I joined the Board on 16 June 2015 as Senior Independent Director and Chair of the Audit Committee. It has been a busy year for the business and its people and I look forward to the year ahead.

I am pleased to present the Audit Committee Report for the year ended 31 March 2016, which has been prepared by the Committee and approved by the Board.

The Committee has focused on the integrity, completeness and clarity of financial reporting, the areas where judgements and estimates are required in the financial statements and the quality and effectiveness of audit processes to complement the other risk management activities.

The Board and Committee have also focused on the recently introduced governance requirements regarding the Annual Report and consider that, taken as a whole, the 2016 Annual Report is fair, balanced and understandable with appropriate references being made throughout the various sections to assist shareholders and others to understand the information and disclosures contained within them.

I would like to thank the Committee members, the executive management team and our external auditor, KPMG LLP ('KPMG') for the open discussions that take place at our meetings and the importance they all attach to its work.

Committee membership and attendance

The Audit Committee consists entirely of the Independent Non-Executive Directors and met three times in the year.

Attendance in
2015/2016
Neil Warner (Chairman) — appointed 16 June 2015
2
Jonathan Shearman
3
Scott Mac Meekin
3
Neil Chapman (Chairman) — retired 16 June 2015
1

The external auditor KPMG, the Executive Chairman, the Chief Executive, the Chief Financial Officer and the Company Secretary are also invited to attend meetings.

The Committee is considered to be adequately qualified. The Chairman, Neil Warner, has significant, recent and relevant financial experience as a former CFO of a FTSE 250 company and through his other Non-Executive appointments.

Responsibilities

The Committee operates within its terms of reference, which are reviewed on an annual basis and are available on the Company's website or on request to the Company Secretary.

The Committee's main responsibilities are:

  • to assist the Board in ensuring the integrity of its financial statements
  • to review the strategic report, financial results, announcements and financial statements, monitoring compliance with relevant regulations
  • to provide advice to the Board on whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable
  • to review the appropriateness of accounting policies and the supporting key judgements and estimates
  • to monitor and review the internal financial controls and risk management systems including the identification of principal risks and their mitigation and the requirement for a formal internal audit function
  • to review the procedures for detecting, monitoring and managing the risk of fraud
  • to make recommendations to the Board on the appointment and remuneration of the external auditor
  • to review and monitor the external auditor's performance, expertise, independence and objectivity along with the effectiveness of the audit process and its scope

Neil Warner |
Chairman of the Audit Committee

Jonathan Shearman |
Independent Non-Executive Director

Scott Mac Meekin |
Independent Non-Executive Director

Our Audit Committee is focused on ensuring the integrity of the Group's financial reporting and the effectiveness of our risk management processes and internal controls"

Key matters considered and activities during the year

During the year, the Committee met to agree the audit strategy for the full year audit, reviewed the results of the external audit for the financial year and reviewed the external auditor's half year review and the half year results. It also considered the results of the internal review process ('Health Checks') carried out as part of the cycle (more details of this process are given in the section 'Internal Audit' below), and finally it reviewed the Annual Report and the financial statements contained within it.

The Committee reports to the Board on how it has discharged its responsibilities on a regular basis.

The Committee's prime areas of focus have been:

  • the integrity, completeness and consistency of financial reporting and disclosures
  • the areas where significant judgements (during the year, at and post the balance sheet date) and estimates are required in the financial statements
  • the materiality level to apply to the audit
  • whether the going concern basis of accounting should continue to apply in the preparation of the annual financial statements; and
  • the appropriateness of the bases of disclosure in the company's viability statement
  • the appropriateness of transactions separately identified and disclosed as one-off in order to highlight the underlying performance for the periods presented in the financial statements
  • the key assumptions, judgements and estimates as detailed in note 32 to the financial statements
  • to review the Group's cyber risk strategy to ensure controls and testing are in place to mitigate the Group's exposure to this growing risk

Financial reporting and significant financial risks

The Committee concluded that there were three significant financial risks arising from the financial statements which would require particular consideration during the year:

• Carrying amount of inventory (recurring)

The Group has significant inventory holdings which fall into two broad categories — standard product ranges and those holdings which are customer specific. The Board recognises that as the business continues to grow the Group is required to carry additional inventory to meet its transactional and OEM business. This carries with it an increased exposure to obsolete inventory. The Committee is satisfied that sufficient focus is given to this whole area and, in particular, the adequacy of provisions made for slow moving and obsolete inventory.

• Recoverability of goodwill (recurring)

The determination of whether or not goodwill has been impaired requires a review of the value in use of the asset. The main judgements in relation to the review were considered to be the achievability of the long term business plan and the impact upon the plan of macroeconomic and regulatory issues. In addition, the Committee reviewed the discount rates used in projecting future cash flows to ensure they were within an acceptable range. The calculation of the value in use was undertaken and the Committee reviewed the conclusion, including sensitivity calculations. The Committee also held discussions with KPMG. The Committee concurred with management's conclusion that goodwill is not impaired.

