Dear fellow shareholder

As Chairman of the Audit Committee, I would like to present our report detailing the role and responsibilities of the Committee and its activities during the year.

The Committee aims to protect the interests of shareholders by:

  • Assisting the Board in ensuring the integrity of the financial and corporate reporting and auditing processes
  • Ensuring effective internal control and risk management systems are in place
  • Assisting the Board to present a fair, balanced and understandable assessment of the Group position and prospects in the Annual Report and Accounts
  • Approving the remit of the Internal Audit function and reviewing its effectiveness and findings
  • Ensuring that an appropriate relationship is maintained between the Group and its Auditor including the recommendation to approve the Auditor's appointment and fees
  • Reviewing the scope and effectiveness of the external audit process
  • Reviewing whistleblowing, anti-bribery and fraud procedures

Specific objectives achieved during the year

During the year, one of our main objectives was to ensure the orderly transition from KPMG to PricewaterhouseCoopers (PwC), our new Auditor. The Committee, including myself, along with the Group Finance Director, have worked together with the Group Finance team to embed the PwC audit approach in order to achieve a high quality audit for this financial year. We would also like to thank KPMG for their professionalism during the transition.

As a result of the external Board evaluation carried out during the last financial year we continue to review the processes for monitoring the Group performance against strategic targets and milestones. Internal control has continued to be a priority for the Committee, and the Group as a whole. This year's Board/Committee evaluation particularly noted the Board/Committee's confidence in the effectiveness of the Internal Audit team.

Specific objectives for the coming year

In addition to maintaining a sound system of internal control, the Committee has agreed on a number of specific objectives for the coming year. With the global roll-out of a SAP-based system, the Group is able to benefit from placing greater reliance on standardised automated controls. As a result we will focus on ensuring that appropriate processes are in place for the review and utilisation of automated controls, including IT user access rights. We will continue to focus on cyber risk.

Noting the changes to the UK Corporate Governance Code and associated guidance relating to the viability statement and corporate risk management respectively, the Committee is considering the implications for the business.

We will also continue to move forward with integrated reporting, with the aim to provide our shareholders with a good understanding of the business and how we operate.

On behalf of the Committee, I would like to thank everyone for their hard work over the year, including PwC as our Auditor, and the Internal Audit and Group Finance teams.

Paul Hollingworth
Chairman of the Audit Committee
21 May 2015

Main activities of the Audit Committee for the year ended 31 March 2015

Review of
financial statements
  • Draft Preliminary Statement and Annual Report and Accounts
  • Group Finance procedures, disclosures and management representation letter
  • Going Concern review
  • Fair, balanced and understandable criteria
  • Significant areas of accounting estimates/judgements
  • Auditor's highlights memorandum
  • Interim Management Statement
  • Draft 2015 Half-year financial report
  • Auditor's highlights memorandum
  • Going Concern review
  • Group Finance procedures, disclosures and management representation letter
  • Impacts of changes in accounting on the financial results.
  • Interim Management Statement
  • Accounting Standards, issues and year-end reporting
  • Accounting update
  • Stock provisions assumptions and historical data
  • Review of current accounting treatments (including vendor rebates)
Risk &
internal control
  • Business continuity update
  • Internal Audit report (including Fraud report)
  • Risk and Control review
  • Review of Internal Audit Performance (without Internal Audit)
  • Internal Audit report (including Fraud report)
  • Meeting with Head of Internal Audit (without executive management)
  • Internal Audit report (including Fraud report)
  • Internal Audit plan for 2016
  • Internal Audit report (including Fraud report)
  • Audit transition planning
  • Review of audit fees
  • Review of Auditor's Audit Strategy
  • Review of non-audit fees
  • Auditor fees
  • Review of non-audit fees
  • Review of IT controls and environment
  • Review of non-audit fees
  • Review of whistleblowing procedures
  • Meeting with the External Auditor (without executive management)
  • Non-audit fees as a policy (including update on EU legislation and policy approval)
  • Audit Committee timetable
  • Audit Committee evaluation
  • Review of whistleblowing procedures
Membership and meetings

Committee members
Paul Hollingworth (Chairman)
Adrian Auer (up to 30 June 2014)
Karen Guerra
John Pattullo
Rupert Soames

Other regular attendees
Company Chairman
Group Chief Executive
Group Finance Director
Company Secretary
Group Financial Controller
Head of Internal Audit
Group Risk Manager

The Board is satisfied that the Chairman of the Committee has the current and relevant financial and accounting experience required by the provisions of the Code and that the other members of the Committee have a sufficiently wide range of business experience and expertise such that the Committee can effectively fulfil its responsibilities. Details of the skills and experience of the Committee members are given in their biographies on the Board of Directors page.

