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Audit Committee Report

INTRODUCTION BY ROBERT MACLEOD, AUDIT COMMITTEE CHAIRMAN

I am pleased to introduce the report of the Audit Committee for 2013.

In 2012, the Financial Reporting Council introduced a new requirement into the Code, for financial years beginning on or after 1 October 2012, for the Directors to confirm that the annual report is fair, balanced and understandable. This is the first year that this requirement applies to Aggreko and although we have always believed that our annual report meets these criteria, it felt appropriate that we should review our processes this year to ensure that we can provide the necessary confirmation and have the evidence to back it up.

This new requirement envisaged that the Board would need some assistance in making this confirmation, so in line with the Code, the Board asked the Committee to provide advice on whether the annual report and accounts for 2013, taken as a whole, were fair, balanced and understandable and provided the information necessary for shareholders to assess the Company's performance, business model and strategy. This has been a key area of focus, discussion and oversight for the Committee throughout 2013. The co-ordination and review of the Group-wide input into the annual report and accounts has been a sizeable exercise which has run alongside the formal audit process undertaken by the external auditors. More detail on this exercise is provided under the section on financial reporting.

In light of the other new disclosure requirements under the Code on the external auditor and review of financial controls, we have strengthened our report on the following pages to ensure we disclose the new details required.

The Financial Reporting Council also published guidance in September 2012 on the role of the Audit Committee. Since this year's Committee evaluation was the first one undertaken since the guidance was issued, we conducted our review by specific reference to the guidance to see how we measured up against the recommendations. Further detail on the Committee evaluation is provided under the sections on Audit Committee effectiveness and external auditor effectiveness.

We regularly review the Group's internal controls. At our December 2013 meeting, we received a presentation from the Director of Finance on the internal financial control environment, which included progress against 2013 objectives and setting priorities for the year ahead. We also received a presentation from our Group Tax function which provided an update on a number of important areas, including tax strategy, environment, risks, our control framework and priorities for 2014. This presentation also informed the Committee in the context of direct and indirect tax provisions, being a primary area of judgement as discussed later in this report. We also received regular updates from the Chief Information Officer throughout the year to enable the Committee to closely monitor progress during the upgrade and implementation of our Movex enterprise resource planning system.

There have been two additions to the Committee's membership this year: Diana Layfield was appointed as a member of the Committee on 29 July 2013 and Ian Marchant was appointed as a member of the Committee on 1 November 2013. Both were selected as Committee Members based on their strong financial experience; Diana has worked for a multinational banking and financial services company for ten years; and prior to his appointment as Chief Executive for SSE, Ian spent six years as Finance Director for SSE. Further details of their relevant skills and experience are set out in the Board of Directors section.

RESPONSIBILITIES AND ROLE OF THE AUDIT COMMITTEE

The Committee's main responsibilities are to oversee and monitor:

  • the integrity of the Company's financial reports, including reviewing the findings of the external audit and, for the first time this year, providing advice to the Board on whether the annual report and accounts for 2013, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy; 
  • the effectiveness of systems for internal financial control, financial reporting and risk management; 
  • the effectiveness of internal audit and ensuring co-ordination with the activities of the external audit; 
  • the relationship with the external auditor, the external audit process, the nature and scope of the external audit, including the appointment of the external auditor, their effectiveness, audit and non-audit fees and independence; 
  • the adequacy and security of the Company's procedure for handling allegations from whistleblowers and for detecting fraud; and 
  • reporting to the Board on how it has discharged its responsibilities. 

The full Terms of Reference of the Committee are available on our website at http://ir.aggreko.com/committee-terms-of-reference.

MEMBERSHIP OF THE COMMITTEE

The members of the Committee during the year were as follows:

Robert MacLeod Chairman
David Hamill  
Russell King  
Diana Layfield (appointed 29 July 2013)
Ian Marchant
 		 (appointed 1 November 2013)

All members of the Committee are independent Non-executive Directors, details of their skills and experience are set out in the Board of Directors section. The members of the Committee identified as having recent and relevant financial experience are Robert MacLeod, Diana Layfield and Ian Marchant.

