The Audit Committee of the Board of Directors has been established with delegated powers in accordance with Article 92 of the Articles of Association. These Terms of Reference are effective from 1 August 2020.
1.1 The Audit Committee (“the Committee”) shall comprise at least three members. The Chairman of the Board shall not be a member of the Committee. Members of the Committee shall be appointed by the Board on the recommendation of the Nominations Committee and in consultation with the Chair of the Committee.
1.2The Board shall appoint the Committee Chair who shall be an independent non-executive director. In the absence of the Committee Chair and/or an appointed deputy, the remaining members present shall elect one of themselves to chair the meeting.
1.3All members of the Committee shall be independent non-executive directors at least one of whom shall have recent and relevant financial experience ideally with a professional qualification from one of the professional accountancy bodies. The Committee as a whole shall have competence relevant to the sector in which the company operates.
1.4Only members of the Committee shall have the right to attend Committee meetings. However, the external auditor, Chairman of the Board, other directors and representatives from internal audit, risk management and finance functions shall be invited to attend all or part of any meeting as and when appropriate and necessary.
1.5There should be at least one meeting a year, or part thereof, where the external and internal auditors attend without management present.
The Company Secretary or their nominee shall act as the Secretary of the Committee.
A quorum shall be two members.
4.1 Meetings of the Committee shall be convened by the Secretary of the Committee at the request of any of its members or at the request of the external or internal auditor if they consider it necessary.
4.2 In general, notice of each meeting confirming the venue, time and date together with an agenda of items to be discussed, shall be forwarded to each member and any other person required to attend, no fewer than five working days prior to the date of the meeting. Supporting papers shall be sent to members and to other attendees, as appropriate, at the same time.
Minutes of Committee meetings shall be circulated to all members of the Committee and be available to all other members of the Board unless it would be inappropriate to do so.
Meetings shall be held not less than three times a year, and where appropriate should coincide with key dates in the Group’s financial reporting and audit cycle and otherwise as required.
7.1 Financial reporting
The Committee shall:
7.1.1 monitor the integrity of the financial statements of the Group, including its annual and half-yearly reports, and any other formal announcement relating to its financial performance, reviewing and reporting to the Board on significant financial reporting issues and judgements which they contain having regard to matters communicated to it by the auditor;
7.1.2 review and challenge the approprianess of the viability and going concern statements and, if thought appropriate, recommend that the Board approve the viability and going concern statements;
7.1.3 review and challenge where necessary:
18.104.22.168 the consistency of, and any changes to, significant accounting policies both on a year on year basis and across the Group;
22.214.171.124 the methods used to account for significant or unusual transactions where different approaches are possible;
126.96.36.199 whether the appropriate accounting standards have been followed and whether appropriate estimates and judgements have been made, taking into account the views of the external auditor; and
188.8.131.52 the clarity and completeness of disclosure in the Group’s financial reports and the context in which statements are made.
7.1.4 The Committee shall review any other statements requiring Board approval which contain financial information, where to carry out a review prior to Board approval would be practicable and consistent with any prompt reporting requirements under any law or regulation including the Listing Rules or Disclosure Guidance and Transparency Rules sourcebook.
7.1.5 Where the Committee is not satisfied with any aspect of the proposed financial reporting by the Group, it shall report its views to the Board.
7.2 Narrative reporting
Where requested by the Board, the Committee shall review the content of the Annual Report and Accounts and advise the Board whether, taken as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy. The Committee shall also review statements in the Annual Report relating to the risk management process.
7.3 Internal financial controls, risk management, viability and fraud
The Committee shall:
7.3.1 review the adequacy and effectiveness of the Group’s internal financial controls and other internal control and risk management systems review and approve the statements to be included in the annual report concerning internal financial controls; and
7.3.2 review the Group’s procedures for detecting fraud.
7.3.3 review the adequacy and effectiveness of the Group’s risk management processes and approve the statements to be included in the annual report concerning the risk management processes; and
7.3.4 keep under review the Group’s overall risk assessment processes including the processes being used to determine the Group’s overall risk appetite, tolerance and strategy, and advise the Board on the appropriateness of those processes
7.3.5 oversee the production of the viability statement required under the UK Corporate Governance Code, including a review of the stress-testing and other processes management has applied, and provide advice to the Board on the overall appropriateness of the viability statement.
7.3.6 ensure the risk management function has adequate resources and appropriate access to information to enable it to perform its function effectively. Ensure the Head of Risk Management has direct access to the Chairman of the Board and the Chair of the Audit Committee.
7.4 Internal audit
The Committee shall:
7.4.1 acting by the Committee Chair, approve the appointment or termination of appointment of the head of internal audit and ensure the internal auditor has direct access to the Chairman of the Board and to the Committee Chair, and is accountable to the Committee;
7.4.2 review and approve the remit of the internal audit function and ensure the function has the necessary resources and access to information to enable it to fulfil its mandate, is appropriate for the current needs of the organisation and is equipped to perform in accordance with appropriate professional standards for internal auditors;
7.4.3 review and assess the annual internal audit work plan to ensure it is aligned to the key risks of the business and receive a report on the results of the internal auditor’s work on a periodic basis;
7.4.4 review and monitor management’s responsiveness to the internal auditor’s findings and recommendations;
7.4.5 monitor and carry out an annual review of the effectiveness of the Group’s internal audit function having regard to the overall context of the Group’s risk management system; and
7.4.6 consider whether an independent, third party review of processes is appropriate.
