The Chairman of the Company's Board, Executive Directors, senior managers and key advisors are invited to attend meetings, as appropriate, in order to ensure that the Committee maintains a current and well-informed view of events within the business and to reinforce a strong risk management culture. The Audit Committee meets according to the requirements of the Company's financial calendar. The meetings of the Audit Committee also provide the opportunity for the independent Non-Executive Directors to meet without the Executive Directors present and to raise any issues of concern with the external Auditor. There have been four such meetings in the period ended 3 April 2020 and nothing of note was reported.
2019/20 Key Achievements
- Carried out our responsibilities as set out in the Terms of Reference, including reviewing the external reporting to ensure it is fair, balanced and understandable.
- Reviewed the accounting policies and judgements made in applying the new standard on leases.
- Reviewed the accounting treatment associated with the acquisitions and disposals made during the year.
- Reviewed and challenged the Longer-Term Viability Statement and Going Concern basis of preparation in advance of approval by the Board, including a review of the carrying value of goodwill.
- Reviewed and challenged the external Auditor's year-end and half-year reports.
- Reviewed the statement of external Auditor's independence.
- Approved the non-audit fee policy.
- Reviewed key and emerging risks and the effectiveness of the Group's risk management framework.
- Reviewed and challenged progress of the Internal Audit plan and received regular updates on internal control systems.
- Reviewed and approved the Internal Audit Charter.
- Received an update on the Group's GDPR and Compliance, and on Health and Safety matters.
- Reviewed and approved the Group's tax strategy and arrangements.
- Reviewed and approved the Committee's Terms of Reference.
- Reviewed and approved the external Auditor's annual strategy and fees.
- Reviewed and challenged the effectiveness of the Group's whistleblowing procedures and approved the Group Whistleblowing Policy.
- Reviewed and approved the Anti-Money Laundering Policy.
- Received regular updates on the Gifts and Hospitality register.
- The Group received a letter on 8 November 2019 from the Financial Reporting Council (FRC) noting it had carried out a limited review of the Annual Report and Accounts for the year ended 29 March 2019. The letter indicated that the FRC had not identified any matters on which it wished to raise specific questions with the Group but made some observations relating to certain disclosures included in the annual report on the impairment of non-financial assets and the presentation of the financial statements. As a result, the Group has sought to improve its goodwill impairment disclosures and certain critical accounting estimates. The Group recognises that the FRC's review was solely based on a review of its Annual Report and Accounts for the year ended 29 March 2019 and did not benefit from detailed knowledge of the Company's business or an understanding of the underlying transactions entered into. As a result, the review did not provide any assurance that the Company's Annual Report and Accounts are correct in all material respects.
Areas of Focus FY21
- Monitor the impact upon the Group's viability and going concern in response to the COVID-19 pandemic.
- Continued emphasis on the quality of financial reporting, including the application of accounting judgements.
- Maintain focus on the adequacy of the control environment and further development of the risk management framework.
- Review the financial statements of the Group and assess whether appropriate suitable accounting policies have been adopted, and whether management has made appropriate estimates and judgements. Assess the appropriateness of disclosures in the Annual Report and Accounts and ensure that it is fair, balanced and understandable.
Risk and Control Environment
- Assist the Board in achieving its obligations under the UK Corporate Governance Code in areas of risk management and internal control, focusing particularly on compliance with legal requirements, accounting standards and the Listing Rules.
- Review the risk management framework and the Principal Risks and mitigation strategies.
- Review concerns of financial fraud.
- Review reports from Internal Audit on developments in the internal control framework to ensure that an effective system of internal financial and non-financial controls is maintained on an ongoing basis.
- Make recommendations to the Board on the appointment of the external Auditor, including on effectiveness, independence, non-audit work undertaken (against a formal policy) and remuneration.
- Approve a formal Whistleblowing Policy whereby colleagues may, in confidence, disclose issues of concern about possible malpractice or wrongdoings by any of the Group's businesses or any of its employees without fear of reprisal, including arrangements to investigate and respond to any issues raised.
- Approve the Company's systems and controls for the prevention of bribery and corruption, including the receipt of any reports on non-compliance.
- Approve the Group's Tax Policy and published tax strategy.
- Approve the Group's Treasury Policy, including foreign currency and interest rate exposure.
The Audit Committee has reviewed its Terms of Reference and its composition during the year and believes that both are appropriate.
Copies of the full Terms of Reference are available on the Company's website or on request from the Company Secretary.
