The Audit Committee is pleased to present its report for the financial year ended 31 March 2018 to the shareholders of TFG. This report is in compliance with the requirements of the Companies Act of South Africa, No. 71 of 2008, as amended, (the Act), and the King IV Report on Corporate Governance™ for South Africa 2016 (King IV™).
- Meeting attendance for the committee is set out in the Corporate Governance report. All members of the committee continue to meet the independence requirements of the Companies Act and King IV™.
- Each member’s qualifications and experience is set out in their profiles.
- Details of fees paid to committee members appear in note 32 of the annual financial statements.
COMMITTEE MANDATE AND FUNCTIONING
The committee is governed by a formal Audit Committee charter that is reviewed regularly and incorporates all the requirements of the Act. This charter guides the committee in terms of its objectives, authority and responsibilities, both statutory and those assigned by the Supervisory Board. The committee fulfilled its responsibilities in accordance with its charter during the 2018 financial year.
The Audit Committee recognises its important role as part of the risk management and corporate governance processes and procedures of TFG.
The committee typically meets three times per year and further meetings are held as required. Internal audit reports are discussed at each meeting. In addition, the following is addressed at each respective meeting:
- Review of enterprise risk management and combined assurance methodology and consideration of outcome of financial risk assessment (typically in March each year)
- Approval of annual results (typically in May each year)
- Approval of interim results (typically in November each year)
The committee considered the draft interim and annual financial reports prepared by executive and senior management and recommended the adoption of these reports to the Supervisory Board subject to certain amendments. The Chairman provided written reports to the Supervisory Board that summarise the committee’s findings and recommendations.
The committee held four formal meetings during the 2018 financial year. To further strengthen the Group’s governance structures, a joint Audit and Risk Committee was constituted for both TFG London and TFG Australia. This committee met once this financial year.
Independently of executive management, members of the committee meet separately with the Head of Internal Audit and the external auditors respectively. The Head of Internal Audit reports directly to the Audit Committee.
Meeting dates and topics are agreed well in advance each year. Each meeting is preceded by the distribution of an Audit Committee pack to each attendee, comprising inter alia:
- a detailed agenda;
- minutes of the previous meeting;
- a report by the external auditors; and
- written reports by executive and senior management including:
- compliance and legal,
- governance over technology and information management,
- internal audit,
- loss statistics, and
- enterprise risk management (ERM).
MEMBERS AND APPOINTMENT DATES
|S E Abrahams (Chairman)||29 January 1999|
|D Friedland||1 April 2016|
|B L M Makgabo-Fiskerstrand||1 October 2015|
|E Oblowitz||1 October 2010|
|N V Simamane||24 February 2010|
|F Abrahams||1 October 2016|
The Chief Executive Officer, the Chief Financial Officer, the Head of Internal Audit, the Head of Enterprise Risk Management, the Company Secretary and the external audit partner and staff attended meetings of the committee by regular invitation. Additional attendees, including Mr R Stein, a non-executive director, and members of executive management, are invited to attend meetings on an ad hoc basis. The Chairman of the Group has an open invitation to attend meetings of the Audit Committee.
ROLES AND RESPONSIBILITIES
Statutory duties as prescribed in the Act
to receive and deal appropriately with any concerns or complaints (whether internal, external or on its own initiative) relating to the accounting practices and internal audit of TFG, the content or auditing of TFG’s financial statements, the internal financial controls of TFG or any related matter.
- to evaluate the independence, effectiveness and performance of the external auditors;
- to obtain assurance from the auditors that adequate accounting records are being maintained and that appropriate accounting policies are in place, which have been consistently applied;
- to evaluate the appointment of the external auditors on an annual basis and to ensure that such appointment is in terms of the provisions of the Act and any other legislation;
- to approve the audit fee and fees in respect of any non-audit services; and
- to determine the nature and extent of any non-audit services the auditors may provide to the Group and to pre-approve proposed agreements for non-audit services.
- to make submissions to the Supervisory Board on any matter concerning the Group’s accounting policies, financial controls, records and reporting; and
- to provide, as part of the integrated annual report and annual financial statements, a report by the Audit Committee.
Duties assigned and delegated by the Supervisory Board
- to ensure that the respective roles and functions of external audit and internal audit are sufficiently clarified and coordinated;
- to assess the effectiveness of the arrangements in place for combined assurance; and
- to assist the Supervisory Board in carrying out its risk management, technology and information management responsibilities.
