Review of the Audit Committee
Report by Colin Day
Chairman of the Audit Committee
Audit Committee members
1 Appointed to the Committee on 13 May 2013.
2 Appointed to the Committee on 1 December 2013.
|Paul Spencer (chairman until 12 June 2013)||4|
|Colin Day (chairman from 12 June 2013)||7|
Dear share owner
We held seven meetings during the year, which were attended by the external auditors, the Company’s chairman, the Group finance director, Bud Morten, the director of internal audit, the Group chief counsel and the Company Secretary.
Preparatory meetings were also held with the internal and external auditors as well as members of the Company’s senior management. The committee received presentations from the heads of internal audit, finance, tax, compliance and legal. The committee also received reports from the Disclosure Committee on financial reports. The Board received regular reports on all matters of particular significance arising at the committee meetings.
The committee’s terms of reference, which are reviewed with the Board annually and most recently in December 2013, are on the Company’s website at wpp.com/investor.
The committee and its members were formally assessed by the chairman of the Company as part of the annual evaluation process for their technical suitability to be members and also for its overall effectiveness. The Board has designated me as the committee’s financial expert for Sarbanes-Oxley Act (SOX) purposes and as having recent and relevant financial experience for the purposes of the UK Corporate Governance Code. The members of the committee have financial and/or financial services experience as set out in their biographies.
Committee responsibilities and how they were discharged in 2013
The main matters we dealt with during 2013 were as follows:
- monitoring the integrity of the Company’s financial statements and reviewing significant financial reporting judgements;
- reviewing internal financial control and internal audit activities;
- assisting the Board in meeting its responsibilities in respect of reviewing and reporting on the systems and key elements of risk management as they affect the Group;
- reviewing the Group Treasury policy with particular focus on debtors, funding foreign exchange and cash management and the continued ability of the Group to adopt the going concern basis in preparing financial statements;
- reviewing reports on any material litigation or regulatory reviews involving Group companies;
- reviewing the Group’s mergers and acquisitions strategy, any significant acquisitions, due diligence procedures and integration processes and the debt financing by the Group;
- reviewing GroupM’s trading model and its risk assessment processes;
- reviewing the Group’s tax strategy;
- monitoring the accounting and legal reporting requirements, including all relevant regulations of the UK Listing Authority, the SEC and NASDAQ and the Jersey Financial Services Commission;
- overseeing continued compliance with Section 404 of SOX, through regular status reports submitted by the internal and external auditors;
- reviewing the Group’s reporting systems and shared services and IT integration initiatives;
- reviewing issues raised on our Right to Speak helpline and the actions taken in response to those calls; and
- reviewing the Group’s initiatives and policies on data privacy and internet security.
The committee examined whether the annual report and accounts for 2013 was fair, balanced and understandable and provided the information necessary for share owners to assess the Group’s performance, business model and strategy. The process the committee, the Disclosure Committee and the Board undertook is outlined in the Nomination and Governance report.
Financial reporting and significant financial judgements
The management team make key decisions and judgements in the process of applying the Group’s accounting policies. These key judgements were detailed in reports to the committee in respect of 2013 which were then examined by the committee and discussed with management.
Deloitte also reported to and discussed with the committee whether suitable accounting policies had been adopted in the financial statements for the year ended 2013 and whether management had made appropriate estimates and judgements. The areas of significant judgement considered by the committee and how these were addressed included:
- the assessments made for goodwill impairment. The committee confirmed, based on management’s expectations of future performance of certain businesses, the level of goodwill impairment charges required in 2013;
- the judgements made in respect of revenue recognition particularly as these relate to media volume income and media trading income. The committee received briefings from Deloitte and management on the appropriateness of the policies adopted and the controls in place;
- the valuations of non-controlled investments which are based on local management forecasts, recent financing rounds and other supporting information such as industry valuation multiples. The committee examined the valuations with management and considered the sample testing of the investments performed by Deloitte and agreed that the valuations performed were appropriate;
- the accuracy of forecasting the potential future payments due under earnout agreements in respect of acquired businesses. The committee considered the forecasting with management and the testing undertaken by Deloitte and agreed that earnouts have been accounted for on a consistent basis to previous periods;
- the approach taken to calculating fair value adjustments in respect of acquired businesses and specifically provisions for non-corporate tax, property and legal exposures which the committee considered was appropriate;
- the valuation of year-end provisions in respect of working capital. The committee received briefings on the approach taken by management in assessing the level of exposure across the Group and agreed it was consistent and appropriate;
- accounting for the judgemental elements of remuneration, including, pensions, bonus accruals, severances and share-based payments. The committee agreed that the assumptions applied by management are reasonable;
- the judgements made in respect of tax, in particular deferred tax assets including their recoverability and the level of tax provisioning. The committee supported management’s assumptions in both these areas and believe the current level of provisions is reasonable; and
- the going concern assessment and key forecast assumptions. The committee concur with management’s going concern assumptions.
Deloitte has been WPP’s auditor since 2002. The lead partner rotates every five years and the last rotation was in 2010. In 2013, the effectiveness of the audit process was evaluated through a committee review of the audit planning process and discussions with key members of the Group’s finance function. The 2013 evaluations concluded that there was a good quality audit process and constructive challenge where necessary to ensure balanced reporting. The committee held private meetings with the external auditors and the committee chair met privately with the external auditors before meetings. The committee continues to be satisfied with the performance of Deloitte and confirmed that Deloitte continues to be objective and independent. The committee recommends the reappointment of Deloitte at the AGM on 25 June 2014.
The committee considered the Group’s position on its audit services contract following changes to the UK Corporate Governance Code and European Union regulations concerning the audit market. In view of the uncertainty regarding the form and impact of these regulations, the committee will recommend a course of action to the Board during 2014 in respect of the tender of the audit contract.
The committee has established a policy regarding non-audit services that may be provided by Deloitte, which prohibits certain categories of work in line with relevant guidance on independence, such as ethical standards issued by the Auditing Practices Board and SOX. Other categories of work may be provided by the auditors if appropriate and if pre-approved by the committee, either as individual assignments or as aggregate amounts for specified categories of services. All fees are summarised periodically for the committee to assess the aggregate value of non-audit fees against audit fees. The level of fees for 2013 is shown in note 3 of the financial statements.
This is my first year as chairman of the committee which has been a year of transition as the committee now has a majority of new members as part of the Board refreshment process.
I would like to thank my colleagues on the committee, the parent company executives and the external advisors for their hard work in 2013.
16 April 2014
Chapter 9 of 13