The Code recommends that all members of the Committee be Non-executive Directors, independent in character and judgement and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgement and that at least one such member has recent and relevant financial experience. Accordingly, the Committee comprises all three independent Nonexecutive Directors with me as Committee Chairman, considered by the Board to have recent and relevant financial experience due to my previous experience in senior financial roles. As such, the Committee complies with the Code recommendations. Regular Committee meetings are also normally attended by the Chief Financial Officer and the external auditor. The Chief Financial Officer, who is also the Company Secretary, acts as secretary to the Committee. Other members of management, particularly senior financial managers, are invited to attend depending on the matters under discussion.
The Committee also meets at least twice per annum with the external auditor with no members of management present. The Committee was set up by the Board to assist it with its responsibilities in respect of financial reporting, including reviewing annual and half-year results, external auditing and internal controls, and advising on the independence and appointment of the external auditor. The Committee also routinely examines significant accounting treatments facing the Group and will focus on those matters raised by KPMG LLP, which they consider to be of significant audit risk. The Committee meets at least twice a year at the appropriate times in the reporting and audit cycle.
The Committee has this year strongly supported the new finance team following the departure of a long-standing Chief Financial Officer in August 2016 and subsequently his replacement in May 2017 as well as a long-standing Group Financial Controller in December 2016. Our current Chief Financial Officer, Mike Foster, joined the business in an interim role in March 2017 and together with the new team initially focused on understanding the reliability of the Group’s forecasts and this resulted in the market announcement on 19 May 2017. The new team also identified that the application of our accounting policies required updating, particularly in two key areas:
- Certain items of marketing expenditure, including menus and branded collateral which were being capitalised as short-life assets. The appropriate treatment for such expenditure is to expense the cost as incurred.
- Certain policies relating to income from supplier rebates and listing fees were not applied correctly, resulting in over-statements of accrued income as at 2 July 2016 and 27 June 2015.
Corrections in relation to these two items have led to prior period adjustments that are set out in Note 1b to the consolidated financial statements.
When these matters came to the attention of the Audit Committee, the Committee engaged PwC to undertake a full independent review relating to these two issues to confirm the amounts involved and the appropriateness of the accounting treatment. In parallel, the new team was asked to review the application of all key accounting policies and practices and this identified several other issues also requiring adjustments to prior periods. These are also detailed in Note 1b to the consolidated financial statements.
The Committee has closely reviewed the PwC report, which was delivered in mid-August 2017, and the other findings of the finance team and their recommended adjustments. The Committee’s main goal at this time has been to ensure that the material judgements and estimates used this financial year are the most appropriate to present a fair and balanced view of the financial affairs of the Group as at 1 July 2017 and the progress made during the course of the year.
During the year, the Directors continued to assess the following key areas:
- Board governance, including the Committee and the procedure for assessing the Group’s key risks;
- management accounting processes and the quality of information provided to the Board;
- external financial reporting procedures and audit arrangements and reporting standards;
- complex transactions, potential exposure and risk;
- information systems; and
- budgeting and forecasting procedures and controls.
The Directors recognise the need to maintain the financial reporting procedures, review them on a continuing basis and adapt them to changing circumstances. Their review forms part of the Committee’s agenda going forward together with its wider role and responsibilities, which are set out in more detail in this report. Based on its performance during the 52 weeks ended 1 July 2017, the Committee will be recommending that KPMG LLP be re-appointed as auditor at the 2017 annual general meeting (“AGM”). I look forward to meeting with shareholders at the AGM to answer any questions on the work of the Audit Committee.
Ensuring external auditor independence
During the year the value of non-audit services provided by the external auditor amounted to £0.02 million (2016: £0.4 million). New EU legislation on permitted non-audit services came into effect from 17 June 2016 which introduced a permitted non-audit services fee cap of 70 per cent of the average audit fee over a consecutive three-year period. This cap will come into effect for the Group in the financial year ending 30 June 2019. A significant proportion of non-audit services delivered during 2017 related to reviewing the Group’s half-year reporting, which is a service incidental to the role as auditor. The Committee is satisfied that, in relation to services provided, KPMG LLP has taken actions to ensure that any potential conflicts of interest are properly managed.
KPMG was appointed as auditor of the Group by the Directors on 18 March 2015. The period of total uninterrupted engagement is the three years ended 1 July 2017. Prior to that KPMG was also auditor to the Group’s previous Parent Company, but which, being unlisted, was not a public interest entity. Under the EU audit regulation, the Company is required to undertake a tender for audit services at least every ten years (being for the period commencing July 2024). In light of the Board recommended offer for the business, there are currently no plans to undertake a tender.
