Audit committee

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INTRODUCTION FROM THE CHAIR OF THE AUDIT COMMITTEE

It is perhaps to be expected that the work of Audit Committees will receive more focus and attention this year than ever before. Trust in financial reporting, and the governance and internal controls that sit behind it, has been tested. It is therefore important for Audit Committees to demonstrate that they have successfully monitored the integrity of financial statements and presented them in a fair, balanced and understandable way. Our Audit Committee report for 2017 is prepared on that basis.

Without financial integrity and robust financial controls, Howdens would be unable to operate. Nor would we be able to support the extensive network of stakeholders that rely on us. This includes our builder customers, our shareholders, our employees, our pensioners, and our suppliers. With such a large reach, Howdens has a responsibility to achieve sustainable success in line with our culture and values and to continue to operate for many years to come.

Sustainable success can only be achieved if proper protection against financial loss and appropriate mitigation of risk is built into our processes. This protection has been realised using a framework of internal controls and risk management, the effectiveness of which requires continual monitoring and improvement.

The Audit Committee are committed to providing assurance on the principal risks of the business (as detailed on pages 30 to 32 of the 2017 Annual Report) through delivery of the Internal Audit Plan. The Internal Audit Plan is regularly reviewed to ensure assurance activity is aligned to the most significant risks facing the business. In additional to providing the Board with assurance on the principal risks, the Internal Audit Programme provides assurance on key business risks and change programme risks. This ensures that the Board receives assurance on the broadest spectrum of risks that could have an impact on the outlook provided within the viability statement.

Review of the internal controls and risk is supported by the Group's internal audit and risk function. An independent review of the function was carried out by Grant Thornton during the year in line with the Committee's policy to perform a review every five years (further information about which may be found on page 90 of the 2017 Annual Report). The Audit Committee was encouraged to note that the review described the internal audit and risk function as 'a valued and independent voice in the business'.

The work of the Audit Committee in reviewing the Company's financial statements is supported by our independent external auditors, Deloitte LLP (Deloitte). Deloitte has been the Company's auditors since 2002 (when the external audit was last tendered). Their effectiveness and independence have been closely monitored by the Audit Committee to ensure a perceptive, robust and objective audit is always undertaken. Following the appointment of a new lead audit partner this year, which provided further confidence of Deloitte's continued independence, the Audit Committee are pleased to recommend that our shareholders reappoint Deloitte as the external auditor at our AGM on 2 May 2018.

During 2018, the Committee will continue to ensure that the Group's financial systems provide accurate and up-to-date information, that the Group's published financial statements represent a true and fair reflection of this position and that the external audit an internal control frameworks are independent and effective.

MEETING ATTENDANCE

The figures below show the number of meetings individual Directors that served on the Audit Committee during the year could have attended (taking account of eligibility, appointment and retirement dates during the year) and the percentage of those meetings they actually attended.

The Chairman of the Board, along with the Chief Executive Officer, Deputy Chief Executive and Chief Financial Officer, Group Finance Director, Head of Internal Audit and Risk, the Chief Information Officer, representatives from the Finance function and senior representatives of the external auditors, are regularly invited by the Committee Chairman to attend all or part of our meetings as and when appropriate. The Committee, however, reserves the right to request any non-members withdraw from any meeting at any time.

The Committee meets at least three times a year and at any other time the Chairman of the Committee requires it.

Meeting Attendance

FINANCIAL REPORTING

Role of the Audit Committee:

  • Monitors the integrity of the financial statements of the Group and formal announcements relating to the Group's financial performance
  • Reviews accounting policies and significant financial reporting judgements contained in financial statements or announcements (although the Board as a whole remains responsible for determining whether the Annual Reports and Accounts as a whole are fair, balanced and understandable)
  • Ensures that information provided to the Committee by the senior management and the external auditor is complete, accurate, timely and robust
  • Reviews the going concern report and the report on the longer-term viability of the business, prior to consideration by the Board

Supporting actions, processes and information:

COMMITTEE ACTIONS

Areas of Signififificant Financial Judgement

The Committee needs to exercise its judgement in deciding the areas of accounting that are significant to the Group's accounts and the external auditor reports detailed results of their procedures in relation to these significant areas to the Committee.

The matters shown below have been discussed with the Deputy Chief Executive & Chief Financial Officer, Group Finance Director and the external auditor, and the Committee is satisfied that each of the matters has been fully and adequately addressed by the Executive Committee, appropriately tested and reviewed by the external auditor and the disclosures made in the Annual Report and Accounts are appropriate.

Inventory obsolescence provisioning
Validity of the actuarial assumptions
Recognition of revenue (presumed risk)
Capitalisation of fixed assets
 
Area of significant financial judgement in 2017 guide Area of significant financial judgement in 2017   Area of significant financial judgement in 2016 guide Area of significant financial judgement in 2016

2017 Areas of significant financial judgement

Inventory obsolescence provisioning

The Group's in stock model (further information about which may be found on page 16 of the 2017 Annual Report) necessitates tight management of our inventory to ensure local availability of stock while at the same time minimising obsolescence and wastage. This is particularly significant in light of the number of new kitchen ranges introduced during the year.

