Audit Committee report

All members of our Committee are Independent Non-Executive Directors. Each member has the requisite financial and commercial skills and experience to contribute to our Committee’s deliberations. We formally met three times during the year ended December 2019. Additionally, we met once during the year to review and consider the quality of the Annual Financial Statements of major subsidiaries to ensure compliance with the Companies Act, 2008.

Discharge of responsibilities for the 2019 financial year:

In the execution of our statutory duties and in accordance with our Charter, we effectively discharged the following responsibilities over the past financial year:

• Overseeing the effectiveness of the Group’s governance and internal control systems
• Nominate the External Auditors appointment, determine audit fees payable, 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’s Internal Audit Services (MAS) reports functionally to the Committee, is considered independent, applies King IV 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 information and technology governance
• Considering the solvency and liquidity of the Group as and when required
• Assessing the suitability and appropriateness of the expertise and experience of the Chief Financial Officer on an annual basis
• 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 our Committee and our members, and both present formal reports to us. The Chief Audit Executive (CAE) meets with us on a quarterly basis; and at the start of every Committee meeting the external auditors have a private meeting with the Committee.

Summary of key focus areas in 2019:

• Performance against Group strategy
• Assessed and are satisfied with the management changes made during the year
• Approval of management’s proposal not to declare a dividend due to the headline loss reported during the period, and recommended this to the Board
• Reviewed the scope, quality, effectiveness, independence and objectivity of the external auditors with reference to the audit quality indicators included in inspection reports issued by external audit regulators and are satisfied with all of these areas. In addition, we confirm that we have executed our responsibilities as set out in paragraph 3.84(g) of the JSE Listings Requirements. The audit firm Ernst & Young Inc. (with audit partner Roger Hillen as lead assignment partner) will be proposed to the shareholders at the May 2020 Annual General Meeting for approval to be the Group’s auditor for the 2020 financial year. In our opinion, Ernst & Young Inc. are independent of the Group and the rotation (every five years) of Mr Roger Hillen is in accordance with the provisions of the Companies Act. We review and approve the fees proposed by the external auditors on an ongoing basis
• Monitored the effectiveness of the Group and Divisional internal financial control environment, tax strategy and policy, combined assurance, compliance and information and technology governance
• Monitored and reviewed the Group financial covenants in relation to its borrowings and debt position and concluded that the business will be a going concern in the year ahead
• We are satisfied that the internal financial controls and procedures of the Divisions and Group operated effectively during the year ended December 2019 and can be relied upon. In addition, we are satisfied with the Group’s accounting policies and that these have been appropriately and consistently applied during the year ended December 2019
• Considered and recommended the audited consolidated Group Annual Financial Statements, Integrated Annual Report, interim and final financial results, trading updates and trading statements to the Board for approval
• Significant matters considered in relation to the Annual Financial Statements include:
  
  • Key assumptions made for the impairment testing of goodwill
  • The implementation of the IFRS 16 ‘Leases’ standard to ensure appropriate accounting disclosure
  • The assessments of the recoverability of deferred tax assets
  • Provisions on inventory balances
  • The review of this Integrated Annual Report and Annual Financial Statements and our recommendation to the Board for approval
  • The Committee has considered the JSE letter of 20 February 2019 (on proactive monitoring) and Massmart-specific thematic reviews and has taken the appropriate action where disclosures were queried
  • The annual review of the nature and extent of non-audit services provided by the external auditors 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 from our Committee. During the year ended December 2019, the non-audit services of approximately R1.5 million made up 4.1% 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 with the competence and effectiveness and arrangements for internal audit
• 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 (www.massmart.co.za) has a link enabling the general public to lodge complaints with the Committee. Since establishing this functionality in 2009, no complaints have been received

Focus areas for 2020 and beyond:

• Performance against Group strategy and implementation of the turnaround plan
• Ongoing monitoring of the effectiveness of the Group and Business Unit internal financial control environment, tax strategy and policy, combined assurance and compliance
• Assess and respond to aspects arising from the Mandatory Audit Firm Rotation relevant regulatory developments
• Monitor the effectiveness of cyber security risk management

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 in terms of King IV and applicable legislation. 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 we review the Financial Review Committee minutes and the external audit reports. In compliance with the Companies Act requirements, we review the Group’s and subsidiaries Annual Financial Statements.

The Group’s interim and provisional reports are always subject to independent review by the external auditors.

Responsible tax policy

Massmart understands that it is in society’s best interest to ensure that the public services and infrastructure we rely on remain properly funded through a transparent, fair and effective system of taxation.

