The Committee particularly focuses on systems and processes of management control, the reporting of internal management information and externally reported financial information.

Chris Batterham

Committee chairman

The Audit Committee's key objectives

The purpose of the Audit Committee is to assist the Board in the discharge of its fiduciary duties of stewardship of the Group's assets. The Committee particularly focuses on systems and processes of management control, the reporting of internal management information and externally reported financial information. The Committee also provides a forum for reporting by the external auditors.

The Audit Committee's responsibilities

The Committee's main responsibilities include:

  • Monitoring the integrity of the Financial Statements relating to the Group's financial performance and their compliance with the provisions of IFRS, the UK Corporate Governance Code, Disclosure and Transparency Rules and other regulations.
  • Reviewing material information and significant accounting judgments contained in it.
  • Advising the Board on the continuing appropriateness of the Group's existing accounting policies and the application of any new or modified accounting and reporting standards.
  • Advising the Board on the effectiveness of the processes ensuring that the Annual Report and Accounts, when taken as a whole, is fair, balanced and understandable.
  • Reviewing the audit findings with the external auditors including discussing any major issues that arise during an audit, the accounting and audit judgments made, the level of any errors identified during the audit and the effectiveness of the audit process itself.
  • Reviewing the effectiveness of the Group's internal control systems.
  • Reviewing the nature and extent of significant financial risks and how they can be mitigated.
  • Making recommendations to the Board in relation to the appointment of the external auditors, approving their remuneration and terms of engagement.
  • Overseeing the relationship with the external auditors including, but not limited to, assessing their independence, objectivity and effectiveness.
  • Reporting to the Board on the procedures for responding to whistleblowing, fraud or potential breaches of anti-bribery legislation.

A full copy of the Committee's Terms of Reference can be found in the Investor Relations section of the Group's website at www.nccgroup.trust/uk/about-us/investor-relations.

Activities during the year

During the year, the Committee:
Reviewed and updated their Terms of Reference
Continued to support relatively new Board members in their onboarding process as well as welcoming a new committee member
Completed the process with the external auditors for the partner rotation at the end of the reporting cycle at the beginning of the current financial year
Initiated and considered a revised risk review undertaken by the new Director of Risk and Assurance
Reviewed the ongoing programme to enhance the quality of the Group's external reporting, including in the Annual Report and Accounts
Considered and approved updated policies including policies on: Treasury, Foreign Exchange, Tax Strategy and Individually Significant Items
Received a presentation from the Group Health and Safety Manager who was appointed in January 2019
Received regular briefings from the Associate Director of Risk and Assurance summarising risk management and control issues
Reviewed the reporting around various areas, including discontinued operations and disposals, onerous contracts and software write-off costs
Was updated on progress in relation to the Securing Growth Together Programme and received an internal audit health check report on the programme

Composition

The Audit Committee is chaired by myself, a Chartered Accountant of 40 years' standing. I have previously served as the Finance Director of Unipalm plc, before becoming Chief Financial Officer of Searchspace Limited until 2005. Both businesses operated in digital technology sectors. My earlier career included roles with BICC Group and accountants Arthur Andersen. The Board considers that I have the recent and relevant experience required by the Code.

The other members of the Committee who served throughout the year are: Thomas Chambers (who stepped down from the Committee and Board on 26 September 2018), Jonathan Brooks and Mike Ettling (who was appointed to the Committee in January 2019). All members of the Committee are considered to be independent and the Committee as a whole continues to have competence in the technology sector.

Summary biographies of each member of the Committee are included in the Board of Directors.

Meeting frequency and attendance

The Terms of Reference for the Committee require at least three meetings per year. During this financial year the Committee met four times. As well as the members of the Committee, standing invitations are given to the Chairman, the other Independent Non-Executive Directors, the Chief Executive Officer, and the Chief Financial Officer, with other attendees also appearing by invitation. The external auditors also attend each meeting. During the year the Committee met, on a number of occasions, with the external auditors without the Executive Directors being present. In addition, following the appointment in 2017/18 of the Group's Director of Risk and Assurance who heads up the Group's Internal Audit function, a number of meetings were held with him without management being present.

