1 Our opinion is unmodified

We have audited the financial statements of NCC Group plc (the Company) for the year ended 31 May 2019 which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated cash flow statement, consolidated statement of changes in equity, Company balance sheet, Company cash flow statement, Company statement of changes in equity, and the related notes, including the accounting policies in note 1.

In our opinion:

  • the Financial Statements give a true and fair view of the state of the Group's and of the parent Company's affairs as at 31 May 2019 and of the Group's profit for the year then ended;
  • the Group Financial Statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU);
  • the parent Company Financial Statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
  • the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the Audit Committee.

We were first appointed as auditors by the Directors on 1 November 2013. The period of total uninterrupted engagement is for the six financial years ended 31 May 2019. We have fulfilled our ethical responsibilities under, and we remain independent of, the Group in accordance with UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.

Overview
Materiality:
Group financial statements as a whole
£0.95m (2018: £0.80m)
4.4% (2018: 4.6%) of Consolidated profit before taxation normalised to exclude individually significant items as disclosed in note 6
Coverage85% (2018: 91%) of Consolidated profit before taxation
Risks of material misstatementvs 2018
Recurring risksRecoverability of goodwill in respect of Fox IT<>
Capitalised software and development costs as intangible assets<>
Assurance revenue recognition in the cut-off periodNew
Recoverable amount of investment in subsidiary – parent Company<>
Event driven risksThe impact of uncertainties due to the UK exiting the European Union on our auditNew
Going concernNew

2 Key audit matters: our assessment of risks of material misstatement

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the Financial Statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the Financial Statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.

The riskOur response

The impact of uncertainties due to the UK exiting the European Union on our audit

(Principal risks and uncertainties), (viability statement), (accounting policies).

Unprecedented levels of uncertainty

All audits assess and challenge the reasonableness of estimates, in particular as described in recoverability of goodwill in respect of Fox-IT and capitalised software and development costs as intangible assets below, and related disclosures and the appropriateness of the going concern basis of preparation of the Financial Statements (see below). All of these depend on assessments of the future economic environment and the Group's future prospects and performance.

In addition, we are required to consider the other information presented in the Annual Report and Accounts, including the principal risks disclosure and the viability statement and to consider the Directors' statement that the Annual Report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

Brexit is one of the most significant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown.

We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included:

  • Our Brexit knowledge: We considered the Directors' assessment of Brexit-related sources of risk for the Group's business and financial resources compared with our own understanding of the risks. We considered the Directors' plans to take action to mitigate the risks.
  • Sensitivity analysis: When addressing recoverability of goodwill in respect of Fox-IT and capitalised software and development costs as intangible assets and other areas that depend on forecasts, we compared the Directors' analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty.
  • Assessing transparency: As well as assessing individual disclosures as part of our procedures on recoverability of goodwill in respect of Fox-IT and capitalised software and development costs as intangible assets we considered all of the Brexit-related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks.

Our results

As reported under recoverability of goodwill in respect of Fox-IT and capitalised software and development costs as intangible assets, we found the resulting estimates and related disclosures of the outcome of the impairment assessment in the valuation of goodwill and disclosures in relation to going concern to be acceptable. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.

Going Concern

Refer to (Principal risks and uncertainties), (viability statement), (accounting policies).

Disclosure quality

The Financial Statements explain how the Board has formed a judgment that it is appropriate to adopt the going concern basis of preparation for the Group and parent Company.

That judgment is based on an evaluation of the inherent risks to the Group's and Company's business model and how those risks might affect the Group's and Company's financial resources or ability to continue operations over a period of at least a year from the date of approval of the Financial Statements.

The risks most likely to adversely affect the Group's and Company's available financial resources over this period were:

  • The impact of Brexit on market demand;
  • Increased pressure from competitors; and
  • Adverse fluctuations in foreign exchange rates.

There are also less predictable but realistic second order impacts, such as the impact of Brexit and the erosion of customer or supplier confidence, which could result in a rapid reduction of available financial resources.

The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed.