The Terms of Reference for the Committees are available at www.halfordscompany.com
Significant Issues in Relation to the Financial Statements
In order to discharge its responsibility to consider accounting integrity, the Committee carefully considers key judgements applied in the preparation of the consolidated financial statements which are set out in the Financial Statements.
With regard to the COVID-19 pandemic, the Committee reviewed its impact in consideration of the following key accounting judgements:
Impairment of Goodwill associated with the Group's Retail and Car Servicing Cash Generating Units (CGU):
- following a number of business combinations across both CGUs, the Group holds significant goodwill. There are a number of factors that could impact on the future profitability of the business (e.g. loss of key customers, change in market behaviour) and, therefore, there is a risk that the business may not meet the growth projections necessary to support the carrying value of the intangible asset (see Note 11 of the Financial Statements); and
- the Audit Committee has received detailed reports from Halfords' finance team and reports from the external Auditor addressing this issue. The finance team has undertaken detailed work to consider the impairment of goodwill associated with the CGUs. Consideration has been given to ensuring that cash flow models, discount rates, sensitivity analysis and store and centre profitability are all reasonable. It was concluded that no impairment is required. The Committee concluded that it is satisfied with the accounting treatment of impairment of goodwill.
Valuation of Inventory Within the Retail Division:
- with the business holding a wide range of stock, it is likely that changing consumer demands will mean that some lines cannot be sold or will be sold at below the carrying value. Provisions are made to reflect this. Given the difficulties in forecasting market trends, there is a risk that inventory provisions made will be inappropriate or incomplete (see Note 15 of the Financial Statements). Management has fully reviewed the inventory provision in the current year, with particular regard to the impact of COVID-19, and believe the level of provisioning is appropriate. Range reviews are regularly undertaken to ensure that all discontinued inventory is identified;
- the Audit Committee has received detailed reports from Halfords' finance team and reports from the external Auditor addressing this issue. The finance team has undertaken detailed work around the valuation of inventory within the Retail division. After consideration of the accuracy of the provisioning model, the completeness and accuracy of range reviews, and the reflection of these reviews within the provisions, the Committee concluded that it is satisfied with the accounting treatment of the valuation of inventory; and
- following a review of inventory costing during the period, the Committee reviewed in detail the treatment of certain distribution costs that had historically been included within the cost of inventories and the treatment of such distribution centre costs as an operating expense rather than a cost of sales. Subsequent to detailed discussions with management and the external Auditor, the Committee agreed that this was not in line with the Group's accounting policy and adjusted the Financial Statements accordingly. In the consolidated statement of financial position, inventories at 29 March 2019 and 30 March 2018 are stated after adjusting for this amount, and consequently retained earnings and net assets have been reduced by £11.7m. In correcting this misapplication, there is no impact on reported gross profit, operating expenses or other items in the consolidated income statement or in the consolidated statement of cash flows for the current or comparative periods.
Adoption of IFRS 16 'Leases'
The Group has initially applied IFRS 16 Leases as at 30 March 2019. The work to collect the relevant data, implement a new accounting system and agree the appropriate adoption method, accounting policies and disclosures has been significant. During both the prior and current period, the Committee and external Auditor received regular updates to ensure that the Committee reviewed all aspects of IFRS 16 adoption and is satisfied that the methodology used and the judgements and assumptions applied are fair and reasonable.
Non-underlying Costs Related to the Closure of Cycle Republic
Following the strategic review of the Group's cycling business, the decision was made to commence with the closure of the operations of Cycle Republic and the Boardman Performance Centre during the period. The Committee reviewed the treatment of the costs related to this closure and is satisfied with the relevant inclusion in non-underlying costs for the period.
BDO UK LLP present their audit plan, risk assessment, and audit findings to the Committee, identifying their consideration of the key audit risks for the year, including the impact of COVID-19, and the scope of their work. These reports are discussed throughout the audit cycle.
Effectiveness of External Audit
The effectiveness of the external audit is considered throughout the year through, amongst other factors: assessment of the degree of the audit firm's challenge of key estimates and judgements made by the business; feedback from any external or internal quality reviews on the audit; and the wider quality of communication with the Committee.
In addition, at its meeting in March 2020, the Committee performed a specific evaluation of the performance of the external Auditor, considering the areas set out above and feedback from management. Following this, the Committee concluded that:
- the overall audit approach, materiality, threshold, and areas of audit focus were appropriate to the business; and
- the audit team possessed the necessary quality, expertise and experience to provide an independent and objective audit.