- to consider and respond to any questions from the Supervisory Board and shareholders regarding the resignation or dismissal of the external auditors, if necessary;
- to review and approve the external audit plan; and
- to ensure that the scope of the external audit has no limitations imposed by executive management and that there is no impairment on its independence.
Internal control and internal audit
- to review the effectiveness of the Group’s systems of internal control, including internal financial controls, reporting procedures and risk management, and to ensure that effective internal control systems are maintained;
- to ensure that written representations on internal controls are submitted to the Supervisory Board annually by all divisional managing directors and general managers (these being representations that provide assurance on the adequacy and effectiveness of the Group’s systems of internal control);
- to monitor and supervise the effective functioning and performance of the internal audit function;
- to review and approve the annual internal audit plan and the internal audit charter;
- to ensure that the scope of the internal audit function has no limitations imposed by executive management and that there is no impairment on its independence; and
- to review that appropriate internal controls and an internal audit plan are prepared to cover the TFG International operations.
- to consider the appropriateness of the expertise and experience of the Chief Financial Officer; and
- to satisfy itself with the expertise, resources and experience of the finance function.
- to consider any accounting treatments, significant unusual transactions, or accounting judgements and estimates that could be contentious;
- to review executive management’s assessment of going concern and to make a recommendation to the Supervisory Board that the going concern concept be adopted by the Group; and
- to review the integrated annual report, as well as the annual financial statements, interim reports, preliminary reports or other financial information prior to submission and approval by the Supervisory Board.
A formal Supervisory Board evaluation (which includes an evaluation of all subcommittees) was followed in the 2017 financial year and will be undertaken again in the 2019 financial year. In the 2018 financial year the Supervisory Board, with the assistance of the Nomination Committee, scheduled an opportunity for consideration, reflection and discussion of its performance and that of its committees, its Chair and its members as a whole. All action items were attended to. This evaluation formally assessed the performance of Audit Committee members during the past year, as well as their independence in terms of the independence requirements of King IV™ and the Act.
ELECTION OF COMMITTEE MEMBERS
The following members made themselves available for election to the committee. Such election was recommended by the Nomination Committee and will be proposed to shareholders at the upcoming annual general meeting (AGM):
- S E Abrahams (Chairman)
- D Friedland
- B L M Makgabo-Fiskerstrand
- E Oblowitz
- N V Simamane
- F Abrahams
The committee confirms that it has carried out its functions in terms of the Audit Committee charter and section 94(7) of the Act, by:
- confirming the nomination of Deloitte & Touche as the Group’s registered auditor for the year ending 31 March 2019 and being satisfied that they are independent of the company;
- approving the terms of engagement and fees to be paid to Deloitte & Touche (and previously KPMG);
- ensuring that the appointment of Deloitte & Touche (and previously KPMG) complies with the provisions of the Act;
- determining the nature and extent of any non-audit services, which the external auditors provide to the company or a related company;
- pre-approving proposed agreements with Deloitte & Touche (and previously KPMG) for the provision of any non-audit services;
- preparing this report for inclusion in the annual financial statements and the integrated annual report;
- receiving and dealing appropriately with any relevant concerns or complaints, if any;
- making submissions to the Supervisory Board on any matter concerning the Group’s accounting policies, financial controls, records and reporting; and
- performing other oversight functions as determined by the Supervisory Board.
INTERNAL FINANCIAL CONTROL AND INTERNAL AUDIT
Based on the assessment of the system of internal financial controls and reporting procedures conducted by internal audit, as well as information and explanations given by executive and senior management and discussions held with the external auditors on the results of their audit, the committee is of the opinion that TFG’s system of internal financial controls and reporting procedures is effective and forms a basis for the preparation of reliable financial statements in respect of the year under review.
In addition, during the 2018 financial year, the committee was not made aware of any:
- material breaches of any laws or regulations; or
- material breaches of internal controls or procedures.
Internal audit continues to develop and refine its approach to analytically examine and interrogate the store data in an attempt to highlight weaknesses. This work has involved the development of IT software to enable intelligent scrutiny of stores’ data. Although this is still work in progress, the Audit Committee, the Risk Committee and senior management believe this initiative is essential to achieve better coverage of critical issues, particularly given the sizeable growth in new stores that has occurred both in Southern Africa and via our recent international acquisitions.
The committee believes that Mr H Nell, the Head of Internal Audit, possesses the appropriate expertise and experience to meet his responsibilities in that position and that the internal audit function is operating and performing effectively.
