Audit Committee Report

MemberIndependentMeetings eligible
to attend
Meetings attended
Neil WarnerYes44
Dr Chris RichardsYes43
Bryan Morton (resigned 9 July 2012)Yes10
Mike Redmond (appointed 19 July 2012/resigned 21 February 2012)*Yes11
Julian Heslop (appointed 1 January 2013)Yes22
Ishbel Macpherson (appointed 1 February 2013)Yes22

Secretary

Zoe Goulding

* Following the resignation of Bryan Morton from the Board, Mike Redmond was appointed as a member of the Audit Committee until the appointment of a new Non-Executive Director.

Role and Responsibilities

The main role and responsibilities of the Audit Committee (the "Committee") are set out in the written terms of reference which are available on the Company website at www.dechra.com. The Committee's terms of reference are reviewed on an annual basis and during the 2012/2013 financial year this took place at the February meeting. Following this review no material changes to the terms of reference were made. The main responsibilities of the Committee remain:

  • to monitor the integrity of the financial statements of the Group, reviewing the annual and half-year reports in detail to ensure they present a balanced assessment of the Group's position and prospects which is understandable to Shareholders and potential investors;
  • to review the effectiveness of the Group's internal controls and risk management systems as described within the Corporate Governance Section (Accountability) and, in conjunction with the Auditor, consider the accounting policies adopted by the Group;
  • to oversee the relationship with the Auditor. The Committee makes recommendations to the Board on the appointment of the Auditor, approves their remuneration and their terms of engagement, monitors their independence and objectivity, and sets the policy for non-audit work;
  • to make recommendations to the Board on the requirement for an internal audit function;
  • to review the arrangements for employees to raise concerns about wrongdoings, the Group's systems and controls for prevention of bribery and procedures for detecting, monitoring and managing risk of fraud.

In the performance of its duties the Committee has access to the services of the Auditor and is at liberty to obtain outside professional advice as necessary. During the year, no legal or independent professional advice was sought. The Auditor also has direct access to the Committee Chairman outside the formal Committee meetings.

Membership, Meetings and Attendance

The membership of the Committee and meeting attendance is stated on the previous page. Following the resignation of Bryan Morton in July 2012, Mike Redmond was appointed as a temporary member of the Audit Committee to ensure adherence to the Committee's terms of reference and in particular to ensure that Committee membership consisted of three Non-Executive Directors. This appointment was terminated on 21 February 2013 following the appointment of Julian Heslop as a Non-Executive Director. The Committee is pleased also to welcome Ishbel Macpherson as its most recent member.

The Board considers that the current Committee Chairman, Neil Warner, has recent and relevant financial experience as recommended by the UK Corporate Governance Code as a result of his financial background. He has held a number of financial positions throughout his career including most recently Finance Director of Chloride Group PLC (a position he held from 1997 until the end of December 2010) and also as Chairman of the Audit Committee of Vectura Group plc (to which he was appointed in February 2011).

Neil Warner will be standing down as a Non-Executive Director of the Company and as the Chairman of the Audit Committee at the forthcoming Annual General Meeting. It is intended that Julian Heslop will replace Neil as the Committee Chairman. As detailed in the Chairman's Letter, Julian worked for GlaxoSmithKline from 1998, latterly as its Chief Financial Officer from 2005 to 2011. It is therefore considered that Julian Heslop also has sufficient recent and relevant financial experience as required under the UK Corporate Governance Code.

Details of the members' financial and accounting experience are contained in the biographical details of the Board of Directors.

The Auditor attends meetings of the Committee other than when their appointment or performance is being reviewed. The Chief Executive Officer, Chairman, Chief Financial Officer and other senior finance staff attend as and when appropriate. The Committee has discussions at least once a year with the Auditor without management being present; during the financial year this took place at the end of the August meeting. Furthermore, during the year the Committee Chairman meets informally and has access to the Chief Financial Officer, Group Financial Controller and the senior audit engagement team. This group generally meets before the Committee meetings that consider the annual and half-yearly results.

