Audit Committee

Role and responsibilities

The¬†Audit¬†Committee‚Äôs role and responsibilities are set out in its terms of reference. These were updated in November 2020 in line with best practice and are available through the link below and from the Company Secretary at the Company‚Äôs registered office. In discharging its duties, the Audit Committee (the ‚ÄúCommittee‚ÄĚ) embraces its role of protecting the interests of all stakeholders with respect to the integrity of financial information published by the Company and the effectiveness of the audit. The¬†responsibilities of the Committee¬†include:

  • reviewing and monitoring the integrity of the financial statements of the Group, including the Annual Report and financial statements and interim financial statements, and reviewing and reporting to the Board on significant financial reporting issues and judgements which they contain;
  • keeping under review the effectiveness of the Group‚Äôs financial reporting;
  • reviewing the effectiveness of and monitoring and overseeing the Group‚Äôs risk management (excluding cyber security and fraud risk, which are retained by the Board), internal financial control systems and processes and compliance controls;
  • overseeing the adequacy and security of¬†the Company‚Äôs arrangements for its employees to raise concerns in confidence about possible wrongdoing in financial reporting or other matters;
  • monitoring and evaluating the independence and effectiveness of the internal audit function and approving the internal audit plan and fee;
  • monitoring and evaluating the independence and effectiveness of the external audit and approving the external audit plan and fee;
  • reviewing, challenging and reporting to the Board on the going concern assumption and the assessment forming the basis of the longer-term viability statement;
  • reviewing and where necessary challenging the consistency of accounting policies, and methods used to account for significant or unusual transactions, and compliance with accounting standards;
  • reviewing the Company‚Äôs procedures for detecting fraud, and its systems and controls for the prevention of bribery;
  • developing, implementing and monitoring the Group‚Äôs policy on external audit and for overseeing the objectivity and effectiveness of the external auditor;
  • assessing annually the external auditor‚Äôs independence and objectivity, taking into account relevant UK law, regulation, the Ethical Standards and other professional requirements and the relationship with the auditor as a whole, including the provision of any non-audit services;
  • reviewing and where necessary challenging the provision of non-audit services by the external 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.

 

External audit

Appointment, reappointment and assessment of effectiveness

The Committee reviews and makes recommendations with regard to the reappointment 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 reappointment.

The current audit engagement partner was appointed in 2019. The Company’s audit firm is required to be rotated by 2024. Therefore, the new audit engagement partner will serve a full five-year term for the Group until the firm rotation in 2024.

The Committee has reviewed the external auditor’s performance and effectiveness. For 2020, a series of questions covering the key areas of the audit process that the Committee is expected to have an opinion over were considered by the Committee, including:

  • the calibre, experience, resources, leadership 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; and
  • the quality of support provided to the Committee by the external audit partner.

Committee members, together with the Group Finance Director and the divisional finance directors, were requested to provide detailed feedback on the effectiveness of the external auditor. The Chairman of the Committee also sought feedback from the Chief Executive and the internal auditor. The Company Secretary subsequently produced a report summarising the responses, which was considered by the Committee at length. The Committee subsequently 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.

 

FRC Audit Quality Review

The FRC’s Audit Quality Review team selected to review the audit of the 2019 Melrose Industries PLC financial statements as part of their annual inspection of audit firms. The FRC review covered selected aspects of the audit only and focused on identifying areas where improvements were required. The Chairman of the Committee received a full copy of the findings from the Audit Quality Review team and has discussed these with Deloitte. The Committee confirmed that there were no significant areas for improvement identified within the report and was satisfied that there is nothing within the report which might have a bearing on the audit appointment. 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. The Committee is satisfied that the effectiveness and independence of the external auditor is not impaired in any way.

 

Audit tendering

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 (as they form part of retained UK law) and the Competition and Markets Authority (‚ÄúCMA‚ÄĚ). The Committee understands that rotation of the external audit firm is required by 2024. The Committee‚Äôs intention is to put the external audit out to tender in accordance with the relevant timeframes.

The current audit engagement partner was appointed in 2019. The Company’s audit firm is required to be rotated by 2024. Therefore, the new audit engagement partner will serve a full five-year term for the Group until the firm rotation in 2024.

