Audit committee reports

Transcription

1 AUDIT COMMITTEE INSTITUTE Audit committee reports A survey of 2013 annual reports August 2014 kpmg.co.uk/aci

2 2 AUDIT COMMITTEE REPORTS Contents Welcome 03 Effectiveness of the external audit process 04 Use of a questionnaire or survey to assess audit effectiveness 08 Disclosure of action plans and improvement opportunities 10 Auditor appointment and tenure 12 Tenure 12 Approach to tendering 13 Disclosure on tender processes conducted in External auditor independence when performing non-audit services 18

3 AUDIT COMMITTEE REPORTS 3 The last reporting season has seen audit committees get to grips with the new reporting requirements relating to how the audit committee discharges its duties. We have performed a survey of FTSE 350 company annual reports and in this report we have provided some observations on how the requirements are being addressed by different companies. The revised 2012 UK Corporate Governance Code came into effect as of 1 October 2012 and many companies have now published their annual reports under the revised Code. Provision C.3.8 of the revised Code details the new reporting requirements UK Corporate Governance Code provision C.3.8: A separate section of the annual report should describe the work of the committee in discharging its responsibilities. The report should include: The significant issues that the committee considered in relation to the financial statements, and how these issues were addressed; An explanation of how it has assessed the effectiveness of the external audit process and the approach taken to the appointment or reappointment of the external auditor, and information on the length of tenure of the current audit firm and when a tender was last conducted; and If the external auditor provides non-audit services, an explanation of how auditor objectivity and independence is safeguarded. In May, the ACI published a survey on the response to the revised Code s requirement for the audit committee to discuss the significant issues considered in relation to the financial statements and the new audit report requirements. In this publication, we report on our survey of 227 FTSE 350 company annual reports, focusing on the disclosures made in regards to the assessment of the effectiveness of the external audit process; the approach taken to appointment and tenure of the auditor; and the safeguards to auditor independence and objectivity. In performing this survey, we have also taken into consideration the results of the Financial Reporting Lab report Reporting of Audit Committees published in October 2013, which provides listed company and investor views on meeting the disclosure requirements and insights on the content and style of presentation. Timothy Copnell UK Audit Committee Institute August 2014

4 4 AUDIT COMMITTEE REPORTS The revised 2012 UK Corporate Governance Code sets out that a separate section of the annual report should describe the work of the audit committee in discharging its responsibilities, including, inter alia, an explanation of how it has assessed the effectiveness of the external audit process. The ACI published initial findings in January 2014 from a review of the first reports issued under the revised 2012 Code. We have updated our findings for further annual reports published since our initial review. The disclosure of the steps taken by audit committees in assessing the effectiveness of the audit process vary widely both in the number of steps performed and the level of detail. Of the companies surveyed, 6% made no comments in regards to auditor effectiveness and 13% disclosed that the assessment had been performed, but provided no explanation as to how this was performed. Half of the annual reports which made disclosures in relation to audit effectiveness also explicitly concluded on the result of the assessment, all noting favourable results (this excludes comments stating that the auditor was recommended for reappointment at the coming AGM). The average number of assessment activities performed by audit committees across the companies surveyed was 2.8.This was roughly consistent across the different rankings within the FTSE 350, although we note that the top 50 on average was above this (3.6 activities). Financial reporting lab suggestions: Disclosures can become repetitive year on year and focus on the process; concise, specific descriptive actions and outcomes are more useful to the reader If the audit committee undertakes a survey as part of this process, the survey should be described and providing a summary of resulting actions is encouraged If the audit committee reviews independent regulator inspection reports, this should be disclosed, along with the outcomes

5 AUDIT COMMITTEE REPORTS 5 Number of assessment activities by FTSE ranking Number of activities to to to to to to to 350 FTSE ranking Whilst, in practice, audit committees may well employ more mechanisms or factors in assessing the effectiveness of the external audit process than they actually report, the most commonly reported factors were: 46% Survey/Questionnaire 44% Review of presentations and communications 42% Review of risk identification process and delivery against the audit plan 41% Assess level of challenge and robustness of the auditor and their viour ongoing beha 40% Feedback from management 38% Review quality of staff, resources and qualifications 23% Review of AQRT reports 19% Reviewing internal quality control procedures and/or transparency reporting 13% Additional insights and observations provided by the auditor

