the audit committee comprised four independent non-executive directors – minnow Powell, Sir michael hodgkinson, Janis Kong and coline mcconville – throughout the year ended 30 September 2013
of whom at least one had recent and relevant financial experience in
compliance with the code provision c3.1.
The Chairman, Chief Executive, Chief Financial Officer, Director of
group audit Services and the external auditor are invited to, and routinely attend, all meetings and other non-executive directors may also attend.
Meetings
the audit committee met 10 times during the year – two of these
meetings were specifically called to review and approve draft
announcements, results and trading statements of the company. the chairman of the audit committee reported to the Board on how the committee had discharged its responsibilities.
as chairman of the audit committee it is my responsibility to ensure that the committee is rigorous and effective in its role of monitoring and reviewing:
• the integrity of the financial statements of the Company (including formal announcements relating to the Company’s financial performance and the significant financial reporting judgements
contained therein);
• the effectiveness of internal controls and the risk management
framework (including presentations from Group, Sector, regional
and functional management);
• the effectiveness of Internal Audit (including agreeing in advance the
work of group audit Services and reviewing the results of the work undertaken);
• the arrangements by which employees may raise concerns regarding
potential impropriety in confidence and ensuring these concerns are
investigated appropriately; and
• the integrity of the group’s relationship with the external auditors and the effectiveness of the audit process, including reviewing the policy for the engagement of the external auditors to supply non-audit services, considering their appointment, re-appointment and removal and approving the remuneration and terms of engagement of the external auditors.
the audit committee agenda is designed, in concert with the Board’s, to
ensure that all significant areas of risk are considered during the course
of the year. during the year we have continued to focus on improving
key financial controls, processes and procedures across the organisation
and i am pleased with another year of good progress that has been
achieved in fulfilling our responsibilities in this regard. However, there
are still improvements to be implemented and embedded across the group which will remain a key point of focus for the committee.
I am satisfied that the Audit Committee was presented with
papers of good quality during the year, provided in a timely fashion
to allow due consideration of the subjects under review. I am also satisfied that meetings were scheduled to allow sufficient time to
enable full and informed debate. we also reviewed our terms of reference during the year, including comparing them against the code, and these were approved by the Board. these are available on www.tuitravelplc.com/investors-media.
during the year we invited a number of members of management to present to the committee on key areas of risk and control. i met, individually and in private, with management in order to understand more fully the context and challenges of their business operations and thereby ensure the committee’s time was used most effectively. we, together and individually, visited various parts of the business and met informally with a number of members of management below Board level to gain a deeper insight into areas relevant to the role of the committee.
the activities of the committee members during the last year have enabled us to gain a good understanding of the culture of the organisation, the risks and challenges faced and the adequacy and timeliness of the action being taken to address them.
No major matters were raised in the annual evaluation of the
committee’s performance.
during the year activities of the committee included the following:
The integrity of financial reporting
We reviewed the integrity of the financial statements of the Company and all formal announcements relating to the Company’s financial
performance.
In last year’s Annual Report we reported on judgements relating to
revenue recognition and aircraft maintenance Provisions along with our annual review of going concern, impairment, Provision for claims, Sdis and tax. the key areas reviewed in the current year are set out below. in each case we reviewed and discussed detailed papers received from management and took account of the views of the external auditors.
Aircraft
2013 was a busy year for aircraft transactions with the following events occurring:
• 737 maX order signed with Boeing and approved by shareholders; and
• delivery of Boeing 787 aircraft commenced and finalisation of
related credits in respect of entry into Service costs for this new type of aircraft.
Minnow Powell chairman
£59m this year, due to the continued downturn in the french economy
and the difficult trading environment caused by the ongoing political
unrest and violence in what has traditionally been the popular north african destinations for the french market. in the absence of any
perceived recovery in these North African destinations (particularly
egypt) in the near-term, management proposed an impairment of £59m of the goodwill attached to the french tour operator and we
agreed with this judgement.
we also reviewed and approved the sensitivities used by management which were consistent with 2012 and ‘a reasonably possible’ change to model inputs including the related disclosure, as required by iaS 36.