The attendance of individual Committee members at Audit Committee meetings is shown in the table below:

AttendeeMeetings attended
Chris Batterham4(4)
Jonathan Brooks4(4)
Thomas Chambers1(1)
Mike Ettling2(2)

Significant issues considered during the year in relation to the Financial Statements

During the year, the Committee reviewed and considered the following areas in respect of financial reporting and the preparation of the interim and annual Financial Statements:

The appropriateness of the accounting policies used
Significant areas of management judgment or estimation
The effectiveness and changes to the financial control environment
Compliance with external and internal financial reporting standards and policies
Disclosure and presentation of GAAP and Alternative Performance Measures (APMs)
Whether the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary to assess the Group's financial position, performance, business model and strategy

In carrying out this review the Committee considered the advice of the Group's finance team and the external auditors' reports setting out their views on the accounting treatments and judgments included in the Financial Statements.

2017 Annual Report and Accounts FRC review

In the previous year the Group received a letter from the Conduct Committee of the Financial Reporting Council (FRC), a body appointed to review the Annual Report and Accounts of public and large companies. The reviews are intended to support continuous improvement in the quality of reporting. The letter was sent following a review of the Group's 2017 Annual Report and Accounts. The letter focused on the disclosures given around accounting errors in respect of prior years, acquisitions arising in that financial year (PSC and VSR), sensitivity analyses around impairment reviews and the Group's use of Alternative Performance Measures (APMs).

As a result of the responses made by the Company, the review was formally closed in June 2018 and the proposals suggested by the FRC have been incorporated in subsequent Company announcements and publications.

Significant accounting areas and areas of significant management judgment

The table below summarises some of the significant accounting issues and judgments that the Committee considered during the year in relation to the Financial Statements. These are split between those items which are identified either as recurring items that the Committee regularly reviews or as items of current year focus. The table also sets out the financial context and potential impact of each item as well as the impacted metric. Finally, the table shows the degree of judgment that the Committee feels has to be applied for each item. Items with a significant impact but with a 'low' judgment level will typically have extensive independent third party evidence of the bases for any judgment. Areas assessed as requiring a 'high' level of judgment tend to rely more heavily on management estimates and historical trends than extensive independent third party evidence.

Review itemsRelevance to the Financial StatementsRelated metricEstimation required
Goodwill carrying values (recurring)Group net assets £210.8m
Goodwill value £189.4m
High
Intangible assets – carrying values (recurring)Group net assets £210.8m
Intangible assets value £41.8m
Adjusted¹ operating marginLow
Onerous leases (recurring)Group net assets £210.8m
Adjusted operating profit¹ £33.7m
Adjusted¹ operating marginLow
Loss-making contracts (recurring)Group net assets £210.8m
Adjusted operating profit¹ £33.7m
Adjusted¹ operating marginMedium
Revenue recognition/IFRS 15
(current year focus)
Revenue £250.7m
Adjusted operating profit¹ £33.7m
Revenue and growth rates
Adjusted¹ operating margin
Low
Individually significant items (recurring) and APMsNet charges (£3.6m)
Adjusted operating profit¹ £33.7m
Adjusted¹ operating marginLow
IFRS 16 LeasesDisclosure only this yearAdjusted¹ operating marginLow

Goodwill carrying value

(Recurring item: see note 13 to the Financial Statements)

The Group has made a number of historical acquisitions which generated goodwill at the time of purchase. On 31 May 2019, the Group had goodwill of £189.4m.

In accordance with IAS 36, management has determined appropriate cash generating units (CGUs) on which to base the annual impairment review for goodwill and indefinite-lived intangible assets by comparing the recoverable amount to the carrying value. Impairment reviews are based on discounted future cash flow models that can contain a significant degree of management estimate in terms of the basis of the CGUs, the associated forecast cash flows, the appropriate growth rates to apply to revenues and margins, and the discount rates to be used. This is set out in more detail in note 13 to the Financial Statements.

The Committee has reviewed the rationale used to determine the CGUs and assumptions used in future cash flows that underpin the valuation of goodwill. There have been no changes to the CGUs in the current year other than the UK MSS (Accumuli) CGU has been incorporated into the Assurance CGU as its operations have been subsumed into the UK Assurance division following its acquisition.

Intangible assets – carrying value

(Including acquired intangibles, software and capitalised development costs) (Recurring item: see note 13 to the Financial Statements).