Our procedures included:

  • Key dependency assessment: Assessed sufficiency of the Group's resources to repay the debt falling due in at least the 12 months from the date of approval of the Financial Statements by assessing the Group's cash flow forecasts and key assumptions within the forecasts.
  • Funding assessment: We inspected key correspondence with finance providers to ascertain the committed level of financing, any related covenant requirements, and the attitude of the lender to any required refinancing.
  • Historical comparisons: Assessing the Group's forecasting accuracy by comparing actual results in the year to what was previously forecast for the year.
  • Sensitivity analysis: We considered sensitivities over the level of available financial resources indicated by the Group's financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively.
  • Benchmarking assumptions: Critically evaluating the cash flow forecast assumptions particularly in relation to growth rate to assess if these are realistic, achievable and consistent with external and internal information and other matters identified in the course of the audit.
  • Assessing transparency: Assessing the completeness and accuracy of the matters covered in the going concern disclosure particularly in relation to the sensitivity of the outcome of the cash flow forecasts and compliance with covenants.

Our results

We found the going concern disclosure without any material uncertainty to be acceptable (2018 result: acceptable).

Recoverability of goodwill in respect of Fox-IT

(£63.1m; 2018: £63.1m).
Refer to (Audit Committee Report), (accounting policies) (financial disclosures).

Forecast-based valuation

Due to the inherent uncertainty involved in forecasting and discounting future cash flows which are the basis of the assessment of recoverability, the outcome could vary significantly if different assumptions were applied in the model.
This risk is specifically related to the cash generating units (CGUs) for Fox-IT where there is minimal headroom on the carrying value of goodwill.
The effect of these matters is that, as part of our risk assessment, we determined that the value in use of Fox-IT has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the Financial Statements as a whole, and possibly many times that amount. The Financial Statements (note 13) disclose the sensitivity estimated by the Group.

Our procedures included:

  • Historical comparison: Assessing the Group's forecasting accuracy by comparing actual results in the year to what was previously forecast for the year. Critically evaluated the assumptions for future growth, with regard to actual growth rates in previous years.
  • Benchmarking assumptions: Critically evaluating the risk adjusted discount rates, having regard for market observable data with regards to risk-free rates and returns on equity for comparator companies. We also evaluated the assumptions for cost inflation and the terminal growth rate.
  • Our sector experience: Using our valuation specialists and our discount rate tool to determine an appropriate discount rate adjusted for forecasting risk and comparing this to the rate used by the Group.
  • Comparing valuations: Comparing the sum of the discounted cash flows to the Group's market capitalisation adjusted for debt to assess the reasonableness of the value in use calculations.
  • Sensitivity analysis: Performing breakeven analysis on the key assumptions.
  • Assessing transparency: Assessing the completeness and accuracy of the Group's disclosures and ensuring that the disclosure reflects the impact of reasonably possible changes in key assumptions on the amount of impairment.

Our results

We found the carrying value of the goodwill related to Fox IT to be acceptable (2018 result: acceptable).

Capitalisation of software and development costs as intangible assets

(Carrying value £5.2m (2018: £5.1m)).
Refer to (Audit Committee Report), (accounting policies) and (financial disclosures).

Accounting treatment

The Group capitalises internal and external costs in respect of software and development projects. The Group has also capitalised costs in relation to the finance and operational systems upgrades that represent substantial improvements to these assets. The Directors apply judgment in the classification of expenditure as capital in nature rather than ongoing operational expenditure.

Forecast-based valuation

There remains a degree of uncertainty around whether expected revenues and profits will be realised and be sufficient to ensure the recoverability of the assets recognised on the balance sheet. Certain of the key inputs, specifically timing and amount of capital expenditure, customer sign-up rates and related cost of sales, and discount rates applied to future cash flows require significant estimation and judgment.

Our procedures included:

  • Testing application: Agreeing a sample of costs to supporting documentation to understand the nature of the items and evaluate the appropriateness. This included discussions with project teams, agreeing a sample of project team members' capitalised hours to timesheets and assessing whether major projects are commercially viable by reference to existing and future orders and assessing whether there are indicators of impairment.
  • Historical comparison: Assessing the Group's forecasting accuracy by comparing actual results in the period to what was previously forecast for the year for each significant project to assess whether an impairment is required.
  • Assessing transparency: Assessing the adequacy of the Group's disclosures about the capitalised software and development intangible assets and the degree of estimation involved in assessing their recoverability.

Our results

We found the carrying value of the capitalised software and development costs to be acceptable (2018 result: acceptable).

Assurance revenue recognition in the cut-off period

(Total Assurance revenue £212.7m; 2018: £193.9m).
Refer to (Audit Committee Report), (accounting policies) and (financial disclosures).

