I am pleased to present the report of the Audit Committee for the financial year ended 30 April 2016.
Throughout the year, the Audit Committee has continued its work of reviewing the effectiveness of Consort Medical's corporate governance framework with particular emphasis on the quality of financial reporting, internal control, and risk management systems. This report explains in detail how the Committee undertook its duties.
During the year, the Audit Committee discussed the following key items:
- Risk assurance
- Treasury, including foreign currency hedging
- Accounting policies
- Financial results and budgets
- Fair value of the Aesica acquisition balance sheet
- Goodwill impairment
- Treatment of special Items
- Contingent consideration from Ambu A/S relating to King Systems
- Engagement and review of external auditors
- Review of audit and non-audit services and fees
- Review of reimbursed expenses
- Committee terms of reference
- Cyber risk and disaster recovery procedures
- Going concern and viability review
Key Developments in Accounting, Corporate Reporting and Taxation
The Audit Committee is responsible for reviewing, on behalf of the Board, the Group's financial and reporting practices and disclosures, reviewing the integrity of the financial statements, the Group's system of internal controls, the work of the external auditors and the Group's compliance with financial policies, laws and regulations. The Audit Committee's terms of reference may be obtained from the Company's website.
The annual and half-yearly financial reports are reviewed by the Committee through a process which includes discussion with the Chief Financial Officer and the external auditors. The external auditors prepare reports to the Committee on significant accounting policies and issues and judgements applied in the preparation of the financial reports. The Audit Committee gives its recommendation to the Board concerning the adoption and publication of all financial reports to shareholders.
In addition to the Board, the Audit Committee has conducted its annual review of the system of internal controls based on a review of significant risks identified, internal reviews, external audits and reports from management.
Financial Reporting and Significant Financial Matters
In carrying out its duties, the Committee is required to assess whether suitable accounting policies have been adopted and to challenge the robustness of significant management judgements reflected in the financial results. This process involves reviewing relevant papers prepared by management in support of the policies adopted and judgements made. These papers are discussed with management and the external auditors. In addition, the Committee reviews the year end report to the Audit Committee from the external auditors based upon its work performed and findings from the annual audit.
The significant accounting issues considered by the Committee during the year were areas where management is required to use significant judgement. These issues are listed below:
The value of goodwill is supported by a value in use model prepared by management. This is based on cash flows extracted from the Group's budget and strategic plan, which have both been approved by the Board. The Committee debated the performance of the operating segments, considered the cash flow models in the Group's strategic plan, and evaluated sensitivities in relation to that plan.
Contingent Consideration on the Disposal of King Systems
The contingent consideration due on the disposal of King Systems is recorded at fair value, a calculation which previously required judgements around the level of expected sales of the King Vision product for three years post disposal. Since the current year marks the end of this three year period, there is little judgement in calculating the fair value calculation as at 30 April 2016.
The Treatment of Special Items and their Presentation in the Consolidated Financial Statements
Special items have been separately disclosed within the Group's consolidated financial statements. The Committee has reviewed papers prepared by management showing how these costs have been identified and calculated. It has challenged both the quantum of the charge and its presentation in the consolidated income statement and is satisfied that these costs have been treated appropriately. The Committee specifically evaluated the appropriateness of the treatment of those items relating to the Aesica acquisition and considered the adequacy of the related disclosures.
The Group's policy for revenue recognition is set out in note 1 to the financial statements. Management prepares a paper for the Committee setting out any key judgements applied in respect of revenue recognition and in the accounting for major manufacturing contracts. The Committee has reviewed the papers presented and challenged management on the judgements applied ensuring they are in line with the Group's policy.
Accounting standards require that all assets and liabilities acquired in a business combination are recorded at fair values on acquisition. During the financial year, the Group completed the initial accounting for the Aesica acquisition which was included in the annual report and accounts to 30 April 2015. The key judgements in completing the accounting for the Aesica acquisition were:
- determination of the fair value of acquired assets and liabilities including the recognition of any provisions to fulfil customer obligations and other costs and
- finalisation of the goodwill associated with the transaction as result of the above
Management prepared a paper for the Committee setting out the key judgements applied in respect of the completion of the accounting for the Aesica acquisition during the lookback period. The Committee reviewed these papers and the papers prepared by the external auditors, understood the basis for the valuation and discussed the key judgements with management and the external auditors.
Based upon its review and discussions with both management and the Group's external and internal auditors, the Committee is satisfied that, after raising appropriate challenge, the judgements outlined above are reasonable and that the appropriate disclosures have been included in the Group's consolidated financial statements.
During the course of the year, the Committee received updates from management on tax matters affecting the Group.
The Committee also reviewed the corporate tax rate for the financial year of 13.0%, discussed the key risks in respect of corporate tax and considered KPMG's audit work and conclusions in this respect.
In accordance with its policy on non-audit services provided by the Company's auditors, the Committee reviews and approves the award of any such work. The Audit Committee refers to the Board for approval of any non-audit services where the fees for such work may represent a significant proportion of the annual audit fee.
PricewaterhouseCoopers LLP, during their remaining tenure as auditors of the Aesica subsidiaries in the year, completed an agreed upon procedures engagement related to the completion of the acquisition accounting noted above. There were no non-audit services provided by KPMG LLP during the year.
Details of non-audit services provided to the Company by the external auditors are shown in note 3 to the financial statements.
During the year, the Audit Committee conducted a tender process and in November 2015 we announced the appointment of KPMG LLP as the Group's auditors for the financial year which commenced on 1 May 2015.
The Audit Committee has from time to time considered the need for a separate dedicated internal audit activity. Having previously determined that this was not required, the Group has now determined that the scale and nature of the Group's operations are now sufficiently large and complex that such a dedicated resource would be required. Additional Group resource has been appointed and this is being supplemented as and where appropriate through the engagement of internal audit services from suitable qualified external providers. The Audit Committee keeps this under review.
The Audit Committee has reviewed and approved the internal procedures whereby employees can raise concerns about possible financial or other irregularities. The policy gives guidance on the type of matters that staff may wish to disclose, and a means of doing so via an independent organisation in the event that any staff member feels that he or she cannot make a disclosure via the usual management channels.
The Group is committed to the highest standards of openness, integrity and accountability and the prevention of bribery and corruption. As noted above, the Group operates a whistleblowing policy so that employees can report confidentially any matter giving rise to concerns about the operation of the Group's business.
15 June 2016