6 6 AUDIT COMMITTEE REPORTS Some examples of more interesting and detailed disclosures are: Example 1 The Committee has reviewed the effectiveness of the external audit process during the year, including consideration of the following factors: The appropriateness of the proposed audit plan and the significant risk areas and areas of focus, and the effective performance of the audit in line with the agreed plan. The technical skills and industry experience of the audit engagement partner and the wider audit team. The quality of the external auditor s reporting to the Committee. The effectiveness of the co-ordination between the UK and Chilean audit teams. The effectiveness of the interaction and relationship between the Group s management and the external auditor. Feedback from management, including questionnaires completed by the operational finance teams in respect of the effectiveness of the unit audit processes. Consideration of the auditor s management letter and, in particular, the view this provides of the auditor s level of understanding and insight into the Group s operations. Review of reports from the external auditor detailing their firm s internal quality control procedures, as well as the auditor s annual transparency report. Antofagasta plc Example 2 We formally reviewed the effectiveness of the external audit process and the quality of the audit. The review covered the following: The audit partners with particular focus on the lead audit engagement partner. The skills and experience of the audit team. The planning and scope of the audit and identification of areas of audit risk. The execution of the audit. The role of management in the audit process. The quality of communication between the external auditor and the audit committee. The quality of their regular reports on accounting matters, governance and control. The support provided by the external auditor to the audit committee. The contribution made by the external auditor towards insights and added value. The reputation and standing of the external auditor. The independence and objectivity of the external auditor. The quality of the formal report to Shareholders. We conducted this review as part of the 2013 year-end process. The views of each member of the Audit Committee, the Chief Financial Officer, the Vice President Group Finance and key members of the finance management team at Group and divisional level were sought. We considered the feedback from this process and shared it with the external auditor and with management. During the year, we considered the inspection reports from the Audit Oversight Boards in the UK and US, specifically the: Financial Reporting Council s Audit Quality Inspections Annual Report 2012/13 and Public Report on the 2012 inspection of Ernst & Young LLP. The US based Public Company Accounting Oversight Board s Report on the 2012 inspection of Ernst & Young LLP. We reviewed the fees of the external auditor which benchmarked well against groups of comparable size and complexity. Smith & Nephew plc

7 AUDIT COMMITTEE REPORTS 7 Example 3 The Audit Committee has adopted a formal framework in its review of the effectiveness of the external audit process and audit quality which includes the following areas: The audit partners, with particular focus on the lead audit engagement partner. The audit team. Planning and scope of the audit and identification of areas of audit risk. Execution of the audit. The role of management in an effective audit process. Communications by the auditor with the Audit Committee, and how the auditor supports the work of the Audit Committee. How the audit contributes insights and adds value. The independence and objectivity of the audit firm and the quality of the formal audit report to shareholders. An auditor assessment tool is completed each year by each member of the Audit Committee and by the CFO. Feedback is also sought from the CEO, other members of the finance team, divisional management and the head of internal audit. The assessment tool adopted is comprehensive and includes detailed questions which are completed by way of a formal questionnaire every three years, with the key areas being performed every year. The feedback from this process is considered by the Audit Committee and is provided both to the auditors and to management. Action plans arising are also reviewed by the Committee. The effectiveness of management in the external audit process is assessed principally in relation to the timely identification and resolution of areas of accounting judgement, the quality and timeliness of papers analysing those judgements, management s approach to the value of independent audit, the booking of audit adjustments arising (if any) and the timely provision of draft public documents for review by the auditor and the Audit Committee. Example 4 As part of its role in ensuring effectiveness, the committee has completed a formal review which focused on the effectiveness, independence and objectivity of the external audit and included the following areas: The audit partners and audit teams with particular focus on the lead audit partner including an annual assessment of the qualifications, expertise and resources of the external auditors. Planning and scope of the audit and identification of areas of audit risk. The execution of the audit including the robustness and perceptiveness of the auditors in handling their key accounting and audit judgements. The role of management in an effective audit process. Communications by the auditor, including the quality of their reporting and the availability of the lead audit partner to meet senior management and to discuss matters with the committee. How the auditor supported the work of the audit committee. How the audit contributed insights and added value. A review of independence and objectivity of the audit firm. The quality and content of the formal audit report in the annual report. The appropriateness of the audit fee including value for money considerations but also to ensure a sufficient quality of work can be achieved for the fee proposed. Results of regulatory reviews by the audit inspection unit. Euromoney Institutional Investor PLC Every three years, the Audit Committee requests that a partner independent of the audit engagement team discusses the quality of the external audit process with the Audit Committee chairman and the CFO using this evaluation framework. Polymetal International plc

8 8 AUDIT COMMITTEE REPORTS Use of a questionnaire or survey to assess audit effectiveness A questionnaire or survey completed by the audit committee, senior management, group finance employees, or others, was the most common method of assessing the effectiveness of the external auditor and audit process. The survey participants varied between companies. 28% of the companies employing this mechanism did not specify who participated. The participants, where disclosed, included a mix as shown below. Half noted that the survey had been completed by the audit committee in conjunction with one or several other groups of participants. Approximately 35% of the surveys were only provided to one group of participants identified below. One third of the reports made disclosures around the content and types of questions in the survey or questionnaire. Some examples are shown opposite. Survey participants 53% Audit Committee 66% Senior Management 55% CFO/Finance Director at key geographical locations 26% Group Finance 9% Internal Audit