Roles and responsibilities
The Committee’s terms of reference can be found on the Group’s website or alternatively can be obtained from the Company Secretary. The primary function of the Audit Committee is to assist the Board in fulfilling its responsibilities to protect the interests of shareholders with regard to the integrity of financial reporting, audit, risk management and internal controls. This comprises:
- monitoring and reviewing the Group’s accounting policies, practices and significant accounting judgements; and
- receiving the annual and half-yearly financial statements and any public financial announcements and advising the Board on whether the annual report and accounts is fair, balanced and understandable in relation to the external audit:
- approving the appointment and recommending the re-appointment of the external auditor and its terms of engagement and fees;
- considering the scope of work to be undertaken by the external auditor and reviewing the results of that work;
- reviewing and monitoring the independence of the external auditor;
- reviewing the effectiveness of the external auditor;
- reviewing compliance with the UK Corporate Governance Code;
- overseeing the Group’s procedures for its employees to raise concerns through its whistleblowing policy as set out in the code of conduct and business principles policy;
- monitoring the effectiveness of the risk management systems and processes; and
- assessing and advising the Board on the internal financial, operational and compliance controls.
Meetings and attendance
During the 52 weeks ended 1 July 2017, the Audit Committee met formally on three occasions, with all members attending the meetings. In addition, at two of the meetings, the Audit Committee had access to the external auditor without management present.
Following the end of the reporting period, the Committee met formally on two further occasions prior to the approval of the consolidated financial statements. In addition to the Committee’s work associated with the accounting review referred to on the previous page, other work performed by the Committee during the year has included:
- reviewing and approving the external audit plan for the 52 weeks ended 1 July 2017;
- agreeing the Committee’s rolling agenda for the 52 weeks to 30 June 2018 and the associated financial calendar;
- reviewing the annual report and accounts for 2017 and recommending to the Board its adoption as fair, balanced and understandable. In fulfilling this task, the Committee reviewed the process undertaken to produce the annual report and accounts 2017, which included internal verification processes and content approval procedures;
- reviewing the pre-close statement in July 2017;
- receiving the external auditor’s reports to the Committee;
- reviewing the Group’s accounting policies and key accounting judgements;
- considering the risk assessment, mitigation actions and assurance activities produced by management;
- reviewing the independence and objectivity of the external auditor, together with its effectiveness, and recommending its re-appointment to shareholders at the AGM;
- reviewing compliance with and explaining any exceptions from the UK Corporate Governance Code; and
- reviewing the internal financial, operational and compliance control.
The Group does not have an internal audit function and considers that the key risks to the business are covered by a combination of resources including its compliance department, stock-takers and area managers.
The Group’s compliance department is responsible for managing many of the principal risks facing the business concerning licensing and health and safety. Its work is supported by external consultants on both of these matters and as part of these arrangements annual contracts are in place to provide at least two audit visits per annum by fully qualified health and safety advisers.
The Group also employs four full-time stock-takers who are checking stocks and various other related compliance matters such as cash counts on a risk assessed basis. Site stocks are counted on average between eight and ten times per annum. Stock-take results are reviewed by both operational and finance staff immediately that they are made available.
An important element of the area manager’s role is to perform spot checks on cash, stocks, licensing and health and safety matters as part of their regular site visits. The area manager assessments are used, amongst other things, to rate general managers and poor scores relating to these standards will reduce their bonus earnings potential.
Significant accounting matters
In reviewing the financial statements with management and the external auditor, the Committee has discussed and debated the critical accounting judgements and key sources of estimation uncertainty as set out in Note 1 to the consolidated financial statements. There has been particular emphasis this year on the matters giving rise to the prior period adjustments.
As a result of its review, the Committee has identified the following issues that require particular judgement or have significant impact on the interpretation of the annual report and accounts for 2017:
- Accrued rebates from suppliers: rebates are usually invoiced on a monthly or quarterly basis based on supplied volumes and whilst-these can usually be quickly assessed post-period, judgements are also sometimes required as to whether longer-term contractual thresholds will be met. The Committee is satisfied that appropriate judgements have been made.
- Carrying value of fixed assets: the Group keeps the carrying value of its fixed assets under review. Formal procedures are used in each external reporting period to make assessments of the appropriateness of carrying values within the balance sheet.
- Capitalisation of property, plant and equipment: the Committee has reviewed capitalisation policies and in particular the capitalisation of internal costs in relation to property development and IT systems development and is satisfied that its policies and the amounts capitalised are appropriate.
- Accounting for and the disclosure of prior period errors: the Committee has reviewed each of the items and is satisfied that they constitute prior year adjustments.
- Exceptional items: exceptional items on a pre-tax basis of £4.3 million (2016 Restated*: £1.4 million) represent a material item in the profit and loss account. The charge comprises fees associated with the resignation of the Chief Financial Officer, fees associated with the accounting review, an increase in the provision for onerous leases, a fixed assets impairment charge and charges relating to the Long Term Incentive Plan (see Note 3 to the consolidated financial statements). The Committee reviewed the constituent elements of this cost and was satisfied that they were exceptional in nature.
The Committee reviewed reports presented by KPMG LLP that detailed key audit findings in relation to the above accounting matters.
Chairman of the Audit Committee
3 October 2017
I am pleased to introduce the report of the Audit Committee for the 52 weeks ended 1 July 2017.
Michael Shallow - Chairman of the Audit Committee