During the 2016 financial year, the Committee met on three occasions.
Responsibilities of the Audit Committee:
- Overseeing the effectiveness of the Group’s governance and internal control systems;
- With regard to the External Auditors, to nominate their appointment, to determine audit fees payable, to pre- determine fees and scope of non-audit services, and monitor their independence;
- Reviewing the scope and effectiveness of the External and Internal Audit functions;
- Ensuring that adequate accounting records are being maintained;
- Ensuring appropriate accounting policies have been adopted and are consistently applied;
- Testing that the Group’s going-concern assertion remains appropriate;
- Overseeing the quality and integrity of the annual financial statements, interim financial results and trading statements;
- Ensuring that Massmart Internal Audit Services (MAS) reports functionally to the Committee, is considered independent, applies King III standards and adheres to the Institute of Internal Auditors’ Standards for the Professional Practice of Internal Auditing and Code of Ethics;
- Approving MAS’s plan and ensuring that MAS have sufficient resources and skills to effectively perform their function;
- Reviewing the adequacy and effectiveness of combined assurance, compliance and IT;
- Assessing the suitability of the Chief Financial Officer on an annual basis; and
- Receiving and reviewing the assurance assertion of MAS and presenting this to the Board.
The CEO, the CFO, senior financial Executives of the Group and representatives from the external and internal auditors attend all meetings by invitation. The internal and external auditors have unfettered access to the Audit Committee and its members, and both present formal reports to the Committee. The Chairman of the Committee meets quarterly with the Chief Audit Executive (CAE), and at the start of every Committee meeting the external auditors have a private audience with the Committee.
Summary of key focus areas in 2016:
- The Committee has reviewed the scope, quality, effectiveness, independence and objectivity of the external auditors and is satisfied with all of these areas. The audit firm Ernst & Young Inc., and audit partner Roger Hillen, will be proposed to the shareholders at the May 2017 Annual General Meeting for approval to be the Group’s auditor for the 2017 financial year. Ernst & Young Inc. are, in the Committee’s opinion, independent of the Group.
- The Committee is satisfied that the internal financial controls of the Divisions and Group operated effectively during the year ended December 2016 and can be relied upon. In addition, the Committee is satisfied with the Group’s accounting policies and that these have been appropriately and consistently applied during the year ended December 2016.
- Significant matters considered in relation to the AFS include:
- Key assumptions made for the impairment testing of goodwill;
- The assessments of the recoverability of deferred tax assets; and
- Provisions on inventory balances.
- The Committee reviewed this Integrated Annual Report and recommended it to the Board for approval.
- The Audit Committee has considered the JSE letter of 15 February 2016 (JSE Proactive Monitoring Process) and has taken the appropriate action.
- The nature and extent of non-audit services provided by the External Auditors is reviewed annually to ensure that fees for such services do not become so significant as to call into question their independence of Massmart.
- The nature and extent of any future non-audit services have been defined and pre-approved, and the total fee associated with those non-audit services may not exceed 50% of the total audit fee without approval of the Committee. During the year ended December 2016, the non-audit services made up 0.5% of the audit fee. If it appears that this guideline will be exceeded on a consistent basis, non-audit services will be outsourced to alternative auditors.
- No reportable irregularities were identified and reported by the external auditors to the Committee.
- The Committee is satisfied that the internal financial controls of the Divisions and Group operated effectively throughout the year ended December 2016 and can be relied upon. In addition, the Committee is satisfied with the Group’s accounting policies and that these have been appropriately and consistently applied throughout the year ended December 2016.
- The Committee is satisfied with the competence and effectiveness of the Chief Audit Executive and arrangements for internal audit.
- As at the date of this report, no complaints have been received relating to accounting practices and internal audit of the Company or to the content or auditing of the Company’s financial statements, or to any related matter.
- The Massmart website has a link enabling the general public to lodge complaints with the Committee. Since establishing this functionality in 2009, no complaints have been received.
Annually the Committee considers whether it is meeting its duties and responsibilities as set out in the Committee charter and in terms of the requirements of the Companies Act.
As part of the Audit function, the Committee receives reports on Group companies’ financial performance, governance, and internal controls, adherence to accounting policies, compliance and areas of significant risk, amongst others. The Committee also receives written reports by both the external and internal auditors, which are accompanied by discussion with Committee members. After considering these reports, the Committee formally reports to the Board, twice a year, regarding the overall control framework and effectiveness of controls.
Each of the four Divisions has a Financial Review Committee, which meets twice a year, before the finalisation and release of the Group’s Interim and Preliminary financial results, respectively. These Committees effectively function as Divisional Audit Committees but not strictly in the manner required by the regulators or King III. The attendance at these meetings includes the following invitees: the Chief Financial Officer, Divisional Chief Executive and Divisional head of Finance, key finance and accounting staff, members of internal and external audit, and Massmart Corporate Finance executives. Minutes from these meetings are included with the papers of the following Committee meeting. Twice a year the Audit Committee reviews the Financial Review Committee minutes and the external audit reports. Annually they review the Annual Financial Statements, to comply with the Companies Act requirements of a holding company audit committee and its responsibilities in regard to all Company subsidiaries.
