with accounting standards and the Corporate Governance Code
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- Compliance with UK Listing Authority regulations and stock exchange and legal requirements.
Our own performance /
The Committee reviewed its own terms of reference. It also discussed its own performance, inviting the views of management and internal and external auditors. Whilst we felt that considerable progress has been made, the Committee recognised that there was more to do in the current year.
Review of internal control effectiveness /
The Board, advised by the Audit Committee, reviewed the effectiveness of the whole system of risk management and internal controls. The Board concluded that the processes in place are appropriate, improved during 2011 and are still improving. The Board considers that this fully satisfies the requirements of the revised Turnbull Guidance on Internal Controls.
Simon Laffin
Chairman of the Audit Committee
14 March 2012
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