9 AUDIT COMMITTEE REPORTS 9 A specimen questionnaire can be found in Appendix 17 of the ACI Audit Committee Handbook. Again this year we requested a review of the effectiveness of external audit as perceived by 12 senior financial personnel and senior management closely involved in the year-end reporting process as well as members of the Audit Committee. The approach was consistent with last year, involving 25 questions covering three key areas the robustness of the audit process, the quality of delivery and the quality of people and service. Questions related to professional scepticism, integrity and competence, understanding of the business risks, issues and their impact, the clarity and appropriateness of the audit strategy, the efficiency and effectiveness of audit delivery, constructive relationships and control recommendations, good judgement and clear and timely communication. The survey covered a total of 22 different aspects of the audit process grouped under three separate headings; the robustness of the audit process, the quality of delivery of the audit process and the quality of the people in the audit team and the service provided by them. Each respondent was asked to award a rating on a scale of 1 to 5 for each aspect reviewed and to provide any additional comments they wished to make in relation to the questions raised. (Bunzl plc) (TUI Travel PLC) The questionnaire used is the template produced by KPMG s Audit Committee Institute which considers comprehensively different aspects of the audit process. (Elementis plc) This covered resource and expertise of the audit teams, quality of planning, execution and deliverables as well as an assessment of overall performance. Resultant themes and findings were discussed between ourselves, management and EY with both management and the auditors reporting to us on the actions being implemented in response. (The Weir group PLC)

10 10 AUDIT COMMITTEE REPORTS Disclosure of action plans and improvement opportunities Interestingly, 23 companies made disclosures in regards to action plans or improvement opportunities identified as part of the assessment. This was an area highlighted in the Financial Reporting Lab report: investors want to know about the results and any actions. The level of disclosure in this area differed greatly, ranging from noting that there were no action points; to there being action points; to disclosure of the points and actions agreed with the auditor. Some examples are shown below. The review included seeking views of Audit Committee members, senior executives across the business and members of Group Audit, through a questionnaire and a number of one to one interviews, together with consideration of the reports provided by PwC to the Audit Committee. The review concluded that the external audit process was effective and identified a number of areas where further enhancements could be made. (Lloyds Banking Group plc) The findings were that the 2012 audit was appropriately scoped and was well planned and executed. A number of actions were agreed with Deloitte, including increasing efficiency of the audit, by improving coordination with both the internal auditor and finance managers across the Group s various jurisdictions, and also reviewing the impact of the new accounting system being introduced in 2013 on future audits. (SEGRO plc) The results confirmed that both PwC and its audit process were considered to be effective and that a good working relationship was supplemented by a sufficient amount of challenge. Minor improvements, including proactive communication of emerging topics and new industry/ regulatory guidance, were suggested to and accepted by PwC. (GKN plc) The Committee assesses annually the qualification, expertise and resources, and independence of the Group s external auditors and the effectiveness of the audit process. The Committee s assessment is informed by an external audit satisfaction survey completed by members of senior management, which it reviews in detail. 94 surveys were completed this year and no material issues were identified. (British American Tobacco plc)

11 AUDIT COMMITTEE REPORTS 11

12 12 AUDIT COMMITTEE REPORTS The Code requires disclosures about the length of tenure of the external auditor and when the last tender was performed, as well as the audit committee s approach to external auditor appointment. Again, we have found that the level of disclosure varied between companies. Tenure The majority of the companies disclosed the year of appointment of the current external auditor, however a handful were less informative, giving a vague statement (such as: the external auditor s tenure has exceeded 20 years). 30% did not make any disclosures around the length of tenure, as shown below. 38% of the companies providing disclosure around auditor tenure noted the year of the last tender. These were all conducted between 1994 and The length of the current auditor tenure ranged from 1 to 117 years (where disclosed), with the average term being 14 years. Half of the companies providing information on auditor tenure also disclosed information regarding the current audit partner s tenure and rotation requirements. Only 9% named the partner, which was a suggestion within the Financial Reporting Lab report. Financial reporting lab suggestions: Investors would like to know in advance when the company intends to put the external audit out for tender and to be involved Investors would like information around the tendering policy and process to help them understand how the decision was made Encourage the disclosure of the date of appointment of the current audit firm, the name of the partner and information on their rotation and when the last tender occurred Disclosure of auditor tenure 30% No disclosure in relation to tenure 67% Year of first appointment of current external auditor 3% External auditor appointed for a number of years ie more than 20 years