Provision for claims
we examined the risks relating to the main legal cases facing the group and the adequacy of provisions made against them. management presented papers detailing the background to each case, the latest developments, their assessment of the respective risks, the mitigating action taken and amounts provided.
We agreed with the judgements reached by management in each of the
cases presented.
Separately Disclosed Items (SDIs)
SDIs are those significant items which, in management’s judgement,
are highlighted by virtue of their size or incidence to enable a full
understanding of the Group’s financial performance. We reviewed the
items proposed by management to be reported as Sdis each quarter to validate that it was appropriate for such items to be reported this
way, and agreed with their judgement. Tax
We reviewed the judgements together with any related provisions in
respect of open areas together with assessments from independent experts. in respect of german trade tax we considered the disclosure as a contingency to be appropriate at this time. the risks relating to
the Spanish Tax case (Note 8) and the decision to settle rather than
litigate were taken by the Board as a whole.
Communication of accounting policies
during the year we noted the continued development of our internal accounting policy manual including the review and re-issue of 15 accounting policies together with the related guidance.
The effectiveness of internal controls and the
risk management framework
we recognise that a robust and effective system of internal control is critical to achieving reliable and consistent business performance. On behalf of the Board, we review the effectiveness of the risk
management and control systems in relation to the key financial,
operational and compliance controls. we noted continued focus and improvement in this area during the year.
the cOSO framework of internal control continues to be implemented across the organisation. while this has focused primarily on financial
Reporting with the review and documentation of the key financial
processes, risks and controls, we have noted more focus now starting
to be applied to non-financial operations in those parts of the
organisation where the risk and control environment is more mature.
forecast and working capital statement (including the related reports
from Pwc) before they were presented to the Board. in respect of the Boeing 787 aircraft, we reviewed the accounting treatment of entry into Service costs and associated credits to ensure the most
appropriate accounting treatment and we were satisfied with the judgements made.
Denied Boarding Compensation (DBC)
as a result of a ruling by the european court of Justice in October 2012, there is a present obligation to past events in respect of delay
compensation being due to passengers where they have been subject to a flight cancellation or a delay of more than three hours (subject
to certain restrictions). accordingly, a provision is required. we reviewed the methodology for provisioning in relation to dBc exposure, the input factors, the key assumptions being applied and
the classification for financial reporting. We were satisfied that the
resultant provision had been calculated on a reasonable basis in light of current claims experience.
Going concern
we assessed our available facilities, facility headroom, our banking covenants and the sensitivity analyses on these items.
we challenged management’s forecasts including sensitivities to downturns in budgeted trading. reduced customer deposits were factored explicitly into the model and an assessment of the degree
of flexibility in the payables ledger at the cash low point in December
2013 was also taken into account.
We were satisfied that the going concern basis of preparation
continues to be appropriate in the context of the group’s funding and liquidity position.
Annual goodwill impairment review
During the year we also considered the judgements made in relation
to the valuation methodology adopted by management and the model inputs used, which include the approved three-year business plan, long-term growth rates and weighted average cost of capital. the annual impairment review has resulted in an impairment charge of £178m which, when added to the £10m charge taken earlier in the year, as a consequence of the closure of two businesses, results in a total impairment charge for the year of £188m.
£109m of the impairment charge has arisen from businesses within the Specialist & activity Sector. following the removal of the Sector
management team at the start of the financial year, these businesses have been subjected to a thorough and detailed review, with the consequence that the latest assessment of their future profitability
is lower than anticipated in the prior year. as a consequence, the
discounted cash flow was insufficient to support the previous level
of goodwill for certain of the Specialist & activity Sector businesses
– consequently an impairment has been taken against these specific businesses. Full details can be found in Note 10 of the financial
Group Compliance
we noted the continued development and strengthening of the group compliance functions during this year. the committee receives presentations from the three group compliance functions four times a year.