Approach to Appointment or Reappointment
BDO UK LLP was appointed as external Auditor to the Group in 2019 following a formal tender process. The Audit Committee considers that the relationship with the Auditor is working well and is satisfied with its independence, objectivity and effectiveness and has not considered it necessary to require BDO UK LLP to retender for external audit work this year. The Audit Committee has recommended to the Board, for approval by shareholders at the Annual General Meeting on 15 September 2020, the reappointment of BDO UK LLP as external Auditor. The Audit Committee monitors, and will continue to comply with, best practice and external guidance in respect of the frequency of audit tenders.
Approach to Safeguarding Objectivity and Independence if Non-Audit Services are Provided
The Audit Committee has established a policy to ensure that any non-audit services delivered by the external Auditor will not jeopardise objectivity and independence. The policy is consistent with the Ethical Standards for Auditors.
The policy specifies:
"The external Auditor can be used to provide non-audit services subject to any non-audit engagement proposal provided by the external Auditor being formally approved by the Audit Committee before contractual arrangements are entered into, except for activities set out in a list of prohibited activities. Other than for these, for each separate service proposed to be provided by the external Auditor, the Group Chief Financial Officer will prepare a note either to be tabled and minuted at an Audit Committee meeting or to be circulated via email to the Audit Committee members and the Chief Executive Officer giving a description of the work to be undertaken, the reasons why the external Auditor is involved in the proposal and how objectivity and independence has, and is seen to be, safeguarded.
In addition, the fees for any proposal for non-audit services will not exceed 70% of the three-year average statutory audit fees when taken into consideration with total fees for non-audit services already committed in the financial year.
Consent is required from the Audit Committee Chair on behalf of the Audit Committee before the external Auditor can be engaged for non-audit services."
In addition, the external Auditor follows its own ethical guidelines and continually reviews its audit team to ensure that its independence is not compromised.
An analysis of the fees earned by the external Auditor is disclosed in Note 3 to the Financial Statements.
Role and Effectiveness of Internal Audit
Internal Audit follows an annual risk-based programme of audits to review the effectiveness of the control environment. The Audit Committee reviews the annual audit programme for coverage and may revise it according to changing business circumstances or requirements. The Audit Committee ensures that there are sufficient resources to undertake the audit programme.
The Head of Internal Audit attends each Committee meeting, providing a summary of audit findings and an update on progress against the plan. The Committee also reviews the status of implementation of audit recommendations ranked by age and level of risk to the business. All internal audit reports are shared upon completion with the external Auditor.
Internal Audit reports to the Chief Financial Officer but maintains direct and regular communication to the Audit Committee Chair outside of Committee meetings.
The Audit Committee is satisfied that the Internal Audit team has the quality, experience and expertise appropriate for the business.
A Whistleblowing Policy and procedure (the "Policy") enables colleagues to report concerns on matters affecting the Group or their employment, without fear of recrimination. Posters publicising whistleblowing channels are distributed to all stores, Autocentres, Distribution Centres and the Support Centre.
The Policy was reviewed and approved by the Audit Committee and was subject to an Internal Audit review during the year. The Company Secretary provides the Audit Committee with a regular summary of whistleblowing contacts and resolutions.
Anti-Bribery and Corruption Policy
The Group's Anti-Bribery and Corruption Policy statement reinforces that the Halfords Board is committed to conducting its business affairs in a way that ensures it does not engage in or facilitate any form of corruption. It is Halfords' policy to prohibit all forms of corruption amongst its colleagues, suppliers and any associated parties acting on its behalf. The Group has a detailed Anti-Bribery and Corruption Policy and maintains Gifts and Hospitality Registers. Anti-bribery expectations are set out in standard purchasing terms and conditions. Face-to-face and online training has been provided to colleagues to raise awareness of anti-bribery and corruption legislation.
The Audit Committee has requested that anti-bribery and corruption safeguards are periodically reviewed by Internal Audit.
Internal Control and Risk Management
The Board is responsible for the Group's risk management processes and the system of internal control. The Audit Committee contributes to this purpose by providing oversight and challenge to the Group's risk management framework. During the year Risk Management was an agenda item at each Committee meeting where attention was given to risk appetite, the principal risks and development of the risk management framework. The Committee also receives regular 'deep dive' presentations on key risk areas, in the year this included GDPR, Health and Safety and Financial Controls.
Further details of the Group's internal control and risk management framework are set out in Our Principal Risks and Uncertainties.
CMA Order 2014 Statement of Compliance
The Group confirms that it was compliant 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 during the financial year ended 3 April 2020.
Chair of the Audit Committee
6 July 2020