Jonathan Nicholls
"The Committee aims to ensure high standards of corporate and regulatory reporting, an appropriate control environment, risk management framework and compliance monitoring"

Jonathan Nicholls


Chairman of the audit committee

Dear Shareholder,

On behalf of the Board I am pleased to present the Audit Committee report for 2016.

The Audit Committee ("the Committee) has to use judgment when reviewing the accounting treatment for the carrying values of its operations, the disclosure of other items and the recognition and measurement of supplier rebate income.

As discussed within the Annual Report and Accounts, trading was challenging in 2016. As a consequence, the Audit Committee has reviewed the carrying values of its operations for evidence of impairment. The outcome of this review was that the carrying values of Larivière and Poland have been written down.

The Group has continued to invest in upgrading its accounting systems with the implementation of Kerridge in the UK and Talentia in France. Although not complete at the year end, the Group's management is continuing to develop both systems to ensure that they provide enhanced control and financial information in comparison to the systems that are being replaced. The controls for these ERP systems require further development and this will continue to be of focus in 2017.

The Group has outsourced the Internal Audit function to KPMG. KPMG's Internal Control Review undertaken in December 2014 and subsequent internal audit reviews support the view that the Group has an effective system of internal financial control.Management actions continued to be taken to improve controls and bring efficiencies across the business in 2016.During the year KPMG performed reviews in IT performance, cybersecurity, programme assurance, ERP back office effectiveness and acquisition due diligence to identify opportunities for further improvements to the control environment.

The cybersecurity review identified a number of areas for improvement and these will be a focus for the Board in 2017.The 2017 programme of reviews will ensure continued focus on areas of risk to the business to ensure that the control environment remains effective and robust.

Although going concern is a matter for the whole Board (see Treasury Risk Management), a review is made by the Audit Committee of the Group's headroom under its covenants and undrawn facilities in relation to the Group's financial forecasts and sensitivity analyses.

The Committee has again considered the issue of external Auditor rotation and, although continuing to keep this under review, currently intends to reconsider the most appropriate time for the next audit tender process. Further detail is provided in this report.

Mr I.B. Duncan was appointed a Non-Executive Director with effect from 1 January 2017.As announced on 12 December 2016, it is my intention to retire as a Non-Executive Director and Chair of the Audit Committee on 31 March 2017.It is proposed thatMr Duncan succeed me as Chair of the Audit Committee, and, with his knowledge and expertise in finance and change management he is a perfect fit for the role.

The Company has complied during the financial year ended 31 December 2016 with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 that are applicable to it.

Jonathan Nicholls

Chairman of the audit committee

13 March 2017

Purpose and aim

The purpose of the Committee is to make recommendations on the reporting, control, risk management and compliance aspects of the Directors' and the Group's responsibilities, providing independent monitoring, guidance and challenge to executive management in these areas.

Through this process the Committee's aim is to ensure high standards of corporate and regulatory reporting, an appropriate control environment, risk management framework and compliance monitoring. The Committee believes that excellence in these areas enhances the effectiveness and reduces the risks of the business.

Key responsibilities

  • The accounting principles, practices and policies applied in, and the integrity of, the Group's accounts.
  • The adequacy and effectiveness of the internal control environment.
  • The effectiveness of whistleblowing procedures.
  • The effectiveness of the Group's outsourced Internal Audit function.
  • The appointment, independence, effectiveness and remuneration of the Group's external Auditor, including the policy on the award of non-audit services.
  • The supervision of any tender process for the Group's internal and external Auditor.
  • External financial reporting and associated announcements.
  • The Group's risk management processes and performance.
  • The Group's compliance with the UK Corporate Governance Code.

The Audit Committee's Terms of Reference are available on the Company's website (www.sigplc.com).

Audit Committee membership

As at 31 December 2016, the Committee comprised the four independent Non-Executive Directors of the Company.

Chairman of the CommitteeMembers
Mr J.C. NichollsMs J.E. Ashdown
Mr C.V. Geoghegan
Ms A. Abt

The Board considers that each member of the Committee is independent within the definition set out in the UK Corporate Governance Code ("the Code").The combined relevant commercial and financial knowledge and experience of the Committee members satisfies compliance with the Code's provision C.3.1.

Audit Committee structure

The Committee operates under Terms of Reference which can be found on the Company's website.They are reviewed annually by the Committee, including comparison against the Code, and changes are recommended to the Board for approval.

The Committee has in its Terms of Reference the power to engage outside advisors and to obtain its own independent external advice at the Company's expense, should it be deemed necessary.During 2016 no member of the Committee, nor the Committee collectively, found it necessary to obtain such separate advice beyond the advice that is directly provided to the Committee by the external Auditor, Deloitte LLP, or from KPMG LLP, who operate the Group's outsourced Internal Audit function.

As part of Corporate Governance the Committee reviews its own performance annually and considers where improvements can be made. The Committee reviewed its own performance in December 2016 and the results of this review were reported to the Board.

The Chairman of the Committee reports to the subsequent meeting of the Board on the key issues covered by the Committee, identifying any matters on which it considers that action or improvement is needed, and makes recommendations on the steps to be taken.