Attendance of others is at the invitation of the Committee Chairman only and does not restrict the Committee's independent decision-making.

Meetings are scheduled in accordance with the financial and reporting cycles of the Company and generally take place prior to Board meetings to ensure effectiveness of the collaboration with the Board.

Members and their attendance at meetings during the year are set out in the Corporate Governance report.

The Committee has independent access to the Internal Audit team and to the Auditor. The Head of Internal Audit and the Auditor have direct access to the Chairman of the Committee outside formal Committee meetings.

Minutes of each Committee meeting are provided to Board members.

Activities during the year

Financial reporting

The primary role of the Committee in relation to financial reporting is to review, with both management and the Auditor, the annual and half-year financial reports. The Committee focuses on, amongst other matters:

  • The quality and acceptability of accounting policies and practices
  • The clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements
  • Material areas in which significant judgements have been applied or there has been discussion with the Auditor
  • Whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable

As part of the annual and half-year financial reports approval process, the Committee met with the External Auditor. During this exercise the Committee considered the key audit risks identified as being significant to the accounts for the year ended 31 March 2015 and the most appropriate treatment and disclosures of any new or judgemental matters identified during the audit and half-year review, as well as any recommendations or observations made by the Auditor. The primary areas of judgement considered by the Committee in relation to the key financial matters for the year under review and how these were addressed are set out in the Audit Commitee report.

To support its review, regular reports are also received from the Group Finance Director and the Group Financial Controller.

Details of the Group's KPIs are shown in the Key Performance Indicators.

Fair, balanced and understandable

In its financial reporting to shareholders and other interested parties, the Board aims to present a fair, balanced and understandable assessment of the Group's position and prospects, providing necessary information for shareholders to assess the Group's business model, strategy and performance. For the year ended 31 March 2014 the Group introduced a new process for reviewing the Annual Report and Accounts to ensure that they were fair, balanced and understandable. The process was used again this year. It included:

  • A thorough understanding of the regulatory requirements for the Annual Report and Accounts
  • A draft copy provided to the Committee early in the drafting process to assess the broad direction and key messages, with a further draft provided prior to sign-off of the Annual Report and Accounts
  • A cascaded sign-off across the Group to determine the accuracy and consistency of the data and language
  • A detailed review by all appropriate parties including the external advisers

A checklist of all the elements of the process was completed to document the process and presented to the Committee for review to provide assurance that the appropriate procedures had been undertaken.

The Committee has reviewed the Group's Annual Report and Accounts for the year ended 31 March 2015 and has advised the Board that, in its opinion, the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary to assess the Group's performance, business model and strategy.

Significant accounting issues and areas of judgement

The Committee focuses in particular on key accounting policies and practices adopted by the Group and any significant areas of judgement that may materially impact reported results as well as the clarity of disclosures, compliance with financial reporting standards and the relevant requirements around financial and governance reporting.

Details on accounting policies and areas of judgement can be found in the Notes to the accounts.

Significant accounting issues and areas of judgement considered by the Committee during the year, and how these were addressed, are set out below. Further details in each of these areas are detailed in the summary of key estimates and judgements in Note 1.

Significant accounting issues and areas of judgementHow the Committee addressed these matters
  • Inventory valuation: Inventory represents a material proportion of the Group's net assets. At 31 March 2015, the Group had £285.1 million (2014: £258.8 million) of inventory on the balance sheet.
The Group estimates the net realisable value of inventory in order to determine the value of any provision required and key judgements relate to the duration of product life cycles, amount of anticipated sales over this life cycle and the value recoverable from any excess stock. An update of these assumptions, based on recent experience, was presented to the Committee for review.
  • Pension valuation: The Group has material defined benefit pension schemes in the UK, Ireland and Germany. At 31 March 2015, the total deficit in relation to these Defined Benefit pension schemes was £56.3 million (2014: £40.9 million).
Small changes to the assumptions used to value the UK retirement benefit obligation can have a significant impact on the financial position and results of the Group. The Committee reviews the assumptions put forward by the actuaries and the Group Pension Manager.
  • Goodwill: There is £176.5 million of goodwill on the balance sheet at 31 March 2015 (2014: £156.8 million), which principally relates to the acquisition of Allied Inc. in July 1999.
The value of goodwill is reviewed regularly for impairment using a value in use model using cash flow and discount rates as set out in Note 12. The Committee reviews these impairment tests every year, confirming that adequate headroom is in place and no impairment provision is required.
  • Taxation: The Group's taxation provision requires accounting estimates regarding tax liabilities accruing across our multiple geographies and the recoverability of losses.
Last year the Board reviewed and endorsed the Group's tax strategy. The Committee reviews the effective tax rate and the balance sheet provision at the half-year and the full-year, and discusses the position with senior management as well as the Auditor.

