Risk
reviews
External
audit
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Area of significant accounting judgement What the Committee reviewed and concluded Valuation of the Proprietary Capital portfolio
The most material area of judgement in the financial statements, and noted as a key risk by the external Auditor, relates to the valuation of the unquoted Proprietary Capital portfolio, which at 31 March 2015 was £3,114 million, or 80% of net assets, under the Investment basis.
In recognition of the importance of this area the Board has established a separate Valuations Committee to review the valuations policy, process and application to individual investments. This Committee provides quarterly recommendations to the Committee and the Board.
On behalf of the Board, the Committee considered quarterly reports from the Chairman of the Valuations Committee and the Group Finance Director, with particular focus on the assumptions supporting the unquoted asset investments, any valuation uncertainties and the proposed disclosure in the financial statements.
For further information see the report of the Valuation Committee on pages 69 to 71.
Fair, balanced and understandable
Under the UK Corporate Governance Code the Board should establish arrangements to ensure the Annual Report presents a fair, balanced and understandable assessment of the Company’s position and prospects.
On behalf of the Board, the Audit and Compliance Committee considered the procedures required to ensure that this statement could be made.
The Committee reviewed the Interim and Annual financial statements as well as the quarterly trading updates with management, focusing on the integrity and clarity of disclosure and to enable the Board ultimately to provide the fair, balanced and understandable confirmation to shareholders in the Annual report. The Committee considers that the Annual report is consistent with its understanding of the business.
The 2015 Annual report has been enhanced, in parallel with the FRC’s Clear and Concise reporting programme, to ensure that it is less cluttered and duplication is removed.
A report highlighting the relevant considerations was reviewed by the Committee in advance of the year end and a summary of the procedures undertaken was prepared alongside the Annual report.
Ongoing development of IFRS 10 and the presentation of 3i’s results The Group adopted IFRS 10 in its 2014 accounts and introduced the non-GAAP Investment basis financial statements to ensure that its results remained understandable.
The Committee monitored feedback received from external users of the financial statements on the presentation of the non-GAAP Investment basis and was satisfied that maintenance of the Investment basis financial statements was appropriate. The Committee continued to receive regular updates on developments in IFRS 10, including the amendment in 2014, and to endorse the engagement of management with the FRC, IASB and relevant industry bodies.
The external Auditors also confirmed that the inclusion of the Investment basis remained consistent with the prior year.
RISK AND INTERNAL CONTROL REVIEWS
The Committee has responsibility on behalf of the Board for overseeing the effectiveness of the Group’s risk management and internal control systems. It monitors the activities of the Group Risk Committee (“GRC”), the risk management processes in place and the activities of the Internal Audit function, including its reporting on the effectiveness of controls, the use of the Group’s whistleblowing facility and any changes in approach or issues relating to the UK Bribery Act.
A report summarising each quarterly GRC meeting, along with the risk report considered, is circulated to the Audit and Compliance Committee for review and discussion. The risk report details the principal risks, which are derived from the Group Risk process, along with commentary on how the exposure to these risks has moved in the quarter. The Committee also receives reports from Internal Audit quarterly, covering change
Audit and Compliance Committee report continued
The General Counsel and Group Finance Director prepare an annual report on the internal controls framework for presentation to the Committee. The review documents the components of the internal control framework and highlights the key developments in the year. A separate commentary on the operation and effectiveness of the internal control framework over the year is independently prepared by Internal Audit. The Group maintains a framework of controls related to key financial processes and management of the associated risks. The
effectiveness of such controls is reviewed by Internal Audit, either through dedicated reviews or in the course of other reviews over the course of the year. Group Compliance carries out desk based monitoring, business unit and thematic reviews in relation to compliance policies and other regulatory matters.
The Committee reviewed the scope, activity and effectiveness of the Internal Audit function and met privately with the Director, Internal Audit.
EXTERNAL AUDIT
Ernst & Young LLP has been the Group’s statutory external Auditor since before the Company was listed on the London Stock Exchange in 1994. The Committee assesses the independence and objectivity, qualifications and effectiveness of Ernst & Young LLP on an annual basis. The Committee also concludes on whether to recommend the reappointment of Ernst & Young LLP as Auditors to the Board.
Auditor appointment and independence
The Committee recognises the importance of ensuring the independence and objectivity of the Company’s Auditors. It reviews the nature and extent of the services provided by them, the level of their fees and the element comprising non-audit fees.
The Committee reviewed the Auditors’ fee structure, resourcing and terms of engagement in the year. The total audit fee for the year was £2.0 million (2014: £2.0 million). The Committee is satisfied that this fee is appropriate in respect of the audit services provided and that an effective audit can be provided. The Committee oversees the Group’s policy on the provision of non-audit services by the external Auditor. The Committee continues to see benefits for the Group in engaging Ernst & Young LLP where:
Work is closely related to the audit;
A detailed understanding of the Group is required; and
Ernst & Young LLP is able to provide at least an
equivalent quality and/or value service than other potential providers.
The Committee Chairman approves all assignments allocated to Ernst & Young LLP over a defined limit, other than those related to due diligence within the Group’s investment process. The key principle of our policy is that permission to engage the external Auditor will be refused when a threat to independence and/or objectivity is perceived. Appointments in relation to the investment process are independent of the audit team and are approved separately by the Investment Committee but are reported to the Committee Chairman. Details of the non-audit fees paid to the Auditors are disclosed in Note 6 to the financial statements. The Committee concluded that all of these fees fell within its criteria for engaging Ernst & Young LLP and that the activities did not undermine the Auditor’s independence or objectivity.
Assessing external audit effectiveness
The Committee reviews the effectiveness of Ernst & Young LLP through the use of questionnaires completed by management, by considering the extent of their contribution at its meetings throughout the course of the year and in one-to-one meetings.
The 2015 evaluation also reviewed the quality of the audit process, the use of Ernst & Young LLP’s valuation practice to support the audit of the portfolio valuations, the technical knowledge of the team and staff turnover within the Ernst & Young LLP audit team and the Committee concluded that the audit was effective.
Audit tender
During the year the Committee reviewed the effect of the UK Corporate Governance Code, the EU Audit Regulation 2014 and the Statutory Service Order 2014 issued by the UK Competitions and Market Authority (“CMA”) with respect to audit relationships. Due to the extent of the changes to the business following the Strategic Review in 2012, the adoption of IFRS 10 and the extent of existing relationships with alternative audit firms across the Group, the Committee concluded that it would take advantage of the transitional arrangements in relation to auditor rotation as outlined by the Financial Reporting Council and the CMA. The Committee currently plans that Ernst & Young LLP will be retained at least until the conclusion of the term of its current lead partner in 2018. A full tender will therefore be conducted no later than 2018.
By order of the Board C J Banszky
Chairman, Audit and Compliance Committee 13 May 2015
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Further information on the Audit and Compliance Committee’s terms of reference can be found on our website www.3i.com
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