Meetings

The Committee meets regularly throughout the year, with four meetings being held during 2016. Its agenda is linked to events in the Company's financial calendar.

Attendance by individual members of the Committee is disclosed in the table in the Corporate Governance section. The Committee Chairman regularly invites senior company executives to attend meetings of the Committee to discuss or present specific items, and in particular the previous Group Finance Director, Mr. D.G. Robertson, attended all four of the meetings in 2016. The external Auditor also attended all four meetings of the Committee in 2016 and has direct access to the Committee Chairman. The external Auditor meets periodically, and in between Committee meetings, with members of the Committee without the Chairman of the Board and the Executive Directors being present. KPMG LLP, who provides an outsourced Internal Audit function for the Group, attends meetings to present its reports. The Committee also meets with KPMG without the Executive Directors being present, and the Committee Chairman meets regularly with KPMG outside of the formal meetings.

The Committee addressed the following key agenda items during its four meetings in 2016:

4 March 2016

  • Internal Audit update
  • Review of going concern basis of accounting and Viability Statement
  • Goodwill and intangible assets impairment review
  • Consideration of the risk management review process
  • Internal control review
  • Review of 2015 audit process and results, and discussion of significant accounting matters
  • Review of the 2015 external Auditor report
  • Review of the 2015 Annual Report (including fair, balanced and understandable) and preliminary results announcement

6 June 2016

  • Review of the Internal Audit report
  • Review of the Committee's Terms of Reference
  • Review of whistleblowing and non-audit services policies
  • Discussion of the 2015 Annual Report compared to best and emerging practice
  • Consideration of 2016 interim results (including goodwill and going concern)
  • Review Auditor plan for interim review
  • Assessment of performance of external Auditor

3 August 2016

  • Review of 2016 interim results
  • Goodwill and intangible assets impairment review
  • Review of going concern basis of accounting
  • Review of the external Auditor's interim work and report and year end planning

8 December 2016

  • Review of the internal control report
  • Consideration of the risk management review process
  • Review and approve the 2017 Internal Audit report
  • Review of audit pre-close accounting and reporting issues
  • Goodwill and intangible assets impairment discussion
  • Review of the updated year end external audit planning report
  • Agreement of 2016 audit fee and review of Auditor independence
  • Discussions regarding going concern and the Viability Statement
  • Review of performance of Committee and identification of training requirements
  • Corporate Governance update by external Auditor

Allocation of time

The chart below gives an indication of the proportion of time spent by the Committee on each of its key areas of responsibility.

Allocation time graph

Governance

Financial reporting

Risk management

External audit

Internal audit

Financial reporting and significant accounting matters

The Committee considered the following financial reporting and key accounting issues with regard to the financial statements:

Recognition and measurement of supplier rebate income*

The Committee examined the procedures and controls in place to ensure that the reporting, reviewing and accounting for supplier rebate income is properly managed and that supplier rebates are recognised appropriately in the Group financial statements.

Carrying value of goodwill and intangible assets*

The carrying value of goodwill is systematically reviewed at each mid-year point and at year end.A consistent methodology is applied to the individual cash generating units, taking account of market outlook, risk-adjusted discounted future cash flows, sensitivities, and other factors which may have a bearing on impairment considerations.

Disclosure of Other items*

The Committee gave careful consideration to the judgments made in the separate disclosure of Other items.In particular, the Committee sought to ensure that the treatment followed consistent principles and that reporting in the Group financial statements is suitably clear and understandable.

Recognition and measurement of trade receivables

Methodologies and judgments applied in establishing provisions for trade receivables were examined to ensure consistent application and appropriateness to the trading position of the Group.

Going concern and longer term viability

The Group is subject to financial covenants related to its committed bank facilities and private placement notes as set out in the Treasury Risk Management section. The Group had net debt of £259.9m at 31 December 2016 and reported a leverage of 2.1x for the period against the covenant maximum of 3.0x. The Committee reviewed the Group's cash flow, net debt and leverage forecast and note that there is sufficient headroom forecast against the Group's financial covenants throughout the viability period. Our assessment has placed additional focus on the covenant test points of 30 June (with particular reference to the working capital seasonality of the business which would ordinarily see leverage rise at the half year) and 31 December. The Committee has also reviewed the Group's potential mitigating actions to reduce leverage in the short term and consider these to be achievable and commercially viable. The Committee is satisfied that the assumptions taken are appropriate.

* Items marked as such are areas where judgment is involved in arriving at the accounting conclusion.

Oversight of Internal Audit

The Internal Audit function provides independent assurance to senior management and the Board on the adequacy and effectiveness of SIG's risk management framework. Internal Audit forms an independent and objective assessment as to whether risks have been adequately identified, adequate internal controls are in place to manage those risks, and those controls are working effectively. The results of all assignments have been reported to the Audit Committee during the year. Areas of weakness that were identified during the year prompted a detailed action plan and a follow-up audit check to establish that actions had been completed. No failings or weaknesses were identified during the year which had a material effect on the Company's financial performance.