13 AUDIT COMMITTEE REPORTS 13 Our view is that if the auditor tenure is 11 years or less as at 17 June 2014, the company has as least 12 years before it must rotate its auditor. In this case, if a Member State has opted to permit a further extension of 10 years (as is likely in the UK), then the company would need to conduct a public tender by 17 June 2026, and may then extend its audit relationship until 2036 (or 2040 if there is a joint audit). Approach to tendering At the time the annual reports included in our survey were being prepared, the now legislated EU reforms were still provisional. The UK Competition Commission reforms were also subject to finalisation, though the UK Corporate Governance Code provision on tendering had come into effect before December year end companies would have prepared their 2013 reporting. 70% of the companies surveyed acknowledged the proposed external audit tendering requirements. Of these, the following acknowledgements were noted. Update on mandatory firm rotation: EU legislation to reform the statutory audit market was adopted in April 2014 and will apply from 17 June This legislation now requires rotation of the audit firm every 10 years. Transitional rules stagger the introduction of mandatory firm rotation and depend on the length of auditor tenure as at 17 June 2014: 20 years or longer 6 years transition; after 17 June 2020 the auditor cannot be reappointed 11 to 20 years 9 years transition; after 17 June 2023 the auditor cannot be reappointed Acknowledgement of tendering reform 5% Noted changes but not the source 3% EU proposals only 56% Competition Commission and/or UK Corporate Governance Code 36% Both Competition Commission and/or UK Corporate Governance Code and EU proposals 2014 KPMG LLP, a UK limited liability partnership, is a subsidiar y of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reser ved.

14 14 AUDIT COMMITTEE REPORTS Disclosure of intention in regards to tendering reforms 21% No further comments made beyond acknowledging changes 33% Intend to comply with the changes and will make use of transitional provisions and wait until current audit partner s rotation ends 14% Intend to comply with the changes (no further comments provided) 32% Intend to comply, but will monitor changes and wait for finalisation before taking action Additional disclosures about timing of recent or planned tender 24% Stated which year they intended to put the audit out for tender 52% No disclosures in relation to tendering 24% Stated that a tender had occurred in the past 1-3 years Time periods provided where companies disclosed when they were going to initiate a tender (4 companies specifically noted that they would not invite the incumbent auditor; 1 noted that they would)

15 AUDIT COMMITTEE REPORTS 15 Anecdotal evidence suggests that institutional investors are increasingly engaging in dialogue with the audit committee about the appointment of auditors. Of those companies acknowledging the proposed tendering changes, the majority specifically noted that they intended to comply with the new requirements. See top chart opposite. Of those who did not acknowledge the proposed changes in relation to audit tendering, some provided additional information about the last tender or the intention to put the audit out to tender, although, a majority made no disclosures in relation to tendering. See middle chart opposite. Where companies disclosed when they were going to initiate a tender, the time periods in the bottom chart opposite were provided. In 2013, 16 of the companies surveyed put their external audit out to tender. 9 of those kept the same auditor, with only 5 changing (2 had not concluded at the time of writing the annual report). Only 7 companies reported that they had a formal policy of tendering every 10 years; whilst 5 reported that their policy was to tender more frequently than 10 years. 4 reported that they currently had no formal policy in relation to tendering. Anecdotal evidence suggests that institutional investors are increasingly engaging in dialogue with the audit committee about the appointment of auditors. One company, Barclays PLC, explained that the stakeholders had been involved in the discussion around when to tender and the considerations in making this decision. See below. The Committee has also had regard to the complexity and scale of the Barclays external audit and is particularly conscious of the degree of change impacting the business, including the Finance function, as a result of the Transform programme and the additional strain that both an audit tender and a change of audit firm would involve. In addition, the Committee noted that both the Group Finance Director and the Committee Chairman are new in role, the latter having previously been a senior partner in one of the audit firms likely to tender. Weighing up all these factors, and with the Committee Chairman having recently spoken to a number of key investors, the Committee has recommended to the Board that, depending on the final rules from the Competition Commission and the European Union, a tender of the external audit should start in 2015 or 2016 with respect to the 2017 or 2018 audit and that PwC should not be invited to tender (Barclays PLC)

16 16 AUDIT COMMITTEE REPORTS Twelve companies disclosed that they were not in compliance with the new UK Corporate Governance Code comply or explain provisions. Twelve companies disclosed that they were not in compliance with the new UK Corporate Governance Code comply or explain provisions, and that it was considered inappropriate to put the external audit out for tender at this time. Reasons cited for this centred around the pace of organisational change. Some examples of these discolosures are shown below. The Company may put the audit out to tender at any time, however, for the reasons noted below it will not be tendered in 2014 and the matter will be reviewed on an annual basis. Deloitte was appointed the Company s auditor in August Its performance is reviewed annually by the Audit Committee. In deciding not to put in place a tender process in 2013 and 2014, the Committee considered: the Deloitte audit partner, Gregory Culshaw, will be rotated off the audit on 25 April 2014 and the new audit partner s five-year term will end in 2019, in accordance with the FRC s Ethics Standard 3 (Revised); the change of the Group Finance Director during the year; The rationale for non-compliance reflects the importance we place on the period of transformational change the business is undergoing to become a predominantly biomassfired power station. The incumbent auditor has accumulated knowledge and experience that allows it to carry out effective and efficient audits during this period of change and provide insightful and informed challenge. In addition, to conduct a thorough competitive audit tender process would require substantial Board and management participation at a time when the transformation of the business is placing greatly increased demands on them. In coming to a recommendation the Committee considered how, notwithstanding its recommendation to defer putting the external audit contract out to tender, the Group would adhere to the principle of the Code to maintain an appropriate relationship with the auditor. The independence and the effectiveness of the external auditor are reviewed annually by the Committee and no weakening in the level of the auditor s scepticism or in its desire to challenge management s judgements and assumptions in relation to financial reporting has been noted. In addition, there is a well-established policy and fees paid to the external auditor for audit and non-audit services are reviewed at each Committee meeting, with gated authority to approve non-audit services without the Committee s approval. In the light of these policies and procedures, the Committee is satisfied that an appropriate relationship has been maintained with the auditor. (Drax Group plc) the upcoming change in the Chair of the Audit Committee; and the Audit Committee s assessment of the external auditor s effectiveness and independence. (Senior plc)

