Role and responsibilities
The Audit Committee’s role and responsibilities are set out in its terms of reference. These were last reviewed in November 2022 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 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, financial statements and interim financial statements, and reviewing and reporting to the Board on the significant financial reporting issues and judgements which they contain;
- keeping under review the effectiveness of the Group’s financial reporting;
- reviewing the effectiveness of, and monitoring and overseeing, the Group’s 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’s arrangements for its employees to raise concerns in confidence in accordance with the Company’s whistleblowing policy, including about possible wrongdoing in financial reporting or other matters;
- developing, implementing and monitoring the Group’s policy on external audit;
- monitoring and evaluating the independence and effectiveness of the external audit function and approving the external audit plan and fee;
- taking into account relevant UK laws, regulations, the Ethical Standards and other professional requirements and the relationship with the auditor as a whole;
- 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, the methods used to account for significant or unusual transactions, and compliance with accounting standards;
- reviewing the Company’s procedures for detecting fraud, and its systems and controls for the prevention of bribery;
- reviewing and where necessary challenging the provision of non-audit services by the external auditor;
- developing and overseeing the selection process for the appointment of the external auditor and in respect of an external audit tender, making a recommendation to the Board on the appointment of the external auditor following on from such tender process;
- monitoring and evaluating the independence and effectiveness of the internal audit function and approving the internal audit plan and fee; and
- reviewing and considering the Annual Report and financial statements to ensure that they are fair, balanced and understandable and advising the Board on whether it can state that this is the case.
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 Committee has reviewed the external auditor’s performance and effectiveness. For 2022, a series of questions covering key areas of the audit process that the Committee is expected to have an opinion on 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 internal auditor. The Company Secretary subsequently produced a paper 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.
The Committee has reviewed the regulations provided by the European Commission (as they form part of retained UK law) and the Competition and Markets Authority (“CMA”) on audit tendering. Rotation of the external audit firm is required by 2024 and last year’s report had outlined the Committee’s intention to undertake an external audit tender process in 2022. The Committee is pleased to confirm that the tender process has now concluded and, subject to shareholder approval, PwC LLP has been selected as the Company’s new external auditor for the financial year ending 31 December 2024. The current audit engagement partner was appointed in 2019.
Therefore, the audit engagement partner will serve until PwC LLP assumes the role of the incumbent external auditor.
The tender process was undertaken in 2022 in order to allow for a competitive process and to provide participants with sufficient time to become independent. The Committee expects that Deloitte LLP will remain the Group’s external auditor until the conclusion of the 2023 financial year (“FY2023”) audit. To facilitate an orderly transition, PwC LLP will also observe the FY2023 audit. The Chairman of the Committee led the tender process and oversaw the work of management, who supported the Committee in developing and implementing the planned approach. The Chairman of the Committee met with both the Group Finance Director and senior members of the Melrose finance team regularly throughout the tender process.
The process was prepared and followed in accordance with best practice FRC guidelines, and in particular was designed to be transparent and efficient, and to give firms an equal opportunity to tender for the services. Except for Deloitte LLP, no other firm was prohibited from taking part in the tender. After initial consideration of audit firms by the Committee, two firms were selected to be provided with a Request for Proposal (“RFP”). Each firm was invited to meet with the functional heads at Melrose, together with the GKN Aerospace finance directors. Processes were implemented such that each firm was provided with equal access to management and information. Both firms were then invited to present to a sub-group of the Committee, which included both the Chairman of the Committee and the Group Finance Director.
The Committee assessed the two firms against a number of criteria, including audit quality and capability, and organisational capability and service delivery. The Committee’s final evaluation of the firms took into account a number of criteria, including analysis of the RFP submission, audit workshops with the Company’s management, assessment of the firm’s approach to audit quality, performance in the final presentations, and due diligence on the firms. After detailed consideration, the Committee concluded that PwC LLP would be recommended to the Board for appointment as the Group’s external auditor from the financial year ending 31 December 2024. The Board supported this decision.
Planning for transition to PwC LLP has commenced, including steps to ensure that they are fully independent in time for their appointment.
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 LLP, 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 current financial year, with audit fees in 2019, 2020 and 2021 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 preapproved (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’s policy in relation to non-audit services is kept under regular review and was last 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 including in respect of corporate finance affairs and risk management. It has also obtained reward, tax, consulting advice and advice on the remuneration reporting regulations and preparation of the Directors’ remuneration report from PwC LLP. These services will be migrated to another firm as part of the transition process to PwC LLP as the Company’s new auditor from the financial year ending 31 December 2024, as detailed further above.
During 2022, the main services provided by Deloitte LLP other than statutory audits were in relation to non-statutory audits of carve-out financial statements and assurance reports for various projects including government grants or subsidies and a review of the half year interim statement. The Company’s non-audit fee paid to the external auditor of £0.6 million represents 6% of the audit fees for 2022. Deloitte LLP also provided reporting accountant services in relation to the demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen (the “Demerger”), and was paid £0.9 million for this work. This fee was not subject to the non-audit fee cap calculation.
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, such as in the case of the Demerger. In such cases, the Chairman of the Committee must first approve such work.
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 152 of the 2022 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.
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 & Young. A rotation programme is in place, such that every 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 GKN Aerospace 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 financial 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. Physical internal audit site visits were conducted by BM Howarth across a total of 48 sites in 2022. Further, due to continued restrictions in China as a result of COVID-19, two sites were reviewed remotely, meaning that 50 sites were reviewed in total.
To supplement the internal audit programme, a targeted sample of sites were 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.
Any control findings are followed up by GKN Aerospace to ensure a strengthening of the site-based accounting functions, including specific action plans to address any shortcomings identified. In the event that significant deficiencies are found in internal financial controls, these are immediately brought to the attention of the Group Finance Director and the Melrose accounting function so that urgent action plans can be agreed. Follow-up site visits were performed during 2022 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. 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)