The Audit Committee reviewed the combined assurance process and related methodologies and the outcomes thereof and considers this process to be effective.
For further information, refer to the Risk Committee report.
The Chairman of this committee has an open invitation to Risk Committee meetings to ensure that relevant information is regularly shared. The committee fulfils an oversight role regarding financial reporting risks, internal financial controls, fraud risk as it relates to financial reporting, and technology and information management risks as they relate to financial reporting.
The strategies adopted by the Audit Committee and the Risk Committee ensure timely review of any internal control weakness identified by any of the assurance providers. In addition, there continues to be significant improvements in the development of ERM methodologies, which will further enhance the Group’s risk management coverage and focus.
Further details on the risk management approach and process are included in the Risk Committee report.
TFG INTERNATIONAL OPERATIONS
The Group continues to focus on fully integrating the TFG International operations into the overall risk management and governance framework of the Group. As reported last year, good progress was made in respect of the Phase Eight and Whistles operations in the United Kingdom, and the various workshops and processes have now been expanded to include the recently acquired Hobbs operations in the United Kingdom and the G‑Star RAW Australia and RAG operations in Australia.
Internal audit continues to draw up an audit plan to cover the major risks identified and audits were conducted during the year to cover those risks. No major concerns surfaced from their audit work, although it must be appreciated that it is still work in progress to achieve full integration into the Group’s risk management and governance framework.
The focus for the 2018 year end was directed at verifying the carrying values of inventory and trade debtors as well as considering the acquisition accounting for the Hobbs, G‑Star RAW Australia and RAG acquisitions. Both internal and external audit provided the Audit Committee with positive reports on these significant focus areas.
In addition, to further strengthen the governance structures in respect of the TFG International operations, a joint Audit and Risk Committee was constituted for both TFG London and TFG Australia. These committees will meet twice a year and will provide feedback to the Audit and Risk Committees as well as to the Supervisory Board. The Chairmen of both these committees will also review the results of the TFG International operations and provide feedback to the Audit and Risk Committees as well as to the Supervisory Board.
THE FINANCIAL AND BUSINESS ENVIRONMENT
Happily most of the political turmoil referred to in the 2017 Integrated Annual Report has subsided and the Audit Committee believes there is room for positive sentiment in the South African political stage.
President Cyril Ramaphosa has already demonstrated his determination to improve governance and competency through the appointment of widely accepted Ministers to the portfolios of Finance and State-owned Enterprises, being individuals with international reputation. The assignment for the Ramaphosa Government is far reaching and demanding. It is essential that government expenditure is valid and curtailed and that initiatives to increase GDP growth and alleviate poverty and unemployment are given the highest priority. Hopefully we will be able to persuade the rating agencies to give the Government, as newly constituted, an opportunity to resuscitate the economy.
The year from a TFG international expansion perspective has been both exciting and challenging. The Hobbs acquisition in London and RAG in Australia together with the integration of the acquired G-Star RAW Australian franchise has meant that the senior executives have been stretched to bed down these acquisitions.
Regrettably the United Kingdom political situation, with Brexit’s unresolved issues, is of concern as uncertainty of the ultimate outcome of Brexit makes business planning complicated with differing strategies to be considered for diverse scenarios.
In South Africa the regulations relating to the impediment of credit granting has been alleviated as the onerous conditions relating to proof of income have been successfully challenged. It remains to be seen what, if any, additional requirements will be introduced by the National Credit Regulator. As the position stands at present the granting of credit to new customers has been normalised and clothing retailers can once again provide credit to those customers meeting their lending criteria.
We continue to see an improvement in the status of the TFG debtors’ book and, as always, the review of the carrying value of year end receivables receives the close scrutiny of the Audit Committee as well as external audit.
Group management has continued with the strategy of balancing funding requirements among short-term, medium-term and longer-term facilities.
The Group continues to place importance on IT risk management as well as the governance over technology and information management and consistently reviews the measures to curb the threat of cybercrime and IT fraud in general. The governance over technology and information management is considered to be best in class and complies with the recommendations contained in King IV™.
The Group continues to suffer from financial loss arising from crime-related incidents. The growth in these losses however has slowed in the current year. The forensic initiatives to address crime have been encouraging.
Following the well publicised governance issues and concerns raised during the course of last year, relating to KPMG South Africa, the Audit Committee met and after careful consideration took the decision to change auditors with immediate effect to Deloitte & Touche on a worldwide basis.