17 AUDIT COMMITTEE REPORTS 17 Disclosure on tender processes conducted in 2013 Several companies disclosed that they had put the external audit out to tender in The disclosures provided around tendering ranged from stating that a tender process had been performed and the results, to a description of the major considerations. Some examples of more descriptive disclosures provided around the tender process by those companies that did tender during the year are as follows. In 2013, the Board recommended to shareholders the appointment of KPMG LLP as external auditor to the Company. This followed a rigorous tender process, overseen and directed by the Committee in which five audit firms were invited to tender. The process included provision of detailed information, meetings and presentations to both management and the Committee. There were 29 members of management involved in meeting with the tendering firms and all evaluated the firms against selection criteria covering industry knowledge, people, audit approach, proactivity, organisational fit and coverage, customer focus and fees. Of the firms who tendered, two were invited to make formal presentations to the Committee. These presentations took the form of meetings at which proposed audit strategy including planning, scope and risk identification was presented, discussed and challenged. Following those meetings, the Committee recommended to the Board that the appointment of KPMG LLP be recommended to shareholders. (RSA Insurance Group plc) PwC, Ernst & Young and Deloitte were invited to tender their proposals. Firms in the next tier of audit firms were considered but as a result of the Group s geographical spread none of these firms were invited to participate. KPMG provides Man with internal audit services and was therefore excluded for independence reasons. The three participating firms were evaluated against set criteria in the following areas: Credentials and capabilities of the audit firm; Effectiveness of the lead partner and engagement team; Behaviour and deliverables; and Fees and terms. The process was led by the Committee and involved meetings with key Man personnel followed by the submission of written proposals. Presentations from each firm were then made to an external audit tender sub-committee who reported to the Committee. As part of this process the effectiveness of the external auditors was assessed and no concerns were raised. The Committee concluded to recommend the appointment of Deloitte on the basis of their experienced lead partner and audit team, their use of technology, their proposed transition process and the value added services identified in their proposal. In reaching this decision, the Committee had also considered the advantages and disadvantages of utilising one firm for both the corporate and fund audits. Although the efficiencies that would be derived from using one firm were recognised, the use of two firms was preferred on the basis of risk management and maintaining broader relationships. (Man Group plc)

18 18 AUDIT COMMITTEE REPORTS The Code also proposes an explanation of how auditor objectivity and independence is safeguarded if non-audit services are provided by the external auditor. Most reports explain that it is often advantageous to have the external auditor perform some non-audit work, particularly in respect of confidential matters, assurance related work, or work where their understanding of the company places them in a better position than other firms. Most reports also commented that the use of the external auditor was not prohibited, however, the decision on which firm to use would always be made with cost-effectiveness and practicality in mind. Only 1 company noted that non-audit work was prohibited to be performed by the external auditor. Two companies noted that the policy was generally not to appoint the external auditor to perform non-audit services, but did not rule this out if a business case existed. A further two noted that there were no non-audit services provided in the financial year being reported on. All of the other companies surveyed permitted their external auditor to provide nonaudit services. 5 of these did not provide any detail around the non-audit service fees or safeguards within the Audit Committee/Directors report. The most common safeguard in relation to auditor independence was a policy of formal approval required for non-audit services. Most companies went some way in explaining their policy towards approving non-audit services being performed by the external auditor, 13% noted that their policy was available on their website. 14% of those companies where non-audit services were allowed to be performed by the external auditor required approval by the Audit Committee in advance for every single piece of work. The majority (63%) disclosed that they used a pre-approval system, whereby Audit Committee approval was delegated to management below a certain fee threshold (85%), and/or certain service limits (27%). Fee thresholds for Audit Committee/Chair approval ranged from 10,000 to 200,000. Companies took different approaches to requiring Audit Committee approval when work requests were above the thresholds for pre-approval, as shown opposite top. A third of the reports reviewed stated that the Audit Committee reviews the audit and non-audit fees paid to the external auditors as part of monitoring their independence. Disclosures were also made in regards to the frequency of this review as shown opposite bottom. Financial reporting lab suggestions: A summary of the non-audit services policy is useful, although replication of full policy is not necessary and can be referenced to the website. Points of interest are: the approach to tendering for non-audit services; and pre-approval thresholds and criteria If any changes are made to the policy, these should be noted and described If a policy on recruiting from the external auditor exists, this should be disclosed Disclosure of a percentage or ratio of non-audit fees is useful, along with an explanation of why this is high (if applicable) Description beyond generic terms of the non-audit services provided is encouraged