The Group’s interim and provisional reports are always subject to independent review by the external auditors.
Ensuring proper system security, data integrity and business continuity is the responsibility of the Board, but is given effect by the Audit Committee, the Massmart Technology Information and Process Forum (TIP Forum) and Massmart’s formally contracted Information Technology (IT) business partners and service providers. The IT governance framework includes structures, processes and mechanisms that will enable the delivery of value to the business and reduce IT risk. There is an IT charter and the Group has established and implemented policies in place.
The Committee’s report in accordance with section 94(7)(f) of the Companies Act, can be found in the “Our performance” section of the Integrated Annual Report.
Effectiveness of the Chief Financial Officer
As required by the JSE, the Committee and Board have considered the skills, qualifications and performance of the Chief Financial Officer, Johannes van Lierop, and are unanimously satisfied of his suitability for the position. He was appointed in March 2015 and his biographical details can be found in the “Leadership Review” section of our IAR.
During the year ended December 2016, Ernst and Young Inc. were the external auditors for all Group companies, with the exception of:
- Masscash Swaziland (Proprietary) Limited who are audited by David Walker FCA (CA) SD; and
- Makro (Lesotho) (Proprietary) Limited, Maseru Cash & Carry (Proprietary) Limited and Game Discount World (Lesotho) (Proprietary) Limited who are all audited by New Dawn Chartered Accountants.
Total fees incurred to Ernst & Young Inc. during the year ended December 2016 were R24.5 million (2015: R23.1 million).
The Committee considers Massmart Audit Services (MAS) to be an independent, objective body providing assurance to the Group’s governance, risk and control activities. MAS comprises a dedicated team that, although managed from Massmart Corporate, is deployed Group-wide. The team comprises appropriately tertiary qualified and experienced personnel, including internal audit and retail/wholesale professionals, to ensure the delivery of a relevant and high-quality risk-based audit service. Pleasingly, 92% of the audit team is African, Coloured or Indian.
MAS is an objective body providing assurance concerning the Group’s governance, risk and control activities. MAS has the unequivocal support of the Board and Audit Committee. It has access to any part of, or person, in Massmart. All employees are expected to co-operate positively with MAS.
MAS is considered independent and has been subjected to a quality review. To ensure independence, MAS reports functionally to the Audit Committee and administratively to the CEO. The MAS team formally reports any material findings and matters of significance at the quarterly Divisional Boards and at the Audit Committee meetings. The reports highlight whether actual or potential risks to the business are being appropriately managed and controlled. Progress in addressing previous unsatisfactory audit findings is monitored until MAS reports the proper resolution of the problem area.
The responsibilities of MAS are defined and governed by a charter approved by the Audit Committee and the Board.
The Internal Audit function has adopted a risk-based methodology for several years in order to ensure appropriate coverage of governance, risk management and control processes that are key to the realisation of strategic objectives. The internal audit plan is based on risk assessments, risk registers, group strategies and input from management, the Board and the Audit Committee. The Audit Committee approves the annual audit plan and the budget. The CAE has unrestricted access to anyone in the organisation, has frequent and independent discussions and updates with the Committee Chairman and Massmart Executive Directors. The CAE holds a senior Executive position in the organisation and has an influential impact across the business strategically and operationally. The Board provides MAS with the authority to attend any strategic session, Committee or Board meeting and to have unrestricted access to all information across the Group to assist with its determination of the types and levels of governance, control and risk that exist across Massmart.
There is significant MAS involvement in IT throughout the Group in order to ensure satisfactory IT governance and assurance. All new major IT systems in the Group require specific MAS sign-off prior to implementation, and all significant IT projects are subject to MAS review. The MAS role is twofold: to assess the process and controls around large IT projects at significant phases of these projects; and to assess the control environment within existing IT systems and the Group’s general computer control environment. MAS adopted the Control Objectives for Information and related Technologies (COBIT) methodology for technology auditing several years ago.
MAS and external audit’s scope and work-plans, and those of other assurance providers, are properly co-ordinated and, when appropriate, are relied upon in order to provide efficient and effective assurance to the Committee and to reduce the governance burden.
MAS applies the standards of the International Standards for the Professional Practise of Internal Auditor and the recommendations of King III. In accordance with the International Standards for the Professional Practise of Internal Audit standards, it has been determined that MAS will be subjected to an independent external quality assessment review at least once in five years. An independent external audit firm conducted the last quality review and concluded that Massmart’s Internal Audit function ‘generally conforms’ to the standards of the Institute of Internal Audit which is the highest standard possible.
|The Audit Committee comprises:
Mr Moses Kgosana
Mr Kuseni Dlamini
Dr Lulu Gwagwa
Ms Phumzile Langeni
Mr Chris Seabrooke was the Chairman and a member of the Audit Committee until his resignation from the Committee on 31 August 2016.
All are independent non-Executive Directors. They each have the requisite financial and commercial skills and experience to contribute to the Committee’s deliberations. The Audit Committee formally met three times in the year ended December 2016.