• group financial compliance. created in 2011 to provide assurance that individual company balance sheets across the group are fairly stated through a programme of site visit reviews to ensure that
companies in the Group comply with existing financial reporting
requirements.
– we received feedback on the individual visits, the ongoing programme of education, communication and independent
validation of the financial minimum controls as well as feedback
on quarterly self-assessment returns.
• Group Legal & Regulatory Compliance. Created in January 2012
to manage legal and regulatory risk across the group, including
Anti-Bribery & Corruption (ABC) and whistleblowing (see page 71).
– we received feedback during the year on the progress being
achieved in relation to existing legislation (for instance Anti-
Bribery & corruption, competition law, anti money laundering, and Know Your Supplier) as well as preparations for new
legislation (for instance the new EU Data Protection legislation
due in 2014/15).
– we also received updates on the development and roll out of
the Supplier Code of Conduct as well as risks identified by the
six-monthly legal & regulatory compliance checklist.
• group it compliance. created in march 2012 to provide a compliance framework across the group’s it function by producing and/or publicising appropriate standards and monitoring compliance to those standards using a mixture of self-assessment and a programme of review visits.
– we received reports on the progress being achieved in relation to the development of minimum it controls and plans for the next year. we also reviewed the group’s compliance with Pci dSS along with updates on the effectiveness of Business continuity
Planning (BCP) and Disaster Recovery (DR). We noted the
progress made during the year in relation to BcP and dr and deadlines set for completion during this coming year. we noted that the three group compliance functions and the three
functions that make up Group Audit Services (Risk, Internal Audit and Fraud) have worked closely to ensure the free flow of relevant
information between them and a co-ordinated and consistent approach across the group through the group compliance Steering committee.
We reviewed the talent pool of senior financial management during
the year, noting the continued roll-out of competency testing in
conjunction with Korn Ferry for key finance management and the
role of the finance academy to educate and train our employees. we have seen continued improvement in the transparency and active
ownership of risk management throughout the organisation, driven and supported by a strong tone at the top. we have noted the growing strength of the three lines of defence. whilst we are pleased with the progress achieved, there remains much still to do and work in these areas will be ongoing in 2014.
First line of defence
Management
we spent time with management below Board level in order to understand their concerns and the risks, controls and challenges in their respective business or functional areas. with good progress
achieved in strengthening the financial controls across the organisation
over the last two years, we are now able to broaden our review and are
inviting the Managing Directors of Sector/Source Markets to join their
finance directors in attending the committee in order to encourage wider debate and accountability.
We continued to receive reports from Group Accounting (e.g. new
accounting developments and controls over prepayments) and group
Treasury (including Group Treasury policy and counterparty risks).
we reviewed and approved the group’s overall taxation strategy during the year. this covered the key factors for the group’s overall tax position and forecasts for the future tax charge and cash taxes.
During the year we received presentations relating to major projects
as well as receiving presentations on the control environment existing within all key business areas.
Local compliance functions
we noted the continued investment in local compliance functions within our key businesses during the year, which will serve to strengthen the control environment closer to the front-end of businesses across the organisation.
Second line of defence
Risk Management
we reviewed the work that the group risk management function has undertaken to enhance the effectiveness of risk management processes throughout the organisation. we noted the impact of a
well-defined risk methodology, effective risk software and improved
infrastructure in supporting this improvement. in addition to reports received from the internal audit function on the adequacy and effectiveness of risk management in various business areas, we reviewed the group risk function’s own assessment of stakeholder engagement and effectiveness by key business area. this assessment is shared openly with management and the Board and is used as a focus for ongoing improvement. in addition, we have received regular updates on the work of the group risk management committee during the last year and noted the quality of the risk discussions that have taken place during the year.
While significant improvements have been made in the year, further
work to embed them into all our processes and procedures is planned for 2014.