Neither the Company nor its Directors have any relationships that impair the Auditor's independence.

Activities during 2012/2013

The Committee met four times during the 2012/2013 financial year, timed to coincide with the financial reporting timetable of the Company. The table below sets out a number of the matters which were discussed (and where necessary approved) at the four meetings:

MeetingMatters discussed/approved at the meeting
July 2012*
  • Review of the requirement for internal audit function
  • Non-audit fee update
  • IFS review update
  • Audit strategy for the year ended 30 June 2012 (including timetable, scope and fees)
  • Auditor independence
  • Company expectations of the audit
August 2012
  • Auditor's Report on the 2011/2012 financial results
  • Draft preliminary statement
  • Draft Annual Report
  • External audit effectiveness
  • Audit Committee effectiveness review
  • Auditor independence confirmation
  • Non-audit fee update
  • Going concern confirmation
  • Internal controls
  • Proposed final dividend
  • Auditor representation letter
  • Internal audit function
February 2013
  • Auditor's report on half-yearly results
  • Draft half-yearly report and announcement
  • Terms of reference
  • Interim dividend
  • Going concern confirmation
  • Senior Accounting Officer requirement
  • Auditor representation letter
  • Non-audit fee update
May 2013
  • Internal audit function
  • Non-audit fee update
  • IFS review update
  • Audit strategy for the year ended 30 June 2013 (including timetable, scope and fees)
  • Auditor independence
  • Company expectations of the audit
  • Senior Accounting Officer

* Meeting postponed from May 2012 due to the Eurovet acquisition.

Internal Control and Internal Audit Function

The Board retains overall responsibility for establishing the systems of internal control and monitoring their ongoing effectiveness and also for the identification and management of risk. The Committee monitors and reviews the effectiveness of the Group's internal control activities and further detail in respect of the internal controls are provided within the Corporate Governance Section (Accountability). As reported in the 2012 Annual Report, in light of the Eurovet acquisition it was agreed that the Group was now of sufficient size to warrant an internal audit function. The Committee discussed the role specification at the August meeting. Following the resignation of the Group Finance Director, Simon Evans, in October 2012 it was agreed that the recruitment process be placed on hold until the new Chief Financial Officer, Anne-Francoise Nesmes, had taken up her role within the Company. Following Anne-Francoise's appointment, discussions in relation to the role took place between the Committee Chairman and Chief Financial Officer and it was decided that the best approach to take in the current circumstances was to outsource the function for the short term so that a longer term view could be taken on the remit and responsibilities of an internal audit function. Tender invitations have been forwarded to a number of accountancy firms (excluding the Auditor, KPMG) for an enterprise risk management and internal support control function. Proposals are expected back by 27 September 2013 with presentations to be held mid-October. The timeframe will therefore allow the project to be initiated at the beginning of January 2014. It is anticipated that this ongoing support will continue for between 12 and 18 months until a firm decision can be made regarding insourcing compared to outsourcing in relation to the function.

Auditor

Audit Engagement Director Rotation

In line with the ethical standards of the Audit Practices Board the Group Audit Engagement Director is rotated every five years. The current Group Audit Engagement Director was appointed during the 2010/2011 financial year. The next rotation is scheduled to take place during 2015/2016.

Independence

The Auditor annually confirms their policies on ensuring audit independence and provides the Committee with a report on their own audit and quality procedures. This report was reviewed during the audit strategy meeting held in May 2013 and the Committee remain satisfied of the Auditor's independence.

Effectiveness

The performance of the Auditor is reviewed annually by the Committee at the end of the annual audit cycle taking into account feedback from financial directors and managers of the Group involved in the audit process, together with a review of the level of service provided by the Auditor to the Group. The Committee are satisfied with the current Auditor's effectiveness.