FY19/FY20 Sales

Incentives and pressures relating to meeting market expectations increase the risk of fraudulent premature revenue recognition.
There is a heightened risk around the cut-off point at the year-end with regards to ensuring revenue (including deferred and accrued income) is recognised in the correct accounting period, particularly where projects are ongoing at the year-end.

Our procedures included:

  • Test of details: Agreeing a sample of revenue transactions within the cut-off period to supporting documentation to assess whether these have been recorded in the correct accounting period. This included specific testing of a sample of items held in accrued and deferred income at the year-end.
  • Analytic sampling: Using data and analytics tools we searched for unusual account combinations involving revenue.
  • Test of details: Using the output from our analytic sampling, we have performed testing over the identified sample. This included enquiry to understand the nature and substance of the transaction and obtaining supporting documentation for the journal.
  • Assessing transparency: Assessing the adequacy of the Group's disclosures around revenue recognition.

Our results

We found the amount of Assurance revenue to be acceptable (2018 result: acceptable).

Recoverability of investments in subsidiaries

(£60.8m; 2018: £60.8m).
Refer to (accounting policies) and (financial disclosures).

Low risk, high value

The carrying amount of the parent Company's investments in subsidiaries represents 28% (2018: 27%) of the Company's total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgment. However, due to their materiality in the context of the parent Company Financial Statements, this is considered to be the area that had the greatest effect on our overall parent Company audit.

Our procedures included:

  • Test of detail: Comparing the carrying amount of investments with the relevant subsidiaries' draft balance sheet as at 31 May 2019 to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making.
  • Assessing subsidiary audits: Assessing the work performed by the subsidiary audit team on a sample of those subsidiaries and considering the results of that work, on those subsidiaries' profits and net assets.
  • Our sector experience: For the investments where the carrying amount exceeded the net asset value, comparing the carrying amount of the investment with the expected value of the business based on its value in use. 

Our results

We found the carrying value of the investments in subsidiaries to be acceptable (2018 result: acceptable).

3 Our application of materiality and an overview of the scope of our audit

Materiality for the Group Financial Statements as a whole was set at £0.95m (2018: £0.80m), determined with reference to a benchmark of Group profit before taxation normalised to exclude Individually Significant Items as disclosed in note 6 of £21.4m (2018: £17.3m), of which it represents 4.4% (2018: 4.6%).

Materiality for the parent Company Financial Statements as a whole was set at £0.90m (2018: £0.60m), determined with reference to a benchmark of Company total assets, of which it represents 0.4% (2018: 0.3%).

We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £47,000 (2018: £40,000), in addition to other identified misstatements that warranted reporting on qualitative grounds.

Of the Group's 23 (2018: 22) reporting components, we subjected 11 (2018: 11) to full scope audits for Group purposes. We conducted reviews of financial information (including enquiry) at a further four (2018: three) non-significant components as these components were not individually financially significant enough to require an audit for Group reporting purposes but a review was performed to provide further coverage over the Group's results.

The components within the scope of our work accounted for 88% (2018: 93%) of total Group revenues, 85% (2018: 94%) of Group profit before taxation and 95% (2018: 98%) of total Group assets.

The remaining 12% of total Group revenue, 15% of Group profit before tax and 5% of total Group assets is represented by eight reporting components, none of which individually represented more than 1% of total Group revenue, Group profit before tax or total Group assets. For these residual components, we performed analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these.

The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £0.20m to £0.65m, having regard to the mix of size and risk profile of the Group across the components. The work on one of the 23 components (2018: one of the 22 components) was performed by component auditors and the rest, including the audit of the parent Company, was performed by the Group team. The Group team performed procedures on the items excluded from normalised Group profit before taxation.

The Group team visited one (2018: one) component location in Delft, Netherlands (2018: Delft, Netherlands) to assess the audit risk and strategy. Telephone conference meetings were also held with these component auditors. At these visits and meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditors.

Group profit before tax normalised to exclude individually significant items as disclosed in note 6

Normalised Group profit before tax

Group materiality

Group revenue

88%
(2018: 93%)

Group profit before tax

84%
(2018: 94%)

Group total assets

96%
(2018: 98%)

Group profit before exceptional items and taxation

86%
(2018: 87%)

Full scope for group audit purposes 2019

Specified risk-focused audit procedures 2019

Full scope for group audit purposes 2018

Specified risk-focused audit procedures 2018

Residual components

4 We have nothing to report on going concern

The Directors have prepared the Financial Statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and they have concluded that the Company's and the Group's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the Financial Statements ('the going concern period').