Peter Kennerley was Secretary to the Committee until 29 July 2013; Helen Middlemist, Assistant Company Secretary, was appointed as Secretary to the Committee from this date.

Ken Hanna, Rupert Soames, and Angus Cockburn, together with the Director of Finance and Director of Internal Audit generally attend meetings by invitation. We also ask other members of senior management to present to the Committee on a regular basis. The Group audit partner from our external auditor also attends the Committee.

MAIN ACTIVITIES OF THE COMMITTEE

The Committee met three times during the year in March, July and December. The timing of meetings is designed to complement the financial reporting timetable.

At each of our three regular meetings during the year, the Group audit partner from PricewaterhouseCoopers presents a report. The first one in the audit cycle is presented to the meeting in July when we review Aggreko's Interim results. This report contains the results of PricewaterhouseCoopers' review of our Interim Report, and also the core of the Group audit strategy and plan for the year end. This is followed up with a report in December, providing an update on the plan presented to the previous meeting, together with an early assessment of any issues identified at that stage. Finally, when the Committee meets in March to review the draft Annual Report, PricewaterhouseCoopers present a commentary report on their audit. At the end of this meeting we hold a separate session with the external auditor without members of management present.

Financial Reporting
Integrity of financial reports - Annual Report
At our March 2014 meeting, we reviewed the draft Annual Report and considered a number of supporting papers. We discussed primary areas of judgement with management and the external auditor and satisfied ourselves that the issues raised had been properly dealt with. The external auditor carried out their work using an overall materiality of £17 million, and confirmed to the Committee that there were no material unadjusted misstatements (this refers to amounts above £1 million as well as misstatements below that amount that warranted reporting for qualitative reasons). We agreed to recommend the approval of the 2013 Annual Report to the Board.

The primary areas of judgement considered by the Committee in relation to the 2013 Annual Report were:

Contract provisions

Area of focus: One of the biggest risks facing the Group is non-payment by customers under some of the larger contracts in our Power Projects business (see Principal Risks and Uncertainties – Failure to collect payments or to recover assets. Identified as an area of judgement in our report last year, contract receivables and associated provisions within Power Projects is a key risk for the Group, and one of the areas of particular external audit focus. The Group policy is to consider each debtor and customer individually, within the relevant environment to which it relates, taking into account a number of factors, in accordance with accounting standards.

Action taken: The Committee addressed contract provisions by considering an accounting judgements paper at the March 2014 meeting, which was tabled by the Chief Financial Officer. PricewaterhouseCoopers' also provided a report on contract provisions at the March 2014 meeting in the context of the year end audit. In addition the Committee is aware that the Board receives a report on contract provisions each month and has assessed the Group's processes for calculating and regularly monitoring contract risk provisions.

Direct and indirect tax provisions

Area of focus: The other key area of judgement is in relation to direct and indirect tax provisioning. The Group's tax strategy is to manage all taxes, both direct and indirect, such that we pay the appropriate amount of tax in each country where we operate whilst ensuring that we respect the applicable tax legislation and utilise where appropriate any legislative reliefs available. However, given the varied, complex and often uncertain nature of tax rules in certain countries, in particular in those in which we have our Power Projects business, we recognise that it makes sense to carry an appropriate level of provision for both direct and indirect taxes. The tax team monitors the status of tax risks monthly and in detail at the half and full year. This monitoring process together with consideration of any relevant legislative change is then used to determine the appropriate level of provisions.

Action taken: The Committee addressed tax provisions by considering an accounting judgements paper at the March 2014 meeting, which was tabled by the Chief Financial Officer. As this is an area of particular external audit focus, PricewaterhouseCoopers' provided a pre year-end audit report on these provisions at the December 2013 meeting and then an update report at the March 2014 meeting in the context of the year end audit. We have monitored and assessed the Group's processes for calculating and regularly monitoring tax provisions.