19 AUDIT COMMITTEE DISCLOSURES SURVEY 19 Audit committee approval of non-audit services 40% Differing thresholds for audit committee chair and full audit committee approval 39% Full audit committee 21% Audit committee chair only Frequency of audit committee review of non-audit service fees 53% No comments in regards to frequency 14% Every meeting 15% Quarterly 8% Bi-annually 11% Annually

20 20 AUDIT COMMITTEE REPORTS The ACI Audit Committee Handbook contains an example policy on the provision of non-audit services by the external auditor, covering independence considerations, the approval process (including pre-approved services), prohibited services (Appendix 19 of the Handbook). 14% of those companies where nonaudit services were permitted also noted that they had a policy around tendering non-audit services. This ranged in detail from stating that if the fee was likely to be over 50K/ 100K then it would be put out to external tender; to a type of service always being tendered (ie tax or consulting); to stating that tendering is performed where appropriate. Some reports detailed the fees paid to other accounting firms for non-audit services in addition to disclosure around the fees paid to their external auditor. The Audit Committee considered that performance of the relevant non-audit services by Deloitte was the most cost-effective way of conducting the requisite work and therefore in the best interest of the Group having due regard to the competence and knowledge possessed by Deloitte. The Committee was also satisfied that no conflicts of interest existed or would arise in the conduct of the work on behalf of the Group. During the year a total of $2.91 million (2012: $3.27 million) was paid to other accounting firms for non-audit work, including $1.4 million for work in relation to tax advice to the Group provided by PricewaterhouseCoopers LLP, Ernst & Young and KPMG. (CSR plc) 8% of those companies where non-audit services were permitted also noted that they had a policy in regards to the recruitment of employees from the external auditor. This ranged from noting that they had a policy, to an explanation of the policy, for example stating that employees from the audit team could not be employed without a cooling off period of two years, and/or without Audit Committee approval, some examples of this are shown. Please see opposite middle and bottom. To safeguard the independence of the Company s external Auditor and the integrity of the audit process, the recruitment of senior employees from the Company s Auditor is not permitted for a period of at least two years after they cease to be involved in the provision of services to the Company. (Compass Group PLC) Further factors identified as contributing to external auditor objectivity and independence include the external auditor s retention of an impartial and questioning approach, particularly with respect to issues of heightened sensitivity, the firm s prudent attitude to the consideration and undertaking of nonaudit services and Shire s own principle of not recruiting staff directly from the external auditor engagement team. (Shire plc) 2014 KPMG LLP, a UK limited liability partnership, is a subsidiar y of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reser ved.

21 AUDIT COMMITTEE REPORTS 21 The services prohibited by the Policy include: book-keeping or other services related to the accounting records or financial statements financial information system design appraisal or valuation services where the results would be material to the financial statements internal audit outsourcing actuarial calculations management functions legal services forensic audit services temporary or permanent services as a director, officer or employee or performance of any decision-making, supervisory or monitoring function recruitment of senior management. (Standard Life plc) 31% of companies who permitted nonaudit services also provided detail of the types of services which were prohibited. See extract to the left. 10 companies stated that they applied a maximum non-audit to audit fee ratio. This ratio was 1:0.64, on average, with most companies stating a ratio of 1:0.5 or 1:1. The chart below shows the type of fee disclosure provided, which ranged from the level of non-audit fees, either as a total or by service type; disclosure of non-audit fees as a percentage of audit fees; a combination of these; or reference to the note to the financial statements which detailed the fees paid to the external auditors. Disclosure of non-audit service fee information Disclosure of non-audit fee amount and as Disclosure of Reference to financial a percentage non-audit fee amount statement note only of audit fees 43% 25% 5% 9% 18% Disclosure of non-audit fees as No disclosure in regards to a percentage/ratio of/to audit fees non-audit fees paid