The total value of acquired intangible assets on 31 May 2019 was £41.8m. Acquired intangible assets are amortised over a period of ten years. Movements in the balance sheet values during the year are set out in note 13 to the Financial Statements. Annual impairment reviews of each intangible asset are based on the same underlying discounted future cash flow models that are used in assessing the carrying value of goodwill. These models can contain a degree of management estimate in terms of the forecast cash flows, the appropriate growth rates to apply to revenues and margins, and the discount rates to be used. This is set out in more detail in note 13 to the Financial Statements.

The Committee reviews the assumptions and estimates underpinning the cash flow models each year given the high level of estimation required in assessing cash flows over an extended period of time to arrive at recoverable values.

  1. See note 3 for an explanation and definitions of Alternative Performance Measures (APMs) and adjusting items. See note 3 to the financial statements for a reconciliation to statutory information.

Finally, the Group also undertakes a number of development projects aimed at producing new products and services. These activities are collectively referred to as 'Development' costs and where IFRS recognition criteria are met, costs incurred are capitalised.

During the year, management undertook a review of assets likely to be impacted by the new system implementations arising from the Securing Growth Together programme. This resulted in a write-off of £3.8m in respect of accelerated amortisation for a number of legacy systems (net of R&D tax credit). The Committee considered the accounting treatment for this and concurred that reflection as an Individually Significant Item was most appropriate.

Onerous leases

(Recurring item: see note 20 to the Financial Statements)

During the year, the Group reviewed the position for the two UK properties that were previously identified as surplus to requirements in the prior year. In addition, they considered the impact of a further element of the Group's head office being identified as surplus. Discounted cash flow models were reviewed and challenged on their assumptions. The Committee is satisfied that liability for onerous leases is properly recorded.

Loss-making contracts

(Recurring item: see note 20 to the Financial Statements)

During the year, the Group reviewed the major long-term contract in the Netherlands for the development and supply of a new product which was identified as a loss-making contract in the prior year. Management prepared updated estimates of future income, costs and resulting cash flows associated with the contract. The annual cash flows were then discounted using appropriate risk-adjusted discount rates to arrive at the Net Present Value (NPV) of the contract in question.

An additional long-term contract in the Netherlands for the development and supply of a new product was reviewed by the Group to assess whether it should be treated as a loss-making contract. Management analysed the relevant cash flows, which were discounted, and concluded that the contract should not be accounted for as a loss-making contract.

The Committee reviewed and challenged the assumptions underpinning the cash flows and discount rates and is satisfied that the contracts have been correctly treated, and that in the case of the loss-making contract that the liabilities recorded are reasonable.

Revenue recognition/ifrs 15

(Current year focus item: see note 1 to the Financial Statements)

The Group implemented IFRS 15 Revenue from Contracts with Customers from 1 June 2018 using the full retrospective method. As a result, prior year revenue and deferred income balances have been restated as shown in note 1. The impacts on the Group were found to be:

  • For Escrow, the initial set-up exercise is not considered to be a distinct service and, as a result, these fees are now recognised with the rest of the contract with revenue being recognised over time.
  • For Assurance, set-up fees charged in respect of initial work and configuration of equipment to allow customers to benefit from a monitoring contract are not considered to be a distinct service and, as a result, this revenue is now recognised over time with the fee for the monitoring activity.

In both cases performance obligations are considered to be satisfied over time as the performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

The Committee discussed the financial impact, the treatment being adopted, IFRS 15 transitional disclosures and is satisfied that the Group's revenue has been correctly accounted for and disclosed.

INDIVIDUALLY SIGNIFICANT ITEMS¹

(Current year focus item: see note 6 to the Financial Statements)

Individually significant items by their nature and scale could have a significant impact on the reporting of 'Adjusted' metrics such as 'Adjusted Operating Profit'1, 'Adjusted EBITDA' 1 and 'Adjusted EPS'1. It is critical that these are properly categorised in order to allow a user of the Financial Statements to form an accurate picture of the underlying performance of the business. The Committee challenged management to provide the rationale for the treatment of certain costs as Individually Significant. The Committee has also challenged management on the use of 'Adjusted' or APMs. All APMs are fully disclosed and reconciled to GAAP measurements in the Financial Statements.

Following this review and challenge to management, the Committee concluded that the items that have been designated as individually significant and hence excluded from 'Adjusted' measures of performance, were sufficiently material and unrelated to the underlying business to be properly classified in this way.

  1. See note 3 to the Financial Statements for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 to the Financial Statements for a reconciliation to statutory information.