The Audit Committee notes that the Company operates a Control Self Assessment ("CSA") internal control process to support the internal audit process. This process is summarised in the Corporate Governance Report.

KPMG LLP was appointed on 1 January 2014 in place of EY LLP to provide the outsourced Internal Audit function.The appointment followed a full review process which involved tenders being made by five accountancy firms leading to a shortlist of three firms from which a candidate was recommended.The process was carried out by the Group Finance Director and the Chairman of the Audit Committee who then recommended KPMG to the Audit Committee as the selected internal audit provider. Their appointment was then recommended by the Audit Committee to the Board, and was approved by the Board.

Oversight of external Auditor

The Board is aware of the need to maintain an appropriate degree of independence and objectivity on the part of the Group's external Auditor. The external Auditor reports to the Committee on the actions taken to comply with both professional and regulatory requirements and with best practice designed to ensure its independence.

The Group has an agreed policy with regard to the provision of audit and non-audit services by the external Auditor, which was operated throughout 2016. The policy is based on the principles that they should undertake non-audit services only where they are the most appropriate and cost-effective provider of the service, and where the provision of non-audit services does not impair, or is not perceived to impair, the external Auditor's independence and objectivity. It categorises such services as Auditor-permitted services, Auditor-excluded services and Auditor-authorised services. The policy, which can be viewed on the Company's website (www.sigplc.com), defines the types of services falling under each category and sets out the criteria to be met and the internal approvals required prior to the commencement of any Auditor-authorised services.

The external Auditor cannot be engaged to perform any assignment where the output is then subject to their review as external Auditor. The Committee regularly reviews an analysis of all services provided by the external Auditor. The policy and the external Auditor's fees are reviewed and set annually by the Committee and are approved by the Board.

The total fees payable by the Group to its external Auditor for non-audit services in 2016 was £0.1m, primarily the Interim Review (2015: £0.1m). The total fees payable to them for audit services in respect of the same period was £1.5m (2015: £1.4m).A full breakdown of Auditor fees are disclosed in Note 4 to the Consolidated Financial Statements.

The external Auditor reports to the Committee each year on the actions taken to comply with professional and regulatory requirements and best practice designed to ensure its independence, including the rotation of key members of the external audit team. Deloitte LLP has formally confirmed its independence to the Board in respect of the period covered by these financial statements.

In June 2016, the Committee undertook its annual review of the effectiveness of the external Auditor and considered the reappointment of Deloitte LLP. A questionnaire was sent to the Finance Directors of each of the Group's operating companies, which provided the Committee with an overall view across the Group.From this questionnaire and further discussions, the Committee is satisfied that Deloitte LLP continues to provide an effective audit service.

Audit tender

During the year, the Committee considered the Group's position on its Auditor services, taking into account the Code, together with the EU Audit Directive and Regulation and the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014.

Having previously acted as Auditor to parts of the Group since 2003, Deloitte was invited to tender for the entire Group audit in 2005 and this resulted in their appointment as the Group's external Auditor.

As noted previously, the Committee continues to review the performance of the external Auditor and has been satisfied with the independence, objectivity, expertise, resources and general effectiveness of Deloitte LLP, and that the Group is subjected to a rigorous audit process. The Committee does not consider it necessary to conduct a tender process for the appointment of the Company's Auditor at this time, although the Committee will continue to keep this under review.

The current lead audit partner took over the audit for the year ended 31 December 2013. The Committee reported its view last year that it was potentially more effective to align the tender of the external Auditor with the rotation of the current lead audit partner, which is due in 2018, by making use of the transition arrangements outlined by the Financial Reporting Council in relation to the Code and retaining the Company's existing audit firm until conclusion of the term of its current lead partner.

The Committee has since reconsidered the position. Given the recent appointment of a new Chief Financial Officer, coupled with the appointment of Mr Duncan, as the new Audit Committee Chair effective from 31 March 2017, the Committee believes that it is appropriate to delay the audit tender until after the 2018 audit, and will advise Shareholders of its audit tender plans in the 2017 report.

Therefore, the Committee recommends, and the Board agrees, that a resolution for the re-appointment of Deloitte LLP as Auditor of the Company for a further year will be proposed at the forthcoming Annual General Meeting.

Fair, balanced and understandable

The Committee has reviewed the contents of this year's Annual Report and Accounts and advised the Board that, in its view, the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the necessary information to enable Shareholders to assess the position and performance, strategy and business model of the Company.

In reaching this conclusion the Committee has considered the following:

  • The preparation of the Annual Report is a collaborative process between Finance, Legal, Human Resources, Investor Relations and Communications functions within SIG, ensuring the appropriate professional input to each section.External guidance and advice is sought where appropriate.
  • The coordination and project management is undertaken by a central team to ensure consistency and completeness of the document.
  • An extensive review process is undertaken, both internally and through the use of external advisors.
  • A final draft is reviewed by the Audit Committee members prior to consideration by the Board.

As a result of its work during the year, the Audit Committee has concluded that it has acted in accordance with its Terms of Reference and has ensured the independence and objectivity of the external Auditor.

On behalf of the Board

Jonathan Nicholls

Chairman of the audit committee

13 March 2017