Role and responsibilities
The Committee’s role and responsibilities are set out in its terms of reference. These were updated in December 2016 in line with best practice and are available through the link below and from the Company Secretary at the Company’s registered office. In discharging its duties, the Committee embraces its role of protecting the interests of shareholders with respect to the integrity of financial information published by the Company and the effectiveness of the audit. Specifically, the Committee is responsible for:
- reviewing and monitoring the integrity of the financial statements of the Group, including the Annual Report and interim report;
- keeping under review the effectiveness of the Group’s financial reporting, risk management and internal control systems and compliance controls;
- monitoring and evaluating the effectiveness of the internal audit function;
- reviewing and challenging the going concern assumption and the assessment forming the basis of the longer-term viability statement;
- focusing and challenging the consistency of accounting policies, methods used to account for significant or unusual transactions and compliance with accounting standards;
- reviewing the Group’s arrangements for its employees to raise concerns in confidence about possible wrongdoing in financial reporting, in accordance with the Company’s whistleblowing policy;
- developing, implementing and monitoring the Group’s policy on external audit and for overseeing the objectivity and effectiveness of the auditor; and
- reviewing and considering the Annual Report and financial statements to ensure that it is fair, balanced and understandable and advising the Board on whether it can state that this is the case.
Appointment, re-appointment and assessment of effectiveness
The Committee reviews and makes recommendations with regard to the re-appointment of the external auditor. In making these recommendations, the Committee considers auditor effectiveness and independence, partner rotation and any other factors which may impact the external auditor’s re-appointment.
The external auditor is required to rotate the audit signing partner every five years. The Group’s audit signing partner changed as part of that rotation process in 2015 and is not due to rotate until the year ending 31 December 2019.
The Committee has reviewed the external auditor’s performance and effectiveness. For 2016, the chairman of the Committee worked with the Company Secretary to develop a series of questions covering the key areas of the audit process that the Committee is expected to have an opinion over, including:
- the calibre, continuity, experience, resources and technical and industry knowledge of the engagement partner and of the wider external audit team;
- the planning and execution of the audit process;
- the quality and timeliness of communications from the external auditor;
- the quality of support provided to the Committee by the external audit partner;
- the degree to which the external auditor and the audit process has contributed to improvements in financial reporting to Melrose’s shareholders; and
- the external auditor’s independence and objectivity.
The Committee, along with relevant members of the management team, were requested to complete a questionnaire containing these questions. The Company Secretary subsequently produced a report summarising the responses. Based on this report, the Committee concluded that the quality of the external audit team remains very high, the external audit process is operating effectively and Deloitte LLP continues to prove effective in its role as external auditor.
As detailed below, the Committee regularly monitors the objectivity and independence of the external auditor. Deloitte LLP was appointed in 2003 when the Company commenced trading and the external audit has not been formally tendered since then. It is the Committee's understanding that the Competition and Markets Authority and EU rules require rotation of the external audit firm by 2024. The Committee is satisfied that the effectiveness and independence of the external auditor is not impaired in any way. There are no legal or contractual obligations that restrict the Group’s capacity to recommend a particular firm for appointment as auditor and the re-appointment of Deloitte LLP as external auditor was approved by shareholders at the 2017 Annual General Meeting.
The Committee has considered the audit tendering provisions outlined in the UK Corporate Governance Code. The Committee has also reviewed the guidance provided by the European Commission and the Competition and Markets Authority (“CMA”). It is the Committee’s understanding that under the CMA and the EU rules rotation of the external audit firm is required by 2024. It is the Committee’s intention to put the external audit out to tender in accordance with the CMA and the EU timeframes.
The current audit engagement partner was appointed in 2015 and is not due to rotate until the year ending 31 December 2019. The Committee remains satisfied with the quality, integrity and the effectiveness of the work undertaken by Deloitte LLP on behalf of the Melrose shareholders. Accordingly, it is not proposed to put the audit out to tender at the present time but the matter will be kept under review.
Under new EU and Competition Commission rules, effective from 17 June 2016, new restrictions on non-audit services will apply, which will cap the level of permissible non-audit services awarded to the external auditor at 70% of the average audit fee for the previous three years. It is the Committee’s understanding that the cap applies prospectively and so will first apply in respect of the Company’s 2020 financial year.
A policy on the engagement of the external auditor for the supply of non-audit services is in place to ensure that the provision of non-audit services does not impair the external auditor’s independence or objectivity. In accordance with best practice FRC guidelines, the Company policy in relation to non-audit services is kept under regular review (it was re-examined during 2016). The policy outlines which non-audit services are pre-approved (being those which are routine in nature, with a fee that is not significant in the context of the audit or audit-related services), which services require the prior approval of the Committee and which services the auditor is excluded from providing. The general principle is that the audit firm should not be requested to carry out non-audit services on any activity of the Company where the audit firm may, in the future, be required to give an audit opinion.
During 2016, the main non-audit services provided by Deloitte LLP were in relation to the Group’s acquisition of Nortek, the introduction of the new Melrose Group holding company, taxation advice, compliance and planning services.
An analysis of the fees earned by the external auditors for audit and non-audit services can be found in note 7 to the consolidated financial statements on pages 114 of the 2016 Annual Report.
Auditor objectivity and independence
The Committee carries out regular reviews to ensure that auditor objectivity and independence is maintained at all times. A different senior partner oversees the taxation audit of the Company compared to those working on the non-audit taxation services.
No fees were paid to Deloitte LLP on a contingent basis. Based on these strict procedures, the Committee remains confident that auditor objectivity and independence have been maintained but accepts that non-audit work should be controlled to ensure that it does not compromise the auditor’s position.
At each year end, Deloitte LLP submits a letter setting out how it believes its independence and objectivity have been maintained. As noted above, Deloitte LLP is also required to rotate the audit partner responsible for the Group audit every five years and significant subsidiary audits every seven years.
Due to the size and complexity of the Group, it is appropriate for an internal audit programme to be used within the business. BM Howarth, an external firm, provides internal audit services to the Group. A rotation programme is in place, such that every business unit will have an internal audit at least once every three years, with the largest sites being reviewed at least once every two years. The rotation programme allows divisional management’s actions and responses to be followed up on a timely basis. The internal audit programme of planned visits is discussed and agreed with the Committee during the year.
The internal auditor’s remit includes assessment of the effectiveness of internal control systems, compliance with the Group’s Policies and Procedures Manual and a review of the businesses’ balance sheets. A report of key findings and recommendations is presented to the Group Finance Director and the Head of Financial Reporting, followed by a meeting to discuss these key findings and to agree on resulting actions.
A review of the internal audit process and scope of work covered by the internal auditor is the responsibility of the Committee, to ensure their objectives, level of authority and resources are appropriate for the nature of the businesses under review. A report of significant findings is presented by the internal auditor to the Committee at each meeting and implementation of recommendations by the Board is followed up at the subsequent Committee meeting. The Committee also reviews BM Howarth’s performance against the agreed internal audit programme.
Audit Committee terms of reference (PDF 0.19MB)