Audit Committee Report

This report meets the requirements of the Code.

Introductory Letter

Dear shareholder,

I am pleased to present my report to shareholders on the key activities undertaken by the Audit Committee during the year in accordance with its principal responsibilities which are to:

  • monitor the integrity of the Group's financial statements, the half year report and any formal announcements relating to the Group's financial performance, reviewing significant financial reporting judgements contained therein, together with compliance with accounting standards and other legal and regulatory requirements;
  • review the Group's internal financial controls and internal control and risk management systems, by considering reports on their effectiveness from the Chief Financial Officer and the Chief Operating Officer and reports from both the internal and external auditors;
  • review the Group's controls and systems to ensure compliance with the provisions of the Bribery Act 2010 and the Group's whistleblowing policy;
  • review the effectiveness of the Group's internal audit function and ensure that it is adequately resourced;
  • recommend to the Board the appointment, reappointment and removal of the external auditors and to approve the remuneration and terms of their engagement;
  • review and monitor the external auditors' independence and objectivity, the effectiveness of the external audit process and the audit plan; and
  • review the engagement of the external auditors to ensure that the provision of non-audit services by the external audit firm does not impair its independence or objectivity.

The Audit Committee has a standing agenda of areas to be covered at each meeting based on its terms of reference and in addition it considers relevant matters as they arise. The Audit Committee has met seven times during the year and reports were provided to the subsequent Board meeting.

I am satisfied that the Audit Committee was presented with papers of good quality during the year, provided in a timely fashion to allow due consideration of the subjects under review. I am also satisfied that meetings were scheduled to allow sufficient time to enable full and informed debate. We also reviewed our terms of reference during the year, including comparing them against the Code, and these were approved by the Board. These are available at www.supergroup.co.uk.

No matters were raised in the annual evaluation of the Audit Committee's performance.

The qualifications of each of the Audit Committee members are set out in the details of the Board of Directors page.

Minnow PowellAudit Committee Chairman 9 July 2014

Audit Committee

The members of the Audit Committee during the year were:

Member

Audit Committee member since

Minnow Powell (Chairman)

1 December 2012

Ken McCall

24 May 2010

Euan Sutherland

1 December 2012

All of the Audit Committee members are non-executive directors. The Board considers them all to be independent and the biographies of each of the members are set out here. At least one member (Minnow Powell, the Audit Committee Chairman) has recent and relevant financial experience.

By invitation of the Chairman, the Chief Operating Officer, Chief Financial Officer and Head of Internal Audit (outsourced to KPMG LLP), other senior managers, and the external auditors also attend Audit Committee meetings.

The role of the Audit Committee secretary is performed by the Company Secretary.

At least once a year the Committee meets separately with the external auditors and Head of Internal Audit without management present.

The principal matters under consideration during the year are set out below.

Internal Control and Risk Management

The Audit Committee has continued to review and discuss with management the Group's process for and evaluation and assessment of its internal controls and management of risk. The review focuses on the effectiveness of the risk management process including financial, operational, technical and compliance risks and related controls which are described here. The Audit Committee has noted the continued focus and improvement in the risk management process and the strengthening of internal controls during the year.

To assist with raising employee awareness of the Company's legal responsibilities to comply with data protection and competition law, a programme of e-learning has been launched across the business.

The identification and management of key risks for the Group is achieved through a risk register which is formally reviewed and updated by management on a regular basis. During the year, a more comprehensive review was undertaken to ensure that it was focused on real, current and significant business risks and ensure that mitigating actions were feasible. To enhance the process for risk management, the role of the Risk Committee was strengthened in 2013; members include the Chief Operating Officer, Chief Financial Officer, Group General Counsel and relevant senior managers. The Risk Committee meets on a monthly basis to review the risk register, assess the appropriateness of key risks and then make recommendations to the Board and Audit Committee.

In 2012 the Group developed a two-year plan to focus on principal areas to improve internal controls. Progress during the year is described below:

  • Significant improvements to the depth and quality of senior management and a reorganisation and improvement in skills within the finance department, which has resulted in a substantial contribution to the development of the Group's risk management and internal control framework. The Group has further reviewed its senior management resource against future growth plans and has identified additional roles and individuals required to support that growth, including a Managing Director of International and Wholesale, Group General Counsel, Group Financial Controller, Head of International Retail and a Director of E-commerce.
  • The upgrade of the core business infrastructure was a significant investment programme approved by the Board to be completed by 2015. The programme covered new systems, and replacement or upgrades to a number of the Group's core existing systems and facilities. The key projects included:
    • a new major distribution facility in Burton upon Trent which opened in December 2013;
    • a replacement payroll and HR system operational from April 2014;
    • a new Merchandise Management System (MMS) operational from March 2014;
    • a new Point of Sale (POS) system being rolled out across retail stores from June 2014 onwards; and
    • replacement finance and new business information reporting systems, which are currently being implemented and are planned to be operational by the end of 2014.