7.5 External audit
The Committee shall:
7.5.1 consider and make recommendations to the Board, to be put to shareholders for approval at the Annual General Meeting (AGM), in relation to the appointment, re-appointment and removal of the external auditor;
7.5.2 ensure that the audit services contract is put out to tender at least as regularly as required under the UK Corporate Governance Code (the Code) or any other applicable law or regulation, to enable the Committee to compare the quality and effectiveness of the services provided by the incumbent auditor with those of other audit firms; and in respect of such tender oversee the selection process and ensure that all tendering firms have such access as is necessary to information and individuals during the duration of the tendering process;
7.5.3 if an auditor resigns, investigate the issues leading to this and decide whether any action is required;
7.5.4 oversee the relationship with the external auditor including (but not limited to):
184.108.40.206 approve their remuneration, and ensure that the level of fees is appropriate to enable an effective and high quality audit to be conducted;
220.127.116.11 approval of their terms of engagement, including any engagement letter issued at the start of each audit and the scope of the audit;
18.104.22.168 assessing annually their independence and objectivity taking into account relevant UK professional and regulatory requirements and the relationship with the auditor as a whole, including any threats to the auditors’ independence and the safeguards applied to mitigate those threats the provision of any non- audit services;
22.214.171.124 monitoring the auditor’s compliance with relevant ethical and professional guidance on the rotation of audit partner, the level of fees paid by the Group compared to the overall fee income of the firm, office and partner and other related requirements;
126.96.36.199 assessing annually the qualifications, expertise and resources of the auditor, which shall include a report from the external auditor on their own internal quality procedures;
188.8.131.52 review the effectiveness of the audit process, including an assessment of the quality of the audit, the handling of key judgements by the auditor, and the auditors response to questions from the Committee;
184.108.40.206 seeking to ensure co-ordination with the activities of the internal audit function;
220.127.116.11 evaluating the risks to the quality and effectiveness of the financial reporting process and consideration of the need to include the risk of the withdrawal of their auditor from the market in that evaluation; and
18.104.22.168 to review the Group’s policy regarding the hiring of senior audit firm personnel and monitor the application of the policy.
7.5.5 review and approve the annual external audit plan and ensure that it is consistent with the scope of the audit engagement; and
7.5.6 review the findings of the audit with the external auditor. This shall include, but not be limited to, a discussion of any major issues which arose during the audit; key accounting and audit judgements; levels of errors identified during the audit; and the effectiveness of the audit process.
7.5.7 seek to ensure coordination of the external audit with the activities of the internal audit function; The Committee shall also:
7.5.8 review any representation letter(s) requested by the external auditor before they are signed by management;
7.5.9 review the management letter and management’s response to the auditor’s findings and recommendations; and
7.5.10 develop and implement a policy on the supply of non-audit services by the auditor, including prior approval of non-audit services by the Committee and specifying the types of non-audit services to be pre-approved, and assessment of whether non-audit services have a direct or material effect on the audited financial statements. The policy should include consideration of the following matter: threats to the independence and objectivity of the external auditor and any safeguards in place; the nature of the non-audit services; whether the external audit firm is the most suitable supplier of the non-audit service; the fees for the non-audit services, both individually and in aggregate relative to the audit fee; and the criteria governing compensation.
The Committee is authorised by the Board to:
8.1 seek any information that it requires from any employee of the company in order to perform its duties;
8.2 call any employee to be questioned at a meeting of the Committee as and when required;
8.3 obtain at the Company’s expense, independent legal, accounting or other professional advice, on any matter it believes it necessary to do so; and
8.4 publish in the Group’s annual report, details of any issues that cannot be resolved between the Committee and the Board.
9.1 The Committee Chair shall report formally to the Board on its proceedings after each meeting whenever there is a member of the Board present who is not a member or attendee of the Committee.
9.2 The Committee shall compile a report on its activities to be included in the Group’s annual report. The report should include an explanation of how the Committee has addressed the effectiveness of the external audit process including the approach taken to the appointment or reappointment of an external auditor, how independence and objectivity are safeguarded, length of tenure of the audit firm, when a tender was last conducted and advance notice of any retendering plans; the significant issues that the Committee considered in relation to the financial statements and how these issues were addressed, having regard to matters communicated to it by the auditor; and all other information requirements set out in the Code;
9.3 In compiling the report referred to in 9.2, the Committee should exercise judgement in deciding which of the issues it considers in relation to the financial statements are significant, but should include at least those matters that have informed the Board’s assessment of whether the Group is a going concern. The report to shareholders need not repeat information disclosed elsewhere in the annual report, but could provide cross-references to that information.
9.4 The Committee Chair shall attend the AGM and shall answer questions on the Committee’s activities and their duties.
10.1 Outside the formal meeting programme, the Committee Chair will maintain a dialogue with key individuals in the company’s governance, including the Board Chair, the CEO, the CFO, external audit lead partner and head of internal audit if they consider it necessary.
10.2 As and when appropriate, the Committee Chair shall seek engagement with shareholders on significant matters related to the Committee’s area of responsibility.
The Committee shall:
10.3 have access to sufficient resources in order to carry out its duties, including access to the Company Secretary for assistance as required;
10.4 be provided with appropriate and timely training, both in the form of an induction programme for new members and on an ongoing basis for all members;
10.5 give due consideration to laws and regulations, the provisions of the Code and the requirements of the UK Listing Authority’s Listing, Prospectus Rules and Disclosure Guidance and Transparency Rules sourcebook and any other applicable rules, as appropriate;
10.6 oversee any investigation of activities which are within its Terms of Reference;
10.7 arrange for periodic reviews of its own performance and its constitution to ensure it is operating at maximum effectiveness and recommend any changes it considers necessary to the Board
10.8 Review these Terms of Reference on an annual basis and recommend any changes it considers necessary to the Board.
As approved by the Meggitt PLC Board of Directors on 30 July 2020.