The Committee reviewed the results of stock counts and the processes used to value inventory, including the assumptions behind obsolescence provisions.

The external auditor provided reports to the Committee which considered the appropriateness of provisions held against the carrying value of inventory, while also having regard to the age of discontinued lines and volumes of continuing lines relative to the expected usage and the levels of historical write offs.

Validity of the actuarial assumptions

The net deficit of the Group's defined benefit pension scheme has remained in line with the prior year reflecting the fall in the discount rate offset by the Company's contributions and better than expected return on assets. The Committee carefully considered:

  • whether the actuarial assumptions, and in particular the mortality assumptions, applied were appropriate; and
  • the views of the external auditors. The Committee also met with the Group's external actuaries and considered their recommendations.

Recognition of revenue (presumed risk)

In accordance with ISA240, there is a presumed fraud risk with regard to revenue recognition.

2016 Area of significant financial judgement

Capitalisation of fixed assets

The capitalisation of fixed assets is no longer considered to be an area of significant financial judgement. It continues to include inherent judgement but to a lesser degree than the areas of significant financial judgement. The change in significance is as a result of the changing nature of capital expenditure in the business's supply division.

Annual Report and Half Year Financial Report

FRC Review of the 2016 Annual Report and Accounts

The Conduct Committee of the FRC carried out a review of the Company's Report and Accounts for the 52 weeks ended 24 December 2016.

Based on their review, the Conduct Committee did not have any questions or queries to raise with the Company which required a response and did not intend to take any further action in relation to the accounts.

Audit Committee Review

The Audit Committee reviewed the Group's 2017 Annual Report and Accounts and the half-yearly financial report published in July 2017.

As part of this review, the Committee received a report from Deloitte on their audit of the Annual Report and Accounts and review of the half-yearly financial report which took into account the Group's key risks, going concern considerations and longer-term viability.

The Committee also considered whether the Annual Report and Accounts were fair, balanced and understandable.

Financial controls

The effectiveness of the Group's internal financial controls (with specific reference to controls in place on a divisional basis) and the disclosures made in the Annual Report and Accounts on this matter were reviewed by the Audit Committee.

EXTERNAL AUDIT

Role of the Audit Committee:

  • Makes recommendations to the Board in relation to the appointment of the external auditor and approving the remuneration and terms of engagement of the external auditor
  • Reviews and monitors the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements
  • Reviews the external auditor's audit plans and Audit Committee reports
  • Develops, implements and monitors the policy on the engagement of the external auditor to supply non-audit services, taking into account relevant legislation and ethical guidance regarding the provision of non-audit services by the external audit firm

Supporting actions, processes and information:

EXTERNAL AUDITOR

External auditor: Deloitte LLP (‘Deloitte')
External auditor tenure: 15 years
Latest a new external auditor will be engaged*: 2022
Lead audit partner: Claire Faulkner
Lead audit partner tenure: 1 year (of a 5 year cycle)

The information in the table above was correct at 30 December 2017.

*Further information about external auditor tender plans may be found on page 89 of the 2017 Annual Report.

Auditor Effectiveness

To assess the effectiveness of the external auditor, the Committee reviewed:

  • The proposed plan of work presented by the external auditor, including audit risks, materiality, terms of engagement and fees prior to commencement of the 2017 audit
  • The external auditor's fulfilment of the agreed audit plan and any variations from the plan
  • Perceptions and professional scepticism of the external auditor and audit process from key management personnel in the finance function
  • Robustness and perceptiveness of the auditor in their handling of the key accounting and audit judgements
  • Internal control and risk content of the external auditor's report

Audit Quality Review

The FRC's Audit Quality Review team (AQR team) selected Deloitte's 2016 audit of the Group's financial statements as part of their 2017/18 annual inspection of audit firms.

The Committee was pleased to note that there were no findings raised following the FRC's assessment of the audit.

Auditor Independence

Auditor independence is an essential part of the audit framework and the assurance it provides. The Committee therefore undertook a comprehensive review of auditor independence during 2017, which included:

  • A review of the independence of the external auditor and the arrangements which they have in place to identify, report and manage conflicts of interest
  • Consideration of the effectiveness of the external auditor through a review of their plan of work and the outputs arising from the audit
  • A review of the changes in key external audit staff for the current year and the arrangements for the day-to-day management of the audit relationship
  • Consideration of the overall extent of non-audit services provided by the external auditor, in addition to case-by-case approval of the provision of non-audit services as appropriate
  • Deliberation of the likelihood of a withdrawal of the auditor from the market and note taken of the fact that there are no contractual obligations to restrict the choice of external auditor

At the year end, the external auditor formally confirmed that their independence and objectivity had been maintained.

Policy for non-audit services provided by the external Auditor

The main aims of this policy are to:

  • Ensure the independence of the auditor in performing the statutory audit; and
  • Avoid any conflict of interest by clearly detailing the types of work that the auditor can and cannot undertake.