22 22 AUDIT COMMITTEE REPORTS 21 companies provided additional detail in regards to the non-audit fees, most of these providing a table of the fees broken down by service type or individual engagement. TUI Travel PLC provided a table of individually significant non-audit engagements, which described the engagement, provided the fee and also provided an explanation of why the external auditor was selected to perform this work. This is shown to the right. 1RQ$XGLW6HUYLFHVt6LJQLåFDQW([SHQGLWXUH$XWKRULVHG Business Work Rationale for use of Area under taken the external auditor 000s Group Boeing Transaction: Detailed knowledge 850 Detailed analysis of the and understanding forecast trading results, of the business. cash and working capital requirements for the Group from 1 March 2013 to 30 September 2014 in support of the circular presented to shareholders as part SJEWMKRMäGERX'PEWW transaction. Germany COSO Operations: Won on competitive 420 Following on from the tender on the basis of ävwxwxekisjxli'373 their detailed knowledge TVSNIGXMIXLI*MRERGMEP and understanding of Reporting Category) the business. PwC will to assist the German support Ernst & Young business in developing )=MRWGSTMRKXLI[SVO the next stage of and collecting basic XLITVSNIGXMIXLI information relating to Operations Category). risk and controls, with EY responsible for ensuring independent review of the results and implementation SJXLITVSNIGX Group Functional Baseline Detailed knowledge and 270 Assessment: understanding of the Assist in gathering FYWMRIWWMXWSTIVEXMSREP data and identifying base and stakeholders), opportunities to reduce the requirements of costs and improve XLII\IVGMWILEZMRK performance across completed a similar Finance, HR and IT in exercise in 2007) and Mainstream and A&D. the travel market. (TUI Travel PLC )

23 AUDIT COMMITTEE REPORTS 23 Update on EU legislation on non-audit services: New EU legislation on non-audit services will come into effect from 17 June The list of prohibited non-audited services is more extensive than current regulations and introduces a non-audit services fee cap of 70% of the average audit fee over a consecutive 3 year period. This cap will come into effect after the 3 year period, so for most companies, on 17 June Some companies did add some disclosure around their level of non-audit service fees, in the case where the fee was considered high. This was a suggestion made in the Financial Reporting Lab report. Examples of this are shown below. Only 20% of the companies noted that they obtained a written confirmation of independence from the external auditor, although we expect in practice, all companies do receive this confirmation. Only 4 companies referred to the then provisional EU 70% non-audit services fees cap (which has now been approved). The Committee does acknowledge that this year the non-audit fees are higher than in previous years. This is principally due to the significant work related to the Company s IPO, where it was felt that KPMG were best positioned to provide the services, without compromising their independence, given their overall understanding of the business, and appropriate segregation was put in place to avoid compromising their independence. The Committee recognises this is an exceptional item and expects the fees spent on non-audit services with KPMG to return to more normalised levels. (Crest Nicholson Holdings plc) The level of non-audit fee awarded to EY is considerably higher in 2013 than would normally be the case, as shown in the table opposite. In conjunction with the CFO, the audit committee chairman approved the services of EY to undertake and support management s due diligence work for the proposed acquisition of Foster Wheeler. The substantial due diligence performed by EY primarily covered the balance sheet, profit & loss, accounting policies, revenues, provisions, liabilities, general accounting, tax, corporate finance and differences between US GAAP and IFRS. The decision to appoint EY to undertake this work was considered by the audit committee to be in the best interest of shareholders. The firm has a deep understanding of AMEC, placing them at a distinct advantage to support the board in this regard. In addition, should the proposed acquisition be successful, a sizeable portion of the work performed by EY will not have to be repeated, thereby making the most efficient and economic use of shareholders funds. (AMEC plc)

24 24 AUDIT COMMITTEE DISCLOSURES SURVEY The companies included in this survey were as follows: 888 Holdings plc Aberdeen Asset Management PLC Aberforth Smaller Companies Trust plc Admiral Group plc Afren plc African Barrick Gold plc Aggreko plc Al Noor Hospitals Group Plc Alent plc Alliance Trust PLC AMEC plc Amlin plc Anglo American plc Antofagasta plc ARM Holdings plc Ashmore Group Plc AstraZeneca PLC Aviva plc AZ Electronic Materials S.A BAE Systems plc Balfour Beatty plc Bank of Georgia Holdings PLC Barclays PLC BBA Aviation plc Beazley plc Berendsen plc BG Group plc BH Global Limited BH Macro Limited BlackRock World Mining Trust plc Bodycote plc Bovis Homes Group PLC BP p.l.c Brewin Dolphin Holdings PLC British American Tobacco p.l.c British Empire Securities & General Trust PLC British Sky Broadcasting Group plc Britvic plc Bunzl plc bwin.party digital entertainment plc Cairn Energy PLC Capita plc Capital & Counties Properties PLC Carillion plc Carnival plc Catlin Group Limited Centrica plc Cobham plc Coca-Cola Hellenic Bottling Company S.A. Colt Group S.A. Compass Group PLC Computacenter Plc Countrywide plc Crest Nicholson Holdings plc CRH plc Croda International Plc CSR plc Derwent London plc Devro plc Dignity plc Diploma plc Direct Line Insurance Group plc Domino Printing Sciences Plc Domino s Pizza Group plc Drax Group plc easyjet Plc Electra Private Equity plc Elementis plc EnQuest PLC Enterprise Inns plc Essentra plc esure Group plc Euromoney Institutional Investor PLC EVRAZ plc F&C Asset Management plc F&C Commercial Property Trust Limited Ferrexpo plc Fidelity European Values PLC Fidessa group plc Foreign & Colonial Investment Trust PLC Foxtons Group plc Fresnillo plc G4S plc GKN plc GlaxoSmithKline plc Glencore plc Grafton Group plc Grainger Plc Greencore Group plc Hammerson plc Hansteen Holdings PLC HellermannTyton Group plc Henderson Group plc Herald Investment Trust plc Hikma Pharmaceuticals PLC Hiscox Ltd Howden Joinery Group Plc HSBC Holdings plc Hunting PLC IMI plc Imperial Tobacco plc Inchcape plc Inmarsat plc InterContinental Hotels Group PLC International Airlines Group International Personal Finance plc International Public Partnerships Limited Interserve Plc Intertek Group plc Intu Properties plc IP Group plc ITE Group plc ITV plc James Fisher and Sons Plc Jardine Lloyd Thomson Group plc John Laing Infrastructure Fund Limited John Wood Group PLC JPMorgan American Investment Trust plc Jupiter Fund Management plc Kazakhmys PLC Keller Group plc