Massmart’s tax strategy is to enhance its international tax position by maintaining a highly qualified tax function that is an effective contributor to the overall corporate strategy and plays a pivotal role in supporting the organisation in fulfilling its mandate as a responsible corporate citizen. The Group’s tax policy seeks to define the governance structures and performance management processes necessary to achieve objectives of compliance, responsible corporate citizenship, and transparency.

The Group is committed to complying with all tax laws and regulations in all jurisdictions in which the Massmart operates. Massmart has financial and tax controls in place to ensure a high level of compliance with applicable tax legislation across all the tax jurisdictions in which it operates.

We submit tax filings and other representations to revenue authorities which:

• Are filed timeously and in co-operation with tax revenue authorities;
• Make full disclosure of matters required by law; and
• Have reasonable and accurate grounds supporting tax positions taken

The performance of operational (day-to-day) tax activities ensures compliance with relevant tax legislation and reporting requirements, whilst addressing tax queries and retaining documents.

Massmart is committed to acting as a responsible corporate citizen by avoiding aggressive tax planning strategies and by upholding ethical business practices. The Group has a low risk tolerance in relation to tax matters and does not subscribe to aggressive tax planning strategies.

The commercial needs of the business are paramount in all tax planning opportunities. All transactions are driven by a business purpose or commercial rationale and are aligned to and consistent with Massmart’s overall business strategy. We are committed to acting with integrity and transparency on all tax matters.

Massmart supports the key principles of the Organisation for Economic Co-operation and Development action plans relating to Base Erosion and Profit Shifting. We are committed to maintaining responsible transfer pricing practices in our transactional dealings across jurisdictions.

Through regular and proactive communication with tax revenue authorities across the regions in which Massmart operates, we are committed to promoting professional and collaborative working relationships based on principles of transparency and trust.

Effectiveness of the Chief Financial Officer

As required by the JSE, the Committee and Board have considered the skills, qualifications, experience and performance of the Chief Financial Officer, Mohammed Abdool-Samad, and are unanimously satisfied of his suitability for the position. He was appointed in August 2019 and his biographical details can be found here.

Combined assurance

Massmart’s combined assurance framework seeks to optimise the assurance obtained from management and internal and external assurance providers on the significant risks and opportunities facing the Group. The model incorporates and enhances all assurance services and functions so that, taken as a whole, they: enable an effective control environment; support the integrity of information used for internal decision making by management and the Board; and support the integrity of Massmart’s external reports.

Massmart applies the five lines of assurance approach to coordinate and optimise our risk and assurance efforts. Combined assurance includes Executive and senior management monitoring and oversight; specialist department monitoring; internal audit and external assurance providers; as well as Board and relevant sub-Committee oversights.

The Audit Committee ensures that the combined assurance model is applied throughout the Group to provide a coordinated approach to all assurance activities and this Committee also monitors the relationship between external service providers and the Group.

Massmart has obtained assurance on the data included in the Integrated Annual Report from the following sources:

• Group and Company Annual Financial Statements were audited by Ernst & Young Inc.
• Emissions data was externally verified by GCX Africa
• Massmart’s Broad-Based Black Economic Empowerment (BBBEE) scorecard was verified by Honeycomb BEE Ratings Proprietary Limited
• Key compliance, Corporate Social Investment (CSI) and human capital performance indicators were assured by Massmart Audit Services (MAS)

External audit

During the year ended December 2019, 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
• Game Discount World (Lesotho) (Proprietary) Limited and Maseru Cash & Carry (Proprietary) Limited who are all audited by New Dawn Chartered Accountants

Total fees incurred to Ernst & Young Inc. during the year ended December 2019 were R36.2 million (2018: R32.3 million)

Internal audit

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 of 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.

MAS has the support of the Board and Audit Committee. It has access to any part of, or person, in Massmart.

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, in collaboration with Global Audit Services, conducted quality review in 2018 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.

To ensure independence, MAS reports functionally to the Audit Committee and administratively to the CFO, where MAS 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 that is reviewed and recommended by the Audit Committee and approved by the Massmart Board.

The internal audit plan is based on defined risk assessments, inclusive planning engagements, group strategies and input from management. The Audit Committee approves the annual audit plan and the budget. The Chief Audit Executive (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 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.

There is significant MAS involvement in IT throughout the Group in order to ensure effective IT governance and assurance. All new major IT systems in the Group require specific MAS involvement.

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 apply the standards of the International Standards for the Professional Practise of Internal Audit and the principles of King IV.

The Committee’s report in accordance with section 94(7)(f) of the Companies Act, can be found in the “Transparency and accountability“ section of the Integrated Annual Report.

Olufunke Oghodaro
Chairman of the Audit Committee

2 April 2020