The external auditors presented a detailed audit plan to the Committee, setting out their analysis of significant audit risks and key judgemental accounting matters, which would inform their planned scope and approach to the current year audit. For the year ended 30 April 2016, the most significant risks identified were in relation to provisioning for insurance claims, taxation, exceptional items, pensions accounting and the Twin America impairment assessment, based on the inherent level of management judgement required in these areas. These risks are monitored through the year and the Committee challenged the work done
by the auditors to test management’s assumptions and estimates.
Private meetings were held with the external auditors at each Committee meeting without the presence of management. The Committee Chairman also holds meetings with the external auditors between Committee meetings. The Audit Committee has responsibility delegated from the Board for making recommendations on the appointment, reappointment, removal and remuneration of the external auditors. There have been no instances of disagreements between the Board and the Audit Committee relating to the external auditors.
Subject to the annual appointment of auditors by the shareholders, the Audit Committee conducts a continuous review of the relationship between the Group and the auditors. This review includes:
- the consideration of audit fees that should be paid and advance approval of any other fees in excess of £50,000 per annum which are payable to auditors or affiliated firms in respect of non-audit activities;
- the consideration of the auditors’ independence and objectivity;
- the nature and scope of the external audit and the arrangements which have been made to ensure co-ordination where more than one audit firm or offices of the same firm are involved; and
- discussions on such issues as compliance with accounting standards.
The Committee formally assesses the effectiveness of the external audit process on an annual basis in the context of the wider assurance processes across the Group. As well as undertaking its own assessment of the audit effectiveness, the Committee also considers the views of a number of finance managers from various parts of the Group. The auditor assessment questionnaire is completed on an annual basis and examines three main performance criteria – robustness of the audit process, quality of delivery and quality of people and service. This assessment also includes consideration of the auditors’ independence and objectivity, taking into account relevant laws, regulations and professional requirements. The assessment involves considering all relationships between the Group and the auditors, including the nature and quantum of non-audit services. Assurances are obtained from the auditors that they and their staff have no financial, business, employment, family or other personal relationship with the Group that could affect the auditor’s independence and objectivity, taking account of relevant ethical standards. The auditors explain to the Audit Committee their policies and processes for maintaining independence and monitoring compliance with relevant requirements.
PricewaterhouseCoopers has been the Group’s external auditor since 2002. Until recently, the audit partner was Graham McGregor and the year ended 30 April 2016 was the fifth consecutive financial year that Graham acted as the audit partner. Martin Cowie, who was involved throughout the 2016 audit, recently became the lead audit partner and signed the auditors’ reports. As disclosed in last year’s Annual Report, the Audit Committee confirmed at its April 2015 meeting its intention to conduct a formal tender process prior to 1 May 2016. Deloitte has managed the Risk Assurance Function since 2002, which was also the last year an internal audit tender was conducted, and as a matter of good corporate governance practice, the Committee decided to formally tender this function in conjunction with the external audit tender.
The Audit Committee issued an initial Request for Information questionnaire (“RFI”) in August 2015 to parties wishing to tender for the Group’s external audit and/or internal audit. An audit tender panel (the “AT panel”) was established, comprised of the Audit Committee Chairman, the Group Finance Director and the Group Financial Controller. The AT panel reviewed the responses to the RFI and created a shortlist to take part in the Request for Proposal stage. Each member of the AT panel had separate meetings with each of the shortlisted bidders in advance of the proposals being submitted. All shortlisted bidders were invited to present to the Audit Committee in December 2015.
The presentations provided the opportunity for detailed discussion and rigorous evaluation of the firms. In determining who to recommend to appoint for each role, the Audit Committee took into account a number of factors. These included, but were not limited to, the experience of the firms particularly in the listed company environment and their knowledge of the transport industry, to inform which firms would provide the best quality and most effective audits.
Having concluded the process in January 2016, the Committee recommended to the Board that Ernst & Young be appointed as the Group’s statutory auditor for the financial year ending 30 April 2017. It also recommended that PricewaterhouseCoopers be appointed to manage the Group’s Risk Assurance Function. The Board accepted these recommendations and, accordingly, a resolution proposing the appointment of Ernst & Young as the Group’s new statutory auditor will be put to the shareholders at the 2016 Annual General Meeting. The Audit Committee and Ernst & Young plan that the audit partner will be Mark Harvey. We expect that PricewaterhouseCoopers will be formally appointed to manage the Group Risk Assurance Function from August 2016.
The Group has complied with the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibility) Order 2014 during the year. The Committee considered the audit fee of £0.9 (2015: £0.8m) for PricewaterhouseCoopers LLP appropriate and concluded that an effective audit can be conducted for such a fee.
Procedures in respect of other services provided by the auditors are in place to safeguard audit objectivity and independence. The Group’s current policies on non-audit services are:
- General – The auditors are not permitted to provided any non-audit services that they would be prohibited by law from providing due to either the nature of the services or the level of the fee for the services.
- Audit related services – These are services that the auditors must undertake or are best placed to undertake by virtue of their role as auditors. Such services include formalities relating to bank financing, regulatory reports, and certain shareholder circulars. The auditors would generally provide all such services.
- Tax consulting – It is the Group’s policy to select the advisor for each specific piece of tax consulting work who has the most appropriate skills and experience for the work required. The Group uses a range of advisors for tax consulting, including the auditors where they are best suited to the work being undertaken.
- General consulting – For other consulting work, the Group will select an advisor after taking account of the skills and experience required and the expected cost of the work. The Group uses a range of advisors for general consulting, including the auditors where they are best suited to the work being undertaken.
- The auditors are only permitted to provide non-audit services to the Group when the Audit Committee and the auditors are satisfied that there are no circumstances that would lead to a threat to the audit team’s independence or a conflict of interest that could not be effectively safeguarded.
In addition to the audit fee, PricewaterhouseCoopers LLP received non-audit related fees of £0.1m (2015: £0.1m), which equate to 19.2% (2015: 12.1%) of the audit fee and further details of which can be found in note 3 of the consolidated financial statements.
The Committee believes that the level and scope of non-audit services does not impair the objectivity of the auditors and that there is a clear benefit obtained from using professional advisors who have a good understanding of the Group’s operations. Other accounting or consulting firms have been used where the Group recognises them as having particular areas of expertise or where potential conflicts of interest for the auditors are identified. The Committee will, however, of course review its policy on non-audit services from time to time, to ensure continued compliance with laws and regulations, including European Union legislation.
In May 2014, the European Commission published a directive amending the Statutory Audit Directive and a new Audit Regulation. The new Audit Regulation has the direct effect of law and European Union member states, including the UK, are required to adopt provisions to ensure its effective application. The new Audit Regulation stipulates that a statutory auditor of a public-interest entity, which would include the Company, shall not provide certain non-audit services to that entity, its parent undertaking and/or its subsidiary undertakings within the European Union. The Company’s auditors will therefore be prohibited from providing certain non-audit services to the Group that are not currently prohibited. The new requirements shall first apply to the Group in respect of its financial year ending 30 April 2018. The Financial Reporting Council is consulting on the implementation of the Statutory Audit Directive and the new Audit Regulation in the UK. The Audit Committee will continue to oversee the Group’s compliance with laws and regulations in this area and will update its policies to reflect developments in laws and regulations.