25 AUDIT COMMITTEE REPORTS 25 Kenmare Resources plc Kentz Corporation Limited Kingfisher plc Ladbrokes plc Laird PLC Lancashire Holdings Limited Law Debenture Corporation p.l.c Legal & General Group Plc Lloyds Banking Group plc Lonmin plc Man Group plc Marston s PLC Meggitt PLC Melrose Industries PLC Merlin Entertainments S.à r.l. Michael Page International plc Millennium & Copthorne Hotels plc Mitchells & Butlers plc Mondi plc MoneySupermarket.com Group PLC Morgan Advanced Materials plc Murray International Trust PLC National Express Group PLC NB Global Floating Rate Income Fund Limited NEXT plc NMC Health plc Ocado Group plc Old Mutual plc Ophir Energy plc Pace plc Paragon Group of Companies plc Partnership Assurance Group plc Pearson Plc Perform Group plc Persimmon Plc Petrofac Limited Phoenix Group Holdings Playtech Limited Polymetal International plc Premier Oil plc Provident Financial plc Prudential Plc Randgold Resources Limited Rathbone Brothers Plc Reckitt Benckiser Group Plc Reed Elsevier PLC Regus plc Rentokil Initial plc Resolution Limited Rexam PLC Rightmove Plc Rio Tinto plc RIT Capital Partners plc Riverstone Energy Limited Rolls-Royce Holdings plc Rotork plc Royal Dutch Shell plc RPS Group Plc RSA Insurance Group plc Sage Group plc Savills plc Schroders plc SEGRO plc Senior plc Serco Group plc Shaftesbury PLC Shire plc SIG plc Smith & Nephew plc SOCO International plc Spectris plc Spirax-Sarco Engineering plc St. Modwen Properties PLC St.James s Place plc Standard Chartered PLC Standard Life plc SVG Capital plc Synthomer plc Taylor Wimpey plc Telecity Group plc Temple Bar Investment Trust PLC Tesco PLC The Bankers Investment Trust PLC The Merchants Trust PLC The Restaurant Group plc The Royal Bank of Scotland plc The Scottish Investment Trust PLC The Weir Group PLC Thomas Cook Group PLC Travis Perkins plc TUI Travel PLC Tullett Prebon plc Tullow Oil plc UBM plc UDG Healthcare plc UK Commercial Property Trust Ultra Electronics Holdings plc Unilever PLC Vesuvius plc Victrex plc Vodafone Group Plc Whitbread PLC William Hill PLC Witan Investment Trust plc Wm Morrison Supermarkets PLC Xaar plc

26 26 AUDIT COMMITTEE REPORTS

27 AUDIT COMMITTEE REPORTS 27 Audit committee statements within the annual report are a rapidly developing area and it will be interesting to see the extent to which companies embrace the enhanced disclosures as time moves forward. The new disclosures present a real opportunity to close the information gap and provide investors with greater understanding as to whether the audit committee is providing sufficient oversight over the matters they themselves perceive to be important. However, this is the start of a journey and its success is dependent on both board directors and the investment community engaging in a frank and robust dialogue about investors needs and how the information will be used. Timothy Copnell UK Audit Committee Institute 2014 KPMG LLP, a UK limited liability partnership, is a subsidiar y of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reser ved.

28 kpmg.co.uk/aci Read more: AUDIT COMMITTEE INSTITUTE Audit Committee Handbook kpmg.co.uk/aci AUDIT COMMITTEE INSTITUTE Audit committees and auditors reports A survey of December year-ends under the new reporting May 2014 Contact us If you would like further information on our survey, please talk to your usual KPMG contact or contact: Timothy Copnell UK Audit Committee Institute Tel: tim.copnell@kpmg.co.uk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. OLIVER for KPMG OM022607A August 2014