Audit committee
Members
Heather Lawrence (Chair)
David Lis
Charlotte Twyning
Gillian Elcock
Ian Barkshire
Role and responsibilities
The responsibilities of the Audit Committee (the “Committee”) include overseeing financial reporting, risk management and internal financial controls, in addition to making recommendations to the Board regarding the appointment of the Company’s internal and external auditors.
The Committee’s role and responsibilities are set out in its terms of reference. These were last reviewed in November 2024 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 and 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 processes (excluding cyber security and fraud risk, which are retained by the Board), internal financial controls and internal control and risk management systems that identify, assess, manage and monitor financial risks and risk management systems;
- 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;
- monitoring and evaluating the independence and effectiveness of the external audit function, taking into account relevant UK laws, regulations, the Ethical Standards and other professional requirements and the relationship with the auditor as a whole 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, 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 including ensuring the internal audit function has the unrestricted scope and resources necessary to enable it to fulfil its mandate 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.
External audit
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 reviewed the performance and effectiveness of the incumbent external auditor, PricewaterhouseCoopers (“PwC LLP”). For 2024, 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 team led by the Chief Financial Officer, were requested to provide detailed feedback on the effectiveness of the external auditor. The Chair 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. The Committee concluded that the quality of the external audit team was appropriate, the external audit process was operating effectively, and PwC LLP had proved effective in its role as external auditor for the first year.
Non-audit services
Under the Competition and Markets Authority (the “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 auditors. These 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 2021, 2022 and 2023 being relevant to the assessment in respect of 2024. PwC LLP were appointed as external auditor in 2024 and as such there were no PwC LLP audit fees in the previous three years. Whilst there is no historical audit fee data, the Committee is satisfied that the level of permissible non-audit services is below 70% of the in-year audit fee.
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’s policy in relation to non-audit services is kept under regular review. The policy was reviewed during the year against the FRC Revised Ethical Standard (2024), and no updates were required to be made. The policy was last updated in 2020 to reflect current market practice and the then current FRC Revised Ethical Standard.
Having undertaken an external auditor tender process in 2022, during the course of 2023, non‑audit services formerly provided by the incoming auditor, PwC LLP, were migrated to other firms as part of the transition process to PwC LLP as the Company’s new external auditor for the financial year ending 31 December 2024. PwC LLP ceased the provision of all non‑audit services to the Group as of 12 August 2023 except as expressly approved by (among others) the Committee.
During 2024, no services were provided by PwC LLP other than for statutory audit and audit related assurance services except for the performance by PwC LLP of a review of the Company’s interim financial statements for a fee of £470,000 which had been approved by the Committee as a permissible non-audit service. The Committee is satisfied that the Company was compliant during the year with the FRC’s Ethical Standards for Auditors in respect of the scope and maximum permitted level of fees incurred for non-audit services provided by PwC LLP.
The Committee closely monitors the amount of non-audit work undertaken by the external auditor and, in accordance with its non-audit services policy, directs non-audit work to other firms unless there is a particular justification for PwC LLP to carry out such work. In such cases, the Chair of the Committee must first approve such work.
An analysis of the fees earned by the external auditor for audit and non-audit services can be found in note 7 to the consolidated financial statements on page 192 of the 2024 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 PwC LLP on a contingent basis.
At each year end, the external auditor submits a letter setting out how it believes its independence and objectivity have been maintained. The external auditor 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
An internal audit programme is used within the Group. 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 local 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 Group’s balance sheet. A report of key findings and recommendations is presented to senior management, including the Head of Financial Reporting, followed by a meeting to discuss these key findings and to agree on resulting actions. Internal audit site visits were conducted by BM Howarth across a total of 17 GKN Aerospace sites in 2024.
To supplement the internal audit programme, a targeted sample of sites was selected for a balance sheet review process is conducted twice-yearly of all site balance sheets (save where an internal audit has been undertaken during the half year). These are undertaken by central and operational finance team members and are carried out cross-divisionally for objectivity and independence. Analysis from these exercises is discussed monthly at internal meetings attended by the Head of Financial Compliance & Assurance, the Chief Financial Officer and other key members of the finance team.
Any control findings are followed up by the business 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 Chief Financial Officer and the senior finance management team so that urgent action plans can be agreed. Follow-up site visits were performed during 2024 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.
During 2024, as part of its regular assessment of internal audit the Committee discussed and approved in principle management’s proposal to transition from an externally resourced internal audit function to an in‑house internal audit function. The Committee decided that such a transition would be appropriate following the change of business strategy and having regard to prevailing market practice of having an in‑house internal audit function among FTSE 100 and aerospace peers (compared to the prior approach by Melrose under its former strategy where the Group composition was expected to change through frequent transformational M&A), as well as to the changing internal controls requirements being introduced by the UK Corporate Governance Code. It was considered that the change to an in‑house function would enable the Company to drive continuous improvement over the long‑term both within the function and within the business more widely. As such, following BM Howarth’s decision to resign from its role, the Committee approved the proposal to bring the function in‑house during 2025 under the leadership of a new Head of Assurance role. A recruitment process was undertaken with an external consultancy firm to secure a Head of Assurance to bring relevant and recent FTSE 100 leadership experience to the internal function, and the Committee approved an appointment in early 2025.
The Committee reviewed the reappointment of BM Howarth as internal auditor following an assessment of the services delivered and approved their reappointment for a transitional period. BM Howarth are expected to continue to provide internal audit services during the first half of 2025 following which the internally-led function, with transitional support from Ernst & Young to facilitate the smooth transition to the internalised function, will take the internal audit programme forward.