The Group's approach to materiality

In considering the materiality of any individual issue or issues in aggregate, the Group looks at a range of qualitative and quantitative measures to assess whether or not a user of the accounts would be likely to be influenced by the item in question. The range of measures includes (but is not limited to) the primary Financial Statements themselves, the individual line item in question, and whether or not the issue moves the result from one side of an inflection point to another (for example, turning a profit into a loss or a net asset into a net liability). Qualitative and quantitative measures are both considered as is any potential impact on remuneration or banking arrangements such as debt covenants.

Internal audit

The internal audit function is responsible for internal audit, the assurance of other quality systems and processes, and monitoring the embedding of risk management processes throughout our operations. The internal audit plan was approved by the Committee during the financial year and a number of audits were performed. The Group will look to increase the scope of the audit plan during FY20.

Internal controls and risk management

The Board is responsible for establishing, maintaining and monitoring the Group's system of risk management and internal control and reviewing its effectiveness. The Committee monitors the performance of management in this area.

We have an ongoing process for identifying, evaluating and managing the principal risks faced by the Group which has been in place for the year under review and up to the date of approval of the Annual Report and Accounts. The Group's non cyber security risks are monitored by the Audit Committee on behalf of the Board which sets aside time for an in-depth discussion of notable or changing risks to the business. A description of the process for managing risk together with a description of the Principal Risks and strategies to manage those risks is provided in the Principal risks and uncertainties.

Internal control systems are designed to meet the particular needs of the Group and the risks to which it is exposed. By their nature, however, internal control systems are designed to manage rather than eliminate the risk of failure and can provide only reasonable but not absolute assurance against material misstatement or loss. Key elements of the risk management and internal control system are described below. Enhancements during the year are highlighted while the other elements have all been in place throughout the year.

Controls Relating to Financial Reporting and Preparation of the Annual Report and Accounts

  • Information provided to management covering financial performance and key performance indicators, including non-financial measures (enhanced by new KPIs and targeted management reports).
  • A detailed budgeting process where business units prepare plans for the coming year (enhanced with new standardised reporting and consolidation models and systems).
  • Procedures for the approval of capital expenditure and investments and acquisitions (enhanced by standardised capital approval request forms).
  • Monthly operational reviews to monitor and reforecast results as required against the annual operating plan, with major variances followed up and management action taken where appropriate.

Other Controls

  • Defined management structure and delegation of authority to Committees of the Board, subsidiary boards and associated business units (enhanced by more detailed authorities and guidance notes).
  • Recruitment standards and training to ensure the integrity and competence of staff.
  • Anti-bribery, security and compliance training for all employees.
  • Clearly documented internal procedures set out in the Group's ISO 9001:2008 accredited quality manual.
  • Regular internal audits of key processes and procedures under the Group's ISO 9001 and ISO 27001 accredited quality assurance process.
  • Monitoring of any whistleblowing or fraud reports.

The external auditors regularly report their findings on those areas of internal control which they assess as part of the external audit and Half Year review to the Board and the Audit Committee.

Our internal control effectiveness is assessed through the performance of regular checks, which in the year ended 31 May 2019 included:

  • Assessment of the identification and management of risks connected to the Group's strategy and management of strategic change;
  • Reviewing and testing the Group's financial reporting processes;
  • Performing compliance monitoring activities;
  • Assessment of the Group's processes for identifying and mitigating potential conflicts of interest; and
  • Monitoring the completion of the Group's mandatory employee training.

Whistleblowing and confidential reporting procedures

The Group operates a confidential reporting and whistleblowing procedure (known as our 'Open Door Policy'). The policy aims to support the stewardship of the Group's assets and the integrity of the Financial Statements as well as protecting staff welfare. The procedure is reviewed annually by the Committee to ensure that it remains fit for purpose.

In the previous year, the Committee appointed an independent third party reporting agent to be the first point of contact for those who do not wish to use normal internal line management channels for reporting their concerns. This is advertised internally via staff noticeboards and our intranet.

The Committee reviews any whistleblowing or confidential reporting of concerns raised during the year with respect to their nature, scale and any associated or consequential risks.

Review of the Audit Committee's effectiveness

The Committee has reviewed and considered the effectiveness of its performance during the year. The review included the views of members of the Committee and of regular attendees at the various meetings (including the Executive Directors). I am satisfied that the degree of rigour and challenge applied in performing the Committee's responsibilities is appropriate, effective and continues to improve.