The Audit Committee records its appreciation to KPMG Inc. and particularly the partners and staff of the Cape Town office (and its predecessors) for their service and dedication to TFG over many decades.
The date of the change in the Group’s auditors was 9 October 2017 which the Committee felt would provide sufficient time for an effective transition to the 2018 year end. Numerous meetings were held with Deloitte & Touche to ensure a seamless take-over of auditor responsibilities and that a complete and comprehensive audit was achievable.
Deloitte & Touche is afforded unrestricted access to the Group’s records and management, and presents any significant issues arising from the annual audit to the committee. In addition, Mr M van Wyk, the designated audit partner, where necessary, raises matters of concern directly with the Chairman of the committee.
The committee gave due consideration to the independence of the external auditors and is satisfied that Deloitte & Touche is independent of the Group and executive and senior management and therefore able to express an independent opinion on the Group’s annual financial statements. The Committee specifically considered the nature and extent of non-audit services. Non-audit services of R0,4 million (KPMG) and R1,5 million (Deloitte & Touche) were provided in the current year.
The committee has nominated, for approval at the AGM, Deloitte & Touche as the external auditor and Mr M van Wyk as designated audit partner for the 2019 financial year, having satisfied itself (as required by the JSE Listings Requirements):
- that the audit firm is accredited by the JSE; and
- that the quality of the external audit is satisfactory (after referencing the most recent inspection reports issued by the Independent Regulatory Board for Auditors (IRBA) in respect of both the audit firm and the designated audit partner).
The committee reviewed the financial statements of the company and the Group and is satisfied that they comply with International Financial Reporting Standards (IFRS) and the requirements of the Act.
In addition, the committee reviewed executive management’s assessment of going concern and recommended to the Supervisory Board that the going concern concept be adopted by TFG.
As recommended by King IV™ the Committee has concentrated primarily on the following financial captions with the actions taken to address the risks listed.
financial captions with the actions taken to address the risks listed
Recovery of Trade Receivables
During the year we receive detailed presentations from the Group Director responsible for Credit on the progress being made in controlling the collection of receivables, which reports detail trends in recoveries, bad debt write-offs and other matrices associated with TFG’s customer accounts status. In addition to reports provided to the Audit Committee, similar presentations are made to the Supervisory Board at regular intervals.
The Audit Committee receives reports from the external auditors on their work. Robust discussions take place on their findings.
The Audit Committee members receive monthly reports from the CEO, which reports include comments made by each divisional head on:
- their inventory holdings, stock turn statistics and write-down information; and
- the adequacy or otherwise of the overall quantum of their inventory holdings per business unit.
Internal audit performs selected reviews to provide assurance regarding the adequacy and effectiveness of the ongoing cyclical inventory counts and reports on their findings to the Audit Committee. In addition, the detailed internal audit reports relating to inventory counts are reviewed throughout the year by the Risk Committee.
The external auditors provide a detailed year-end report on their work to satisfy themselves that this critical caption is fairly stated.
INTEGRATED ANNUAL REPORT
The committee fulfils an oversight role in respect of the integrated annual report. In this regard, the committee gave due consideration to the need for assurance on the sustainability information contained in this report and concluded that obtaining independent assurance would not be beneficial to stakeholders in all aspects of our business.
The committee considered the sustainability information as disclosed in the integrated annual report, assessed its consistency with the annual financial statements and sustainability overview report and is satisfied that the sustainability information is in no way contradictory to that disclosed in the annual financial statements.
The committee has also been receiving regular reports from TFG Finance and Advisory on the readiness to introduce the substantial changes in accounting that will result from the introduction of IFRS 9 (which is at an advanced stage of completion), 15 and 16 over the next few years. It is confidently anticipated that we will be ready to meet the timetables for the introduction of all these revised accounting standards.
EXPERTISE OF CHIEF FINANCIAL OFFICER AND FINANCE FUNCTION
The committee considers the appropriateness of the expertise and experience of the Chief Financial Officer and finance function on an annual basis.
In respect of the above requirement, the committee believes that Mr A E Thunström, the Chief Financial Officer, possesses the appropriate expertise and experience to meet his responsibilities in that position.
The committee further considers that the expertise, resources and experience of the finance function are appropriate based on the nature, complexity and size of the Group’s operations.
The committee recommended the approval of the annual financial statements and the integrated annual report to the Supervisory Board.
S E Abrahams
Chairman: Audit Committee
29 June 2018