Going concern
In assessing the basis for preparing the Annual Report on a going concern basis, and accordingly making a recommendation to the Board, we considered a paper prepared by the Chief Financial Officer based on guidance published by the Financial Reporting Council. The assessment was made for the period of the 16 months to 30 June 2015, in accordance with accepted practice. Based on internal forecasts, including the prospective return of value to shareholders, we reviewed the Group's debt maturity profile, including headroom and compliance with financial covenants. We stress tested this by adjusting the 2014 budgeted cash flow and the six months beyond to 30 June 2015 by a combination of two of the principal risks we have identified – an economic downturn leading to loss of revenue and customer default. (See Principal Risks and Uncertainties – Economic conditions and Failure to collect payments or to recover assets.)

The going concern statement by the Directors is in the Statutory Disclosures section.

Confirmation that the Annual Report is fair, balanced and understandable
In arriving at a position where initially the Committee, and then the Board, are satisfied with the overall –fa–irness, balance and clarity of the annual report and accounts, we made sure that we had the following in place:

  • Comprehensive management and statutory accounts process, with written confirmations provided by the regional senior management teams on the 'health' of the financial control environment. 
  • Detailed reviews of the annual report and accounts undertaken at different levels of the Group and by the senior management team that aim to ensure consistency and overall balance. 
  • A verification process, involving our internal audit team, dealing with the factual content of the annual report.
  • A key accounting judgements paper covering contract and tax provisions, along with a summary of any changes in our accounting policies for 2013. 

The confirmation by the Directors that the Annual Report is fair, balanced and understandable is in the Statement of Directors' Responsibilities section.

Integrity of financial reports - Interim Report
At the July 2013 meeting the Committee reviewed PricewaterhouseCoopers' report on their Interim review, which also included a report on contract provisions. We also reviewed and recommended to the Board the Group's Interim Report. The matters receiving significant focus were contract receivables, direct tax provisions and indirect tax provisions.

External audit
The external auditors are appointed by shareholders to provide an opinion on the financial reports and certain other disclosures prepared by the Directors. Following their re-election at the 2013 AGM, PricewaterhouseCoopers acted as the external auditor to Aggreko throughout the financial year.

External auditor effectiveness
Following completion of the 2012 year end process, the Committee assessed the audit process and the strategy for the 2013 audit and considered the performance of the external auditor.

The Committee believes that the independence, objectivity and effectiveness of the external auditor and their processes is safeguarded and remains strong. This is displayed through their robust internal processes, their continuing challenge, focused reporting and their discussions with management and the Committee. We assess PricewaterhouseCoopers through the quality of their audit findings and management responses. This year, as part of our Committee evaluation we included specific questions on whether we have the correct processes in place to assess the effectiveness of the external auditor, how we monitor the independence, expertise, resources and objectivity of the external auditor and how we monitor the external auditor in relation to non-audit services and compliance with Ethical Standards. The results confirmed that the Committee has a good working relationship with the external auditor, which is supported by a sufficient amount of challenge. Following the evaluation we reviewed the effectiveness of the external auditor, including a detailed review of our non-audit services policy.

Non-audit services policy and external auditor independence
To safeguard the objectivity and independence of the external auditor from becoming compromised, the Committee has a formal policy governing the engagement of the external auditor to provide non-audit services. This year we undertook a detailed review of our non-audit services policy. A summary of our updated policy for services provided by the external auditor is set out as follows:

  • Statutory and audit related services – where the external auditor is best placed to perform the work as it is clearly audit related. Such assignments are pre-approved by the Audit Committee as part of their approval of the annual audit plan and fees. 
  • Permitted non-audit services – where the external auditor is best placed to perform the work due to their network and knowledge of the business, or experience and market leadership in a particular area. 
  • Not permitted – projects that are not to be performed by the external auditor because they would represent a threat to the independence of the audit team. A clear example of this type of work would be where it could lead to the external auditor being in a position of auditing their own work. 