Audit Firm Tendering

The Committee are aware of the recommendations in the FRC UK Corporate Governance Code in relation to the expectation of the external audit being put out to tender every ten years.

KPMG Audit Plc has been appointed as the Auditor since the Company's formation in 1997 and their performance has been reviewed annually by the Committee since that time. The Committee has remained consistently satisfied with the level of independence of the Auditor and the integrity of the audit process. However, given the recent changes in best practice the Committee has considered whether an audit firm tender should be undertaken during the 2013/2014 financial year. Given the appointment of a new Chief Financial Officer in April 2013 the Committee believes that it would not be in the best interests of the audit process or indeed in respect of risk management to undertake a tender so soon after this appointment.

The Committee does, however, intend to undertake a tender process and will seek to align this with the rotation of the Audit Director Engagement scheduled for 2015/2016. The timing of this would therefore allow the successful audit firm (not disallowing for the fact that this could be the incumbent firm) to take up its appointment when the current Audit Director stands down.

Re-appointment of Auditor

In the light of organisational changes within KPMG, the Directors have agreed that KPMG Audit Plc, a wholly owned subsidiary of KPMG LLP, will step down as Auditor at the forthcoming Annual General Meeting and that a resolution to appoint KPMG LLP as Auditor and to authorise the Directors to set their remuneration will be proposed at the Annual General Meeting.

There are no contractual obligations that restrict the Committee's capacity to recommend a particular firm as Auditor.

Non-Audit Assignments

With respect to non-audit assignments undertaken by the Auditor, the Company has a policy to ensure that the provision of such services does not impair their independence or objectivity. Safeguards are in place to ensure continued audit independence including utilising separate teams to undertake the audit and non-audit work. When considering the use of the Auditor to undertake non-audit assignments, the Chief Executive Officer and Chief Financial Officer do at all times give consideration to the provisions of the FRC Guidance on Audit Committees with regard to the preservation of independence. To assist the Auditor's independence Deloitte LLP was appointed in 2012 to undertake tax and compliance work in substitution for the Auditor.

Audit Fee Review

The fee proposals for the external audit and half-yearly results were considered and agreed in the May 2013 meeting.

Non-Audit Fees

The policy in respect of non-audit fees was reviewed and amended during the year ended 30 June 2009, whereby it was agreed that the non-audit fee be capped at 50% of the audit fee. Prior approval of the Committee is required should non-audit fees exceed the cap and an explanation of the reasons for exceeding the limit is provided to the Committee, who assess the qualification, expertise, independence and objectivity of the Auditor prior to granting approval.

The Committee firmly believes that there are certain non-audit services where it is appropriate for the Group to engage the Auditor. During the year, the Auditor was commissioned to carry out working capital and reporting accountant work in respect of the disposal of the Services Segment. The Auditor was considered the most cost effective and appropriate firm to perform this work given both their knowledge of the existing business and the requirement to report on the existing as well as the reduced Group. The Committee did not consider that the performance of this non-audit work would affect or impair the Auditor's integrity. This is consistent with the ethical standard recommended by the Accounting Practices Board.

A summary of audit and non-audit fees in relation to the year is provided in note 6 to the Group's financial statements. This shows that non-audit work represented 135% of the annual audit fee and, in line with the above stated policy, reflects the Committee's prior approval of the fees paid to the Auditor in respect of the disposal of the Services Segment. Excluding the costs relating to the disposal, non-audit work represented 39% of the annual audit fee.

Committee Effectiveness Review

During the year, the Committee reviewed its own effectiveness as a part of the overall Board evaluation process. The Committee considered that it acted transparently and given the number of Committee and Board meetings scheduled throughout the financial year, maintained a thorough understanding of the Group and its business. The Committee also considered it had the skills to perform its responsibilities. The results of the review were advised to the Board.

Neil Warner
Audit Committee Chairman
3 September 2013