The Committee also reviewed the Group's accounting treatment of vendor rebates this year, and as a result has disclosed an updated accounting policy in the Notes to the Group accounts. This takes into account recent Financial Reporting Council (FRC) guidance and aims to provide our shareholders with clear and relevant information to assess the impact of these rebates on the Group's performance.

As a result we will now recognise more income earlier in the year and will prepare our half-year results on this basis going forward, restating comparative periods as required. There is no material impact on our full-year results. Due to the amounts and timings of the receipts, the Committee believes that there are no material accounting areas of judgement required relating to this item.

In its review of the financial statements for the year ended 31 March 2015 the Committee also considered analysis to support the Company's going concern statement.

The Group has significant foreign exchange transactions and uses foreign exchange hedges to minimise profit and loss volatility and allow management time to respond to changes in foreign exchange rates. During the year the Group has updated its internal documentation and revised its internal procedures to ensure a greater consistency across the Group.

Internal control and risk management

The Board's responsibilities for internal control are set out in the Corporate Governance report.

The Committee receives quarterly reports from the Head of Internal Audit on the performance of the system of internal control, and on its effectiveness in managing principal risks and in identifying control failings or weaknesses.

The Committee annually reviews the Group's risk management process with the outcome of the review being reported to the Board and any areas identified for further consideration are discussed at subsequent meetings. This, together with the provision of regular updates to the Board on the principal risks, allows the Board to make the assessment on the systems of internal control and the residual risk for the purposes of making its public statement. Further information regarding principal risks and uncertainties to the business is given in the Strategic Report.

Where weaknesses in the internal control system have been identified through the monitoring processes outlined above, plans for strengthening them are put in place and action plans regularly monitored until complete. During the period under review there were no control failings or weaknesses that resulted in unforeseen material losses.

The Board's report on the systems of internal control and their effectiveness, together with the going concern statement, can be found in the Corporate Governance report.

Internal financial controls

Internal financial controls are the systems employed by the Group to support the Directors in discharging their responsibilities for financial matters. Those responsibilities are noted in the Statement of Directors' Responsibilities.

The main financial control elements are described below.

Clear terms of reference set out the duties of the Board and its committees, with delegation of operating responsibility through the Board committees to management in all locations. Group Finance and Group Treasury manuals are in place to outline the accounting policies and controls necessary in identified areas of financial risk.

Financial reporting systems are comprehensive and include weekly, monthly and annual reporting cycles. An annual budget is set across the Group and approved by the GEC and the Board. This is then updated through quarterly reforecasts, and tracked through monthly reporting of actual against both budget, forecast and prior year. Variances are reviewed by both the GEC and the Board. In each market local leadership teams review variances and key performance indicators. These are then reviewed at regional and global levels by cross-functional teams, and by global functional leadership teams. Specific reporting systems cover treasury operations, major investment projects and legal and insurance activities, which are reviewed by the Board and its committees on a regular basis.

Internal audit

The Committee annually reviews and approves the scope and resourcing of the internal audit programme with the Group's internal auditors. The scope is decided upon by reference to the perceived geographic, functional and operating risks around the business. These risks are identified from previous audit experience, input from the senior management team and other external sources.

The Committee reviews:

  • The level and skills of resources allocated to the Internal Audit function to conduct this programme of work
  • The summary of the results of each audit and the resolution of any control issues identified
  • The effectiveness of the Internal Audit function

The Head of Internal Audit has regular contact with the Chairman of the Committee, in the form of telephone calls and face-to-face meetings. These discussions are around audit planning and matters noted during internal audit assignments. The Company Chairman and other members of the Committee are also available if required. On an annual basis the Committee meets with the Head of Internal Audit without the presence of the executive management.


The Committee and the Board put great emphasis on the objectivity of the Group's Auditor, PwC, in their reporting to shareholders. To ensure full and open communication, the Group Audit Partner from PwC and the Group Audit Engagement Director from KPMG (up to May 2014) were present at all of the Committee meetings.

The performance and effectiveness of the Auditor is reviewed annually by the Committee, and covers qualification, expertise, resources and appointment as well as assurance that there are no issues which could adversely affect the Auditor's independence and objectivity taking into account the relevant standards. As part of risk evaluation planning the Committee considers the risk of its current Auditor withdrawing from the market.