Auditors' independence and objectivity

The Committee received a formal statement of independence from the external auditors.

The Company also operates a rigorous policy designed to ensure that the auditors' independence is not compromised by their undertaking inappropriate non-audit work. The Audit Committee's approval is therefore required for any fees for any non-audit work undertaken by the auditors. However, the Company recognises that it can receive particular benefit from certain non-audit services provided by the external auditors due to their technical skills and detailed understanding of the Company's business. A copy of the full policy on the payment of fees to the external auditors for non-audit services can be found on the Company website at www.nccgroup.com.

During this financial year non-audit fees of £27,500 (2018: £27,500) were paid to the external auditors for the half year review.

All significant pieces of non-audit work are put to informal tender to suitable parties that, if appropriate, can include the external auditors. Upon review as to suitability and price, the work will then be placed with the service provider recommended. If this is the external auditors, then Audit Committee approval is required.

The external auditors were not engaged during the year to provide any services which may have given rise to a conflict of interest. The Committee is satisfied that the overall levels of audit and non-audit fees (i.e. the half year review fee) are not material relative to the income of the external auditors as a whole and therefore that the objectivity and independence of the external auditors was not compromised.

External auditors' effectiveness and appointment

The Committee reviews and makes recommendations regarding the reappointment of the external auditors following a formal review of the auditors' performance following the July Audit Committee meeting. In making these recommendations the Committee considers:

  • The experience, industry knowledge and expertise of the auditors.
  • The scope and planning of the audit and any variations from the plan.
  • The quality of the processes adopted.
  • The auditors' explanations of significant risks to audit quality by reference to the Company's specific circumstances and changes to the risks.
  • The fees charged.
  • Their attitude to and handling of key audit judgments.
  • Their ability to challenge and communicate effectively with management.
  • The quality of the final report.
  • The FRC's Audit Quality Review report relating to KPMG.

During the financial year, I attended regular meetings with KPMG's engagement partner without management being present. This provided the opportunity for open dialogue. The engagement partner demonstrated his understanding of the Group's business risks and the consequential impact on the Financial Statements. Feedback on the conduct of the audit from the engagement partner's perspective is used to determine if any challenges in the prior year audit would be sufficiently addressed in the next audit cycle.

The Group's current auditors, KPMG LLP, have been in place since 1 November 2013 with a competitive audit tender process having last been undertaken in November 2011. The lead audit partner rotates every five years to ensure independence and was last rotated in 2018. While the Company is not a FTSE 350 listed company, we continue to comply with the UK Competition and Markets Authority's (CMA) Statutory Audit Services Order (Order) which states, among other matters, that FTSE 350 listed companies should put their external audit contract out to public tender at least every ten years.

The Group will continue to keep this position under review during the new financial year. The Group intends to remain in full compliance with the requirement to carry out a formal tender at least once every ten years.

Therefore, having fully considered the effectiveness, independence and objectivity of the external auditors and the reports they have produced in the current financial year, the Committee has concluded that it is appropriate to recommend to the Board the reappointment of KPMG LLP as the Group's external auditors for the next financial year.

Related party transactions and other fees approved by the Committee

Refer to note 31 for related party transactions in the year.

There were no such fees payable in the current year.

Fair, balanced and understandable

At the request of the Board, the Committee considered whether the 2019 Annual Report and Accounts, when taken as a whole, was fair, balanced and understandable (FBU) and whether it provided the necessary information for shareholders to assess NCC Group's position and performance, business model and strategy. The reviews outlined in the diagram below include reviews of all material matters, as reported elsewhere in this Annual Report and Accounts, reviews of the balance of good and bad news and ensure the Annual Report and Accounts correctly reflects:

The independent reviewers noted below were not major contributors to the Annual Report and Accounts but, at the same time, as members of the Executive Committee, are deemed to be sufficiently well informed on the Group's activities to be able to give appropriate feedback on the FBU criteria. They undertake a qualitative review of disclosures and a review of internal consistency throughout the Annual Report and Accounts.

The Directors' statement on a fair, balanced and understandable Annual Report and Accounts is set out in the Director's responsibilities statement.

Chris Batterham

Chairman, AUDIT COMMITTEE

24 July 2019