The Audit Committee reviewed and updated the policy for nonaudit services in 2016 to bring it into line with the amended FRC ethical standards and UK Corporate Governance Code.

The regulation substantially limits the non-audit services which can be provided by auditor. The key changes to the policy included:

  • The introduction of a 70% cap of the value of the audit fee for all non-audit services calculated on a rolling three-year basis.
  • The inclusion of the following services as categories that are prohibited from being carried out by the auditor:
    • tax calculation services as one of the category of services upon which is prohibited
    • actuarial valuation services

The policy specifies the type of non-audit work that the auditor may be engaged in without the matter first being referred to the Audit Committee, which considers each referral on a case-bycase basis.

The policy aims to ensure that in providing non-audit services the auditor does not audit its own work or make management decisions for the Company or any of its subsidiaries. The policy also clarifies responsibilities for the agreement of fees payable for non-audit work.

External auditor fees

All relevant fees proposed by the external auditor must be reported to and approved by the Audit Committee.

Details of the total fees, including non-audit fees, paid during the year to Deloitte are set out in the chart below and in note 6 to the consolidated financial statements.

Non-audit services were provided in relation the review of the Interim Report.

The Audit Committee also has a policy in relation to the employment of former members of the external audit team.

External audit tender

As reported in last year's Annual Report, the Audit Committee has decided that it will engage a new external auditor no later than 2022 (following the conclusion of the current five-year lead audit partner cycle). The Committee will keep the need to retender the external audit under review until this time.

In coming to this decision, the Audit Committee considered the transitional arrangements published by the Department of Business, Energy & Industrial Strategy in 2015, which provide that the Company cannot renew Deloitte's appointment as external auditor beyond June 2023, given it has been the external auditor for over eleven years but less than twenty years.

The Committee also considered the UK Corporate Governance Code and the FRC's Guidance on Audit Committees, which provide that the external audit should be re-tendered at least every ten years and that this process should fit in with the lead audit partner five-year rotation.

Deloitte has expressed their willingness to continue in office as auditor and the Committee has unanimously recommended to the Board that a proposal to reappoint them as auditor and to authorise the Directors to fix their remuneration is put to the shareholders at the Annual General Meeting in 2018.

CONTROLS AND INTERNAL AUDIT

Role of the Audit Committee:

  • Monitors the Group's internal financial controls throughout the year
  • Reviews the Group's financial risk management processes, systems and reports (although the Board as a whole remains responsible for overseeing the overall risk profile of the business)
  • Oversees the effectiveness of the Group's Internal Audit function and ensures that its findings are used effectively

Supporting actions, processes and information:

COMMITTEE ACTIONS

Internal Audit

During the year, the Committee reviewed:

  • Internal Audit's programme of work and resources
  • Results of key audits and other significant findings including the adequacy and timeliness of management's response (see Case Study on Product Safety and Recall on page 92 of the 2017 Annual Report)
  • The level and nature of assurance activity performed by Internal Audit
  • Staffing, reporting and effectiveness of divisional audit

Fraud Risk

The Committee considered the controls in place to mitigate fraud risk.

Divisional Controls

Senior management from the business were invited to discuss the controls in their business areas. The Director of Commercial Finance and Head of Compliance of the Trade division gave presentations on the control environments in their area.

An update on the IT control environment was presented by the Chief Information Officer. Updates on cyber security and the General Data Protection Regulation were also provided by the Head of Information Systems Security and Group Counsel.

Independent Assurance

The Committee assessed the coverage of independent assurance by reviewing the Group assurance map and reviewed the business continuity management provisions.

WHISTLEBLOWING POLICY

The Group's whistleblowing policy contains arrangements for all our employees to have access to a confidential outsourced service, which allows calls and emails to be received in multiple languages, 24 hours a day. The policy will be reviewed by the Committee in 2018.

Complaints on accounting, risk issues, internal controls, auditing issues and related matters are reported to the Audit Committee as appropriate. In 2017, The Committee received a report on the activity reported under the Group's whistleblowing policy and the issues raised and investigated under this policy were formally reviewed by the Committee.

INDEPENDENT REVIEW OF THE INTERNAL AUDIT AND RISK FUNCTION

An independent review of the Internal Audit and Risk function was carried out by Grant Thornton during the year (in line with the Audit Committee's policy to perform an external review of the functions every five years) to assess its effectiveness and to ensure it was meeting Audit Committee and Board expectations.

The overall conclusion from the review was that the function was widely valued within the business as an independent voice, giving an early view of emerging risks and committed to helping the business to further improve.

In keeping with the overall business culture, the review also concluded that the function demonstrated energy and drive in its work and supported continuous improvement within the business. While this has led to more challenging audits - particularly where they address Group-wide themes - management recognised the usefulness and value of the function's work.

The audit plan's coverage of business risks was also assessed as good, with a mix of audits that either added or preserved value. The risk framework itself was well-developed with regular consultation within the business regarding risks and a good mix of top-down and bottom-up risk consideration in place. The underlying methodology and quality of audit work of the team was assessed to be appropriate.

 

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