Services likely to cost less than £75,000 require prior approval of the Chief Financial Officer. Services above this amount must be approved by the Audit Committee Chairman, unless they are likely to be in excess of £200,000, when they must be approved by the Audit Committee.

An appendix to the policy provides detailed examples of the types of engagements described above. The full policy may be found on our website at http://ir.aggreko.com/committee-terms-of-reference.

Non-audit fees are monitored by the Committee and we receive an analysis of the actual level and nature of nonaudit work. This year we were again satisfied that all non-audit work undertaken was in line with our policy and did not detract from the objectivity and independence of the external auditor. The majority of the non-audit work carried out by PricewaterhouseCoopers during the year related to tax and minor local compliance services and the Committee believes that, given their experience, PricewaterhouseCoopers was the most appropriate supplier of this work. As a percentage of the overall audit fee for the year, the non-audit fees are 20% (2012: 22%). Further details of the fees paid to the external auditor are set out in Note 6 to the Group Accounts.

Reappointment of external auditor
The Committee considers the reappointment of the external auditor, including the rotation of the audit partner, each year and also assess their independence on an ongoing basis. The external auditor is required to rotate the audit partner responsible for the Group audit every five years. The current lead audit partner has been in place for three years.

PricewaterhouseCoopers have been the Company's external auditor since 1997 when Aggreko plc was incorporated, following the de-merger from the Salvesen Group. We last engaged in a competitive tender process in 2006, following which PricewaterhouseCoopers were reappointed external auditor. The Committee keeps under review the ongoing legislative proposals on audit tendering and rotation from the EU and the Competition Commission, and will implement them when they become final. These proposals effectively superseded the comply-or-explain provision in the Code which would have otherwise applied to the Company for the first time this year. We note that the FRC plans to withdraw this tendering provision during 2014. The Committee will continue to consider annually the need to go to tender for audit quality or independence reasons and will use its regular reviews of auditor effectiveness to assess when a date for such a re-tender would be desirable.

The Committee is again recommending to the Board that a proposal be put to shareholders at the 2014 Annual General Meeting for the reappointment of PricewaterhouseCoopers as external auditor. There are no contractual restrictions on the Company's choice of external auditor, and in making our recommendation we took into account, amongst other matters, the results of the effectiveness review, the tenure of the auditor, the objectivity and independence of PricewaterhouseCoopers, as well as their continuing effectiveness and fees.

Internal audit
The internal audit team undertake financial, operational and strategic audits across the Aggreko Group using a risk based methodology and in accordance with the changing risk profile of the Company. Group Internal Audit is also responsible for IT related audits; these services are provided by an outsourced provider. Each year we agree the scope of work and coverage levels as part of the annual internal audit plan and review its progress during the year through reports at each meeting. During 2013, 131 audits were completed. Audits cover all parts of Aggreko, from Group level down to individual project sites, and all aspects of the business, for example, finance, purchasing, contract management and service and repair. Results are graded, and where audits are given a low grading, Group Internal Audit agree appropriate remedial actions with the businesses concerned and report to us on progress.

We also considered all internal control issues raised in the internal audit reports, the adequacy of internal audit resources and the effectiveness of the internal audit function. We assess the effectiveness of our internal audit function by reviewing their reports, meeting with the Director of Internal Audit without management being present at least once each year and holding separate meetings with the Chief Financial Officer and Group Audit Partner to seek their views on the effectiveness of the function. We have also strengthened our processes for assessing the effectiveness of the internal audit function following feedback from the Board and Committee annual evaluation process.

Financial control and managing risk
Aggreko's objective is to have a strong control environment that minimises financial risk, and as part of our responsibilities we review the effectiveness of systems for internal financial control, financial reporting and risk