Our responsibility is to conclude on the appropriateness of the Directors' conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditors' report is not a guarantee that the Group and the Company will continue in operation.

We identified going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, we are required to report to you if:

  • We have anything material to add or draw attention to in relation to the Directors' statement in note 1 to the Financial Statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company's use of that basis for a period of at least 12 months from the date of approval of the Financial Statements; or
  • The related statement under the Listing Rules set out in the Directors' responsibilities statement is materially inconsistent with our audit knowledge.

We have nothing to report in these respects.

5 We have nothing to report on the other information in the Annual Report and accounts

The Directors are responsible for the other information presented in the Annual Report and Accounts together with the Financial Statements. Our opinion on the Financial Statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our Financial Statements audit work, the information therein is materially misstated or inconsistent with the Financial Statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Strategic report and directors' report

Based solely on our work on the other information:

  • We have not identified material misstatements in the strategic report and the Directors' report;
  • In our opinion, the information given in those reports for the financial year is consistent with the Financial Statements; and
  • In our opinion, those reports have been prepared in accordance with the Companies Act 2006.

Directors' remuneration report

In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

Disclosures of principal risks and longer-term viability

Based on the knowledge we acquired during our Financial Statements audit, we have nothing material to add or draw attention to in relation to:

  • The Directors' confirmation within the Viability statement in the Principal risks and uncertainties that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
  • The principal risks disclosures describing these risks and explaining how they are being managed and mitigated; and
  • The Directors' explanation in the Viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Under the Listing Rules we are required to review the Viability statement. We have nothing to report in this respect.

Our work is limited to assessing these matters in the context of only the knowledge acquired during our Financial Statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group's and Company's longer-term viability.

Corporate governance disclosures

We are required to report to you if:

  • We have identified material inconsistencies between the knowledge we acquired during our Financial Statements audit and the Directors' statement that they consider that the Annual Report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy; or
  • The section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.

We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the 11 provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.

We have nothing to report in these respects.

6 We have nothing to report on the other matters on which we are required to report by exception

Under the Companies Act 2006, we are required to report to you if, in our opinion:

  • Adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
  • The parent Company Financial Statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
  • Certain disclosures of Directors' remuneration specified by law are not made; or
  • We have not received all the information and explanations we require for our audit.

We have nothing to report in these respects.

7 Respective responsibilities

Directors' responsibilities

As explained more fully in their statement set out in the Directors' responsibilities statement, the Directors are responsible for: the preparation of the Financial Statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.

Auditors' responsibilities

Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditors' report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC's website at www.frc.org.uk/auditorsresponsibilities.

Irregularities – ability to detect

We identified areas of laws and regulations that could reasonably be expected to have a material effect on the Financial Statements from our general commercial and sector experience, and through discussion with the Directors and other management (as required by auditing standards).

We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group to component audit teams of relevant laws and regulations identified at Group level, with a request to report on any indications of potential existence of non-compliance with relevant laws and regulations (irregularities) in these areas, or other areas directly identified by the component team.

The potential effect of these laws and regulations on the Financial Statements varies considerably.

Firstly, the Group is subject to laws and regulations that directly affect the Financial Statements including financial reporting legislation (including related companies legislation), distributable profits legislation, and taxation legislation and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.

Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the Financial Statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: health and safety, anti-bribery, employment law, regulatory capital and liquidity and certain aspects of company legislation.

Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the Directors and other management and inspection of regulatory and legal correspondence, if any. Through these procedures, we became aware of actual or suspected non-compliance and considered the effect as part of our procedures on the related financial statement items. The identified actual or suspected non-compliance was not sufficiently significant to our audit to result in our response being identified as a key audit matter.

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the Financial Statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the Financial Statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

8 The purpose of our audit work and to whom we owe our responsibilities

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

Mick Davies

Senior Statutory Auditor

for and on behalf of KPMG LLP, Statutory Auditors

Chartered Accountants

One St Peter's Square

Manchester

M2 3AE

25 July 2019