Historically, feedback is collated from senior management around the Group, which is given to the Auditor to help them improve their processes. Going forward this process will form part of PwC's own system of quality control. The Committee also met with the Auditor without executive management being present, to discuss the adequacy of controls and any significant areas where management judgement has been applied.

The Auditor's engagement letter and the scope of the year's annual audit cycle was discussed in advance by the Committee. Following discussions between local finance teams and the local PwC offices and a review by Group management, audit and non-audit fees are reviewed by the Committee and are then recommended to the Board for approval. Details of audit and non-audit fees are given in Note 4.

A formal statement of independence from the Auditor is received each year. The Group will not engage the Auditor to undertake any work that could threaten their independence. The Company policy with regard to non-audit assignments is detailed below.

The Group has a policy on employment of former employees of the Auditor. This requires that any such employment is considered on a case-by-case basis and takes into account the Auditing Practices Board's Ethical Standards on such appointments. Any appointment requires approval by a combination of the Group Finance Director, the Audit Committee and the Board, depending on the seniority of the appointment.

External audit tender

Last year we carried out an external audit tender process and PwC were appointed as our new Auditor at last year's AGM. This is in accordance with the FRC Guidance on Audit Committees and the Code, both published in September 2012, which stipulated that FTSE 350 companies should put their external audit services contract out to tender at least once every ten years. There are no contractual obligations that restrict the Committee's choice of external auditors.

The Company considers the annual appointment of the Auditor by the shareholders at the AGM to be a fundamental safeguard.

Non-audit assignments undertaken by the Auditor

The Group has a policy to ensure that the provision of such services does not impair the Auditor's independence or objectivity. In determining the policy, the Committee has taken into account possible threats to Auditor independence and objectivity.

Policy on non-audit services:

  • When considering the use of the Auditor to undertake non-audit work, the Group Finance Director should give consideration to the provisions of the FRC Guidance on Audit Committees with regard to the preservation of independence and objectivity.
  • The Auditor must certify that they are acting independently.
  • In providing a non-audit service, the Auditor should not:
    • audit their own work
    • make management decisions for the Group
    • create a mutuality of interest
    • find themselves in the role of advocate for the Group
  • Before commissioning non-audit services, the Committee or the Group Finance Director, as appropriate, must ensure that the Auditor is satisfied that there are no issues as regards independence and objectivity.
  • The Group Finance Director has authority to commission the Auditor to undertake non-audit work where there is a specific project with a cost that is not expected to exceed £50,000. This work has to be reported to the Committee at its next meeting. If the cost is expected to exceed £50,000, the agreement of the Committee is required before the work is commissioned. In either case, other potential providers must be adequately considered.
  • The total non-audit fees for any financial year should not exceed 70% of the average of the external audit fee over the last three years. In practice the non-audit fees are normally significantly below this level.
  • The Group Finance Director monitors all work done by the Auditor or other providers of accountancy services anywhere in the Group where fees are likely to exceed £10,000.

Committee evaluation

The activities of the Committee were reviewed as part of the internal Board evaluation process performed during the year under review. Details of the evaluation process can be found in the Corporate Governance report.


The Committee reviews the procedures for prevention and detection of fraud in the Group. Suspected cases of fraud must be reported to the Company Secretary within 48 hours and investigated by operational management or Internal Audit, as appropriate. The outcome of any investigation is reported to the Company Secretary. A register of all suspected fraudulent activity and the outcome of any investigation is kept, which is circulated to the Committee on a regular basis. During the year in question, very few frauds were reported, none of which were of a material nature.


An anti-bribery policy applies throughout the global business, with an assessment made as to which parts of the business present greater risk. This policy is implemented by means of a global compliance programme which focuses on areas of risk identified. All managers across the Group are required to sign and accept the policy on an annual basis, and managers and all staff in risk areas have access to an online training module. A gift and hospitality register is operated to ensure transparency. Contracts with relevant third-party companies also contain anti-bribery provisions.


In accordance with the provisions of the Code, the Committee is responsible for reviewing the arrangements whereby staff may, in confidence, raise concerns about possible improprieties in financial reporting or other matters and ensuring that these concerns are investigated and escalated as appropriate. An external third party operates the reporting tools to ensure anonymity where required. Whistleblowing is referred to as Speak Up internally and is available to all employees in the Group. The availability of the scheme is advertised to all employees and was refreshed this year with an internal campaign to heighten awareness. The Committee receives aggregated reports on matters raised through these services and monitors their resolution throughout the Group.