• Acquisition accounting for Kuhlmann (in the year)

The determination of the value of intangible assets acquired as part of a business combination requires a cost, market or income approach to be taken. The intangible assets identified on the acquisition of Kuhlmann Befestigungselemente GmbH & Co.KG ('Kuhlmann') have been valued by external valuer Globalview Advisors using the income methodology. The main assumptions used to establish value were profitability, growth, discount and tax rates. The Committee reviewed the conclusions reached and held discussions with management and KPMG. The Committee concurred with management's conclusion that the intangible assets are appropriately valued.

Internal audit

A formalised internal review process called a 'Health Check' has been in operation for some years and all business units are the subject of a Health Check on a rotational basis. The reviews, covering both operational and financial controls, are carried out by senior finance personnel who are independent from the entity which is the subject of the review. All Health Checks are presented by the Chief Financial Officer to the Audit Committee and remedial actions agreed. Whilst the Board recognises that this process does not constitute a fully independent internal audit function, it believes that due to the size of the Group, this provides appropriate comfort as to the operational and financial controls in place.

Internal control

The Board is ultimately responsible for the system of internal control and for reviewing its effectiveness. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Corporate Governance Code requires that the Board reviews the effectiveness of the system of internal controls, in accordance with section C.2, including those of an operational and compliance nature, as well as internal financial controls. Having done so, the Committee is of the view that there is an appropriate ongoing process for identifying, evaluating and managing significant risks. Operating policies and controls are in place and have been in place throughout the year under review, and cover a wide range of issues including financial reporting, capital expenditure, information technology, business continuity and management of employees. Detailed policies ensure the accuracy and reliability of financial reporting and the preparation of Financial Statements including the consolidation process.

The key elements of the Group's ongoing processes are:

  • a full detailed review of the business risks undertaken as part of the ongoing day-to-day procedure of the business
  • an organisational structure with clearly defined lines of responsibility and delegation of authority
  • that Group policies for financial reporting, accounting, financial risk management, information security, capital expenditure appraisal and Corporate Governance are well documented
  • that detailed annual budgets and rolling forecasts are prepared for all operating units and reviewed and approved by the Board
  • that performance is monitored closely against budget and material variances reported to the Board
  • that the Committee is to deal with any significant control issues raised by the auditor
  • that a formal schedule of matters specifically reserved for decisions by the Board is maintained
  • that capital expenditure is controlled by the budgetary process with authorisation levels in place. Any single item of capital expenditure over £50,000 goes to the Board for approval with detailed written proposals and financial analysis of expected returns

There were no significant control deficiencies identified during the year.

External auditor

The external audit is a continuous process. At the start of the audit cycle, KPMG present their audit strategy identifying their assessment of the key risks for the purposes of the audit and the scope of their work. For 2016 these risks were: the carrying amount of inventory, recoverability of goodwill and the acquisition accounting for Kuhlmann. More detail is set out in KPMG's report.

KPMG reports to the Committee at both the half and full year, setting out their assessment of the Group's judgements and estimates in respect of these risks and the adequacy of the reporting. The Chairman of the Committee speaks to the lead audit partner before each meeting and the whole Committee meets with KPMG in private at least once a year without executive management present. The Committee reviews the external auditor's performance and ongoing independence and concluded that the external audit process is operating effectively and KPMG continues to prove effective in its role as external auditor.

Non-audit services provided by KPMG

In order to ensure the independence and objectivity of the external auditor, the Committee has a policy which provides clear definitions of services that the external auditor can and cannot provide. Tax compliance and advisory services are currently provided by another professional services firm PricewaterhouseCoopers LLP ('PwC'). The policy also establishes a formal authorisation process, including either the tendering for non-audit services or pre-approval by the Committee for allowable non-audit work.

The fees in relation to non-audit services are found in note 5 of the Annual Report.

Reappointment of external auditor

Following the completion of the audit, the Committee reviews the effectiveness and performance of KPMG with feedback from Committee members, senior executive management and finance personnel, covering overall quality, independence and objectivity, business understanding, technical knowledge, responsiveness and cost effectiveness.

The Committee acknowledges the new EU rules with regard to auditor rotation and the requirement for companies to put audit services contracts out to tender at least every ten years (outside of transitional rules). KPMG has been our auditor for over 20 years. The current lead audit partner at KPMG was appointed in September 2015 and will be required to stand down no later than the Annual General Meeting in 2020. Accordingly, and in line with the arrangements set out by the EU, the Committee continues to recommend to the Board that the tendering of the external contract should be either at the next rotation of audit lead partner or earlier, if appropriate circumstances arise. There are no contractual obligations which restrict the Audit Committee's choice of external auditor. The Committee and the Board have concluded that KPMG provides an effective audit and have recommended their reappointment at the 2016 AGM.

On behalf of the Audit Committee

Neil Warner
Chairman of the Audit Committee
13 June 2016