 

Non-audit services

Under CMA and EU regulations (as they form part of retained UK law), there are restrictions on the type and amount of non-audit services provided by Deloitte, which 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. The cap applies in respect of the Company’s 2020 financial year, with audit fees in 2017, 2018 and 2019 being relevant.

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. 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. In accordance with best practice FRC guidelines, the Company policy in relation to non-audit services is kept under regular review and was updated in 2020 to reflect current market practice.

Despite being well within the CMA guidance, the Committee has taken into account feedback from institutional shareholder services and has continued migrating non-audit work to other firms and has recently worked with Ernst & Young and KPMG in respect of corporate finance affairs and risk management and obtained reward, tax, accounting, consulting advice and advice on the remuneration reporting regulations and preparation of the Directors’ Remuneration report from PwC LLP.

During 2020, the main non-audit services provided by Deloitte LLP were in relation to non-statutory audits of carve-out financial statements, assurance reports for government grants or subsidies and tax compliance in non-EU subsidiaries. The Company did not use Deloitte LLP for any significant taxation services and does not intend to in the future. The Company’s non-audit fee paid to the external auditor of £1.93 million represents 21.8% of the audit fees for 2020.

The Committee closely monitors the amount of non-audit work undertaken by the external auditor and considers using other firms for transaction-related work. However, there are occasions when it is appropriate, because of background knowledge, to use the auditor for non-audit work, for example on certain compliance projects.

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 page 160 of the 2020 Annual Report.

 

Auditor objectivity and independence

The Committee carries out regular reviews to ensure that auditor objectivity and independence are maintained at all times. As in previous years, the Committee specifically considered the potential threats that each limited non-audit engagement may present to the objectivity and independence of the external auditor. In each case, the Committee was satisfied with the safeguards in place to ensure that the external auditor remained independent from the Company and its objectivity was not, and is not, compromised. No fees were paid to Deloitte LLP on a contingent basis.

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 five years.

Based on these strict procedures, the Committee remains confident that auditor objectivity and independence have been maintained.

 

Internal audit

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 Ltd, an external firm, provides internal audit services to the Group in accordance with an annually agreed Internal Audit Charter and internal audit plan. Where additional or specific resource is required, additional support is provided by Ernst and Young. A rotation programme is in place, such that every business unit site 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 Melrose senior management, including the Head of Financial Reporting, followed by a meeting to discuss these key findings and to agree on resulting actions.

As a result of the COVID-19 global pandemic, the internal audit programme for 2020 was reassessed in the first half of the year as restrictions on site access were necessary and there was a reduced ability to travel. After a near full programme in the first quarter, there was little activity in the second quarter due to site closures and certain staff on temporary leave. During the second half of the year, the internal audit programme was adapted to reflect an achievable level of activity, acknowledging the ongoing implications from the global pandemic. The balance between assurance sought from the internal audit programme and other areas of internal control was considered by the Committee in setting a revised schedule of internal audit site visits along with additional procedures for senior management to conduct, thus allowing the Committee to fulfil its obligations with regard to internal control. Site visits during the second half of the year were conducted through a mix of remote working and physical presence where possible such that a total of 28 sites were assessed in 2020.

To supplement the internal audit programme, a targeted sample of sites was selected for a balance sheet review with interviews of site controllers conducted by the internal auditor and senior management, together with self-certification questionnaires which were discussed in detail with divisional finance directors at the internal control sign-off meetings. A report of all significant findings is presented by the internal auditor to the Committee at each meeting and implementation of recommendations is followed up at the subsequent Committee meeting

During the previous year there were no significant deficiencies found in internal financial controls that needed action by the Group Finance Director and the Melrose accounting function. Any control findings are followed up by the businesses to ensure a strengthening of the site-based accounting functions, including specific action plans to address the shortcomings identified. Follow-up visits were performed during 2020 which identified significant progress in the improvement of financial controls at sites.

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. This also considers the insights provided, improvements achieved and feedback from a number of sources including key representatives of the Company.

The Committee reviewed the reappointment of BM Howarth Ltd as internal auditor, following an assessment of the services delivered and approved their reappointment.

Audit Committee terms of reference (PDF 0.23MB)