The Audit Committee continued to monitor progress on all of these core systems implementations and new facility investments throughout the year, ensuring that full and thorough risk assessments were in place and business disruption was minimised. Members of the management team have been invited to Audit Committee meetings to provide regular updates on project progress, key risks and the mitigating actions that are in place to ensure that the projects were implemented effectively and internal controls appropriately strengthened.

Given the significant IT improvements being undertaken by the Group, the Audit Committee has focused on the development of the IT control environment. Members of the management team have also provided reports on the Group's compliance with PCI Data Security Standard, IT security risks and updates on the development of Business Continuity Planning (BCP) and Disaster Recovery (DR) programmes. Progress is being made on IT security, BCP and DR to identify the key issues and appropriate responses with further work due to be completed in 2015.

In addition, the Audit Committee has reviewed other key areas of risk and internal controls including treasury, tax, credit control management and project governance.

Financial Reporting and Accounting Judgements

The Audit Committee reviewed and approved the financial statements of the Group and all formal announcements relating to the Group's financial performance. The review considers the integrity of the reporting, the appropriateness and acceptability of accounting policies and practices, and compliance with financial reporting standards and requirements.

For accounting judgements, the Audit Committee considered detailed papers from management and the views of the external auditors. The Audit Committee considers that the Group has adopted appropriate accounting policies and made appropriate estimates and judgements where required.

The primary areas of accounting judgements and issues reviewed by the Audit Committee for the current year are set out below:

Area

Issue

How addressed

Acquisition accounting, contract termination and other exceptional items

Material items are outside the normal course of business and are adequately disclosed.

The Audit Committee reviewed management's assessment of the acquisition accounting for Germany including judgements taken in relation to fair values ascribed to assets and liabilities acquired, including identification of intangible assets and resulting goodwill.


The Audit Committee considered the nature and size of costs categorised as exceptional to conclude whether they met the definition of an exceptional item, being material in size, unusual, or infrequent in nature.


The Audit Committee considered contract terminations in Spain and the UK and agreed with management's conclusions that these were exceptional costs.


The Audit Committee reviewed the exceptional items as disclosed in Note 13 to the Financial Statements and is satisfied that the categorisation is appropriate.

Deferred tax assets

The deferred tax asset recognised is based on a judgement as to the amount of future tax benefit that will flow to the Group.

Management has presented a paper to the Audit Committee on the expected recoverability of deferred tax assets held in the Group balance sheet for goodwill amortisation from subsidiary entities. The paper sets out the rationale for recognition of deferred tax assets in relation to the Wholesale business and non-recognition in the Retail business.


The Audit Committee has considered the risks and disclosure given in Note 14 in the Financial Statements, and concluded that the position adopted by management is appropriate.

Other areas that have been discussed and considered by the Audit Committee in relation to the 2014 Annual Report are:

Area

Issue

How addressed

Provisions for inventory, returns, receivables and property

Management judgements and estimates are used to support the provisions.

For each provision, the Audit Committee considered the judgements made by management and assessed the available evidence, including historic trends and concluded that the provisions are appropriate.

Annual goodwill impairment review

The impairment review requires judgement to determine the recoverable amount.

In respect of goodwill, the Audit Committee considered the short-term forecasts and long-term growth rates as well as the weighted average cost of capital and concluded that the judgements used were suitable for use in the goodwill test.

Depreciation policy

Depreciation should reflect the useful economic life of an asset.

As a result of opening the new distribution facility in Burton upon Trent and the significant IT system investment programme being undertaken, management have updated the useful economic life for the asset categories applicable to these relevant asset categories effective November 2013. The Audit Committee has reviewed the useful economic life of these assets and is satisfied that they are appropriate.

Going concern

The appropriateness of preparation of the accounts on a going concern basis.

The Audit Committee reviewed the cash flow forecasts and concluded that it was appropriate to prepare the accounts on a going concern basis.

Fraud, Whistleblowing and Bribery

The Group has a policy and process in place for fraud, security and whistleblowing and the Audit Committee is satisfied that employees have the opportunity to raise concerns in confidence about possible fraudulent activity and any other concerns that arise within the organisation. The Audit Committee is also satisfied that arrangements are in place for proportionate and independent investigation of such matters, including appropriate follow-up action.

During the year the Audit Committee received an update on instances of fraud within the Group and a summary of the calls to the whistleblowing helpline and follow up actions that were undertaken.

Controls and procedures surrounding anti-bribery monitoring to ensure compliance with the Bribery Act 2010 have been put in place by the Group, and the Audit Committee receives a regular report on the Group's gift register which includes any gifts and hospitality received by employees from external business relationships above an agreed threshold.

A review of the procedures in place for anti-bribery has been undertaken during the year to ensure these reflect the requirements of an international business. A programme of e-learning has been launched at the Company's head office which will be cascaded across the business. All of the Group's suppliers have signed up to the SuperGroup anti-bribery procedures and in May this year the Group held a conference for its suppliers where training on the anti-bribery procedures was given.

Internal Audit Effectiveness

The internal audit function has continued to develop and improve its effectiveness during the year. The ongoing review of an audit universe, and the outputs from the new Risk Committee, has enabled the role of internal audit and scope of its work to continue to evolve to take account of changes within the Group and emerging best practice. Annual review of the audit plan ensures that the coming year is planned and following two years agreed in outline so that areas of focus are audited at least once over the course of the three year plan. During the year, internal audit has delivered nine audits including coverage of the following areas: legal and regulatory framework, accounts payable, e-commerce, and supplier management.

The effectiveness of internal audit is reviewed on an ongoing basis by the Audit Committee, by discussion and assessment with the management team on the issues identified by the internal audit reports and the regular follow-up at meetings on progress of the recommended actions. A formal review will be undertaken in 2014 after the year end in conjunction with the external audit review.

External Audit Effectiveness and Integrity of the Group's Relationship

The Audit Committee reviews, with the external auditors, the audit strategy and the outcome and findings of the annual external audit. In addition, the Audit Committee approves the scope and fees for the external audit and is responsible for recommending the appointment, reappointment and removal of external auditors.

Effectiveness of external audit

A review of the effectiveness of external audit in 2013 was undertaken by an internal survey of members of the Audit Committee, Chief Operating Officer and Chief Financial Officer, and the internal finance team. The Audit Committee noted that good progress had been demonstrated and was satisfied that external auditors continued to perform effectively. Further areas for improvement were identified from the review and it was agreed that progress would continue to be assessed during 2014.

Supervision of the external auditors

The Audit Committee oversees the external auditors by reviewing and approving the audit plan and ensuring that it is consistent with the scope of the audit engagement. The Audit Committee meets regularly with the external auditors both with and without management present. During the review of the audit plan, the Audit Committee discussed and agreed those financial statement risk areas identified by the auditors that required additional audit emphasis and discussed and challenged the auditors' assessment of materiality. The audit opinion here provides a full explanation of the auditors' assessment of material misstatement, concept of materiality and scope of the audit.

Re-appointment of external auditors

Based on the assessment of effectiveness and independence of the external auditors, the Audit Committee has recommended the reappointment of PwC for the next financial year. The appointment of the external auditor will continue to be reviewed annually and a tendering process will be undertaken if the Audit Committee considers it appropriate. PwC have been the Group's auditors since the IPO in 2010 and, prior to this, as auditors to the legacy SuperGroup companies since 2008. The Audit Committee notes that under current regulations, the audit will need to be tendered no later than 2020.

Independence

Auditor independence is maintained by monitoring the nature and value of non-audit services carried out, and by ensuring that employees of the external auditors who have worked on the audit in the past two years are not appointed to senior financial positions within the Company. In addition, the rotation of the lead partner occurs every five years.

The Audit Committee assessed the independence of the external auditors and concluded that they were independent.

Non-audit services

The general policy in respect of non-audit work by the external auditors is that they should not be requested to carry out non-audit services on any material activity of the Group where they may, in the future, be required to give an audit opinion or they act as management, in accordance with the Audit Practices Board's Ethical Standards for Auditors. The Audit Committee approves each individual non-audit service above £20,000 in value and every piece of work once an agreed threshold is reached.

Detail of all non-audit services provided during the year are set out within the note on Auditors' Remuneration here and are summarised in the table below:

2014
£m

2013
£m

Audit fees

0.3

0.3

Non-audit fees:

Tax compliance and advisory

0.3

0.2

Other

0.1

Total non-audit fees

0.4

0.2

Non-audit fees as a percentage of audit fees

133%

66%

Non-audit fees are more than 100% of audit fees in 2014 primarily due to ongoing tax advisory services and the appointment of PwC for other work. The Audit Committee approved the appointment for tax advisory and other services as this required an experienced understanding of the Group's structure and business to be able to provide appropriate assurance work.

Given the ongoing scale of tax fees paid, and the related threat to independence, the Audit Committee has agreed that tax advisory services should be tendered in the current year.

The Audit Committee has reviewed and agreed the non-audit services as set out above provided by the external auditors, together with the associated fees, and is satisfied that these did not prejudice the external auditors' independence or objectivity.

Approved and signed on behalf of the Board.

Minnow PowellAudit Committee Chairman 9 July 2014