Corporate governance review
Report of the audit committee
for the year ended March 2019
I am pleased to present the report of the audit committee for the year ended 31 March 2019.
The audit committee submits this report, as required by section 94 of the South African Companies Act No 71 of 2008 (the Act)
Members of the audit committee and attendance at meetings
The audit committee consists of the independent non-executive directors listed below and meets at least three times per year in accordance with its charter. All members act independently as described in section 94 of the Act. During FY2019, two meetings were held as the committee was only constituted on 6 December 2018. The internal and external auditors, in their capacity as auditors to the group, attended and reported at all meetings of the audit committee. The group risk management function was also present. The executive of the board, CEO, CFO and group general counsel are not members, however, they attend audit committee meetings by invitation.
The names of the members who were in office during FY2019 and the details of the audit committee meetings attended by each of the members are:
|Name of committee member||Qualification||Two meetings were held during the year. Attendance||Category|
|S J Z Pacak||CTA (Wits) and CA(SA)||2||Independent non-executive chair|
|D G Eriksson||CTA (Wits) and CA(SA)||2||Independent non-executive|
|L Stephens||BBSc (UCT), BComHons (RAU), CA(SA), CD(SA)||2||Independent non-executive|
Christine Sabwa was appointed by the board as a member on 14 June 2019 and will, together with Steve Pacak, Don Eriksson and Louisa Stephens stand for election by shareholders at the upcoming AGM.
All members of the committee comply with the member requirements as set out in section 94 of the Companies Act 71 of 2008 (the Act). The board and the nomination committee unanimously recommend to shareholders that the committee members as stated previously be elected by shareholders at the upcoming AGM. All audit committee members served on the committee for the remainder of the financial year post appointment on 6 December 2018.
Responsibilities and key actions
The audit committee has adopted formal terms of reference, delegated by the board of directors, as set out in its audit committee charter.
The audit committee has discharged the functions in terms of its charter and ascribed to it in terms of the Act as follows:
- Reviewed the provisional report, consolidated annual financial statements and integrated annual report, culminating in a recommendation to the board to adopt them.
- In the course of its review the committee:
- took appropriate steps to ensure the consolidated annual financial statements were prepared in accordance with IFRS and in the manner required by the Act
- considered and, when appropriate, made recommendations on internal financial controls
- dealt with concerns or complaints on accounting policies, internal audit, the auditing or content of consolidated annual financial statements, and internal financial controls
- reviewed legal matters that could have a significant impact on the organisation's consolidated annual financial statements, and
- reviewed the ability of the group to continue as a going concern, including an analysis of the group's liquidity and solvency.
- Reviewed external audit reports on the consolidated annual financial statements.
- Reviewed the board-approved internal audit charter.
- Reviewed and approved the internal and external audit plans.
- Reviewed internal audit and risk management reports and, where relevant, made recommendations to the board.
- Evaluated the effectiveness of risk management, controls and governance processes.
- Verified the independence of the external auditor, nominated PwC as auditor for FY2019 and noted the appointment of Brett Humphreys as the designated auditor.
- Approved audit fees and engagement terms of the external auditor.
- Determined the nature and extent of allowable non-audit services and approved contract terms for non-audit services by the external auditor.
- Reviewed the JSE's report on the proactive monitoring of consolidated annual financial statements.
Key areas of focus during FY2019
The committee's key focus areas during the year included:
- Discharging its functions in terms of its charter.
- Reviewing and approving group policies for MultiChoice Group.
- Ensuring a successful listing and unbundling from Naspers Limited by:
- reviewing and approving the pre-listing statement financial information (including working capital statement) in terms of the JSE Listings Requirements, and
- ensuring appropriate gap analysis and remediation was performed on the internal control environment around the separation from Naspers Limited (including establishing appropriate secretarial, risk management and internal audit structures).
- Assessing the impact of changes in accounting standards and JSE Listings Requirements.
- Reviewing the organisations application and extent of application of the principles set out in the King IV.
Financial statement reporting issues
The audit committee's main responsibility in relation to the group's financial reporting is to review, with both management and the external auditor, the appropriateness of the group's consolidated annual financial statements (AFS) with its primary focus being on:
- The quality and acceptability of accounting policies and practices.
- Material areas where significant judgements have been made, along with any significant assumptions or estimates, or where significant issues have been discussed with or challenged by the external auditor.
- An assessment of whether the consolidated AFS, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the group's position and performance, business model and strategy.
The significant judgements, issues and conclusions reached, or actions taken by the audit committee in relation to the FY2019 consolidated AFS are outlined below. The significant judgements and issues are broadly comparable in nature to prior years, as disclosed in the group's pre-listing statement. Each of the matters was discussed with the external auditor and, where appropriate, has been addressed as key audit matters in the report on the audit of the consolidated financial statements.
|Significant reporting matter||Conclusions reached/actions taken|
Preparation of consolidated financial statements
MultiChoice Group was only formed on 28 September 2018 under a common control business combination transaction (the transaction). As this is excluded from the scope of IFRS 3 Business Combinations, judgement was required to be applied to develop an accounting policy to account for the transaction (refer to note 1 of the consolidated annual financial statements for the principles applied in the preparation of the consolidated annual financial statements).
The audit committee reviewed the basis of preparation prepared by management and ensure it was in line with IFRS.
Technical accounting advice was received which was audited by the external auditor.
Consequently, the audit committee was satisfied with the basis of preparation applied in the consolidated annual financial statements by management.
As part of the formation of MultiChoice Group Limited, MultiChoice Group Limited allocated for no consideration, an additional 5% stake in MultiChoice South Africa Holdings Proprietary Limited to Phuthuma Nathi.
In terms of IFRS 2 Share-based payment (IFRS 2), this transaction qualifies as an equity-settled share-based payment. The value of the 5% Phuthuma Nathi share issue according to the terms of the empowerment transaction has been calculated at R2.6bn (including an allocation of R0.7bn to the non-controlling interest).
The audit committee reviewed the accounting principles applied to the empowerment transaction to ensure they were in line with IFRS. The disclosure thereof in the consolidated annual financial statements was also reviewed.
Technical accounting advice was received which was audited by the external auditor.
Consequently, the audit committee was satisfied with the accounting and disclosure of the empowerment transaction included in the consolidated annual financial statements by management.
Accounting for taxation
The group operates across many tax jurisdictions and has recognised significant tax provisions and disclosed significant contingencies in this regard (refer to notes 2, 9 and 10, 14 and 15). Significant management judgement is exercised in estimating potential exposures where the interpretation of tax laws and regulations is subjective.
The audit committee reviewed updates on the group's assessment on certain tax matters and challenged both management and the external auditor on the legal judgements underpinning the provisioning and disclosure adopted in relation to contingent tax liabilities and operating assumptions underlying deferred tax asset recognition.
Consequently, the audit committee was satisfied with the approach adopted in the consolidated annual financial statements by management.
Other reporting matters
The audit committee has reviewed and is satisfied with the adequacy and effectiveness of accounting policies, financial and other internal control systems, and the financial reporting processes.
The audit committee reviewed the adoption and calculation of the group's non-IFRS measures, including trading profit, core headline earnings and free cash flow. The audit committee was satisfied that these measures are key to understanding the financial performance of the group and further concluded that the adoption and calculations were appropriate and that they were adequately disclosed in the provisional report and consolidated AFS (where appropriate).
The audit committee has oversight of the group's consolidated AFS and reporting process, including the system of internal financial control. It is responsible for ensuring that the group's internal audit function is independent and has the necessary resources, standing and authority in the organisation to discharge its duties. The committee oversees cooperation between internal and external auditors and serves as a link between the board of directors and these functions. The group head of internal audit reports functionally to the chair of the committee and administratively to the MultiChoice Group CFO. An assessment of the effectiveness of the internal audit function, as well as the head of internal audit, is performed annually by the committee. Based on the assessment, the committee is of the opinion that the internal audit function, as well as the head of internal audit, is effective.
Effectiveness of the company's internal financial controls
The committee reports to the board that it is of the opinion that, based on enquiries made and the reports from the internal and external auditors, the risk management processes and systems of internal control of the company were effective for the year under review. No material weaknesses in financial control of the company and its subsidiaries were reported for the year under review.
Independence and effectiveness of the external auditor
PricewaterhouseCoopers Inc. (PwC) was appointed as auditor of the company until the next AGM. PwC has been the auditor of the group since 10 December 2018. The committee believes that the auditor has observed the highest level of business and professional ethics. The committee is satisfied that the auditor has at all times acted with unimpaired independence.
Details of fees paid to the external auditor are disclosed in note 6 to the consolidated AFS. All non-audit services provided by the auditor were approved by the committee during the current financial year in accordance with the board-approved policy on non-audit services performed by the external auditor. The audit committee approved the provision of non-audit services that it believes are routine and recurring services that would not impair the independence of the auditor and are consistent with the principles of the Code of Professional Conduct set by the independent Regulatory Board for Auditors. Approved services included general consulting advice and limited tax consulting advice such as tax compliance and tax planning. Services approved for FY2019 amounted to R1.1m for general tax consulting advice and R3.1m for other consulting advice.
During FY2019, the audit committee reviewed a representation by the external auditor and, after conducting its own review, confirmed the independence of the auditor. The quality of the external audit was reviewed, focusing on a range of factors considered relevant to audit quality and feedback from PwC on its performance against its objectives, the committee concluded the external audit to be satisfactory. It was confirmed that no unresolved issues of concern exist between the group and the external auditor.
The partner responsible for the audit is required to rotate every five years. Brendan Humphreys was appointed as the audit partner for the first time in FY2019.
The committee has, in accordance with paragraph 3.84(g)(iii) of the JSE Listings Requirements, satisfied itself that the external auditing firm and designated auditor are accredited on the JSE list of auditors and advisers, and further confirms that it has assessed the suitability for the appointment of the external auditor and the designated individual audit partner. The committee has, as part of its assessment, requested and reviewed the information detailed in paragraph 22.15(h) of the JSE Listings Requirements from the external auditor.
Accordingly, the committee recommends the reappointment of the external auditor, PwC, and designated auditor, Brett Humphreys, at the next AGM.
Audit committee agendas provide for confidential meetings between committee members and the internal and external auditors, separately and independently from senior management.
Expertise and experience of the group's CFO and the finance function
As required by the King IV principle 8 practice 59(f) and the JSE Listings Requirements 3.84(g), the audit committee has satisfied itself that the group CFO has appropriate expertise and experience. In addition, the committee satisfied itself that the composition, experience and skills set of the finance function met the group's requirements. Based on an assessment performed annually, the committee is of the opinion that the finance function, as well as the CFO, is effective.
Integrated combined assurance
The board does not only rely on the adequacy of the embedded internal control process in the business but considers reports on the effectiveness of risk management activities from the risk committee. The committee ensures that the assurance functions of management as well as internal and external audit are sufficiently integrated and is satisfied with the effectiveness with the arrangements for combined assurance. The various assurance providers to the board comprise the following:
- Senior management and the risk committee considers the company's risk strategy and policy, along with the effectiveness and efficiency thereof. The risk committee also considers the adequacy of risk management strategies, systems of internal control, risk profiles and legal compliance. The audit committee receives assurance from the risk committee that risk management activities are sufficient and effective.
- The committee considers the systems of internal control, internal and external audit reports and reviews the independence of the auditor, the extent and nature of audit engagements, scope of work and findings. This committee also reviews the level of disclosure in the AFS and the appropriateness of accounting policies adopted by management and jointly with the risk committee considers material issues of fraud and reporting on fraud. The board reviews the performance of the committee against its charter.
The chair of the committee reports to the board at the board meeting following each committee meeting on matters addressed by the committee at its last meeting.
Discharge of responsibilities
The committee determined that, during FY2019, it had discharged its legal and other responsibilities as outlined in terms of its charter, details of which are included in the full corporate governance report on www.multichoice.com. The board concurred with this assessment.
Key focus areas going forward
The committee's key focus for FY2020 include:
- discharging its functions in terms of its charter
- assessing the impact of changes to accounting standards and the JSE Listings Requirements
- King IV recommendations
- focusing regularly on the group's working capital requirements and ensuring that the group and its subsidiaries continue to operate as going concerns, and
- reviewing at each meeting the accounting for taxation provisions and contingencies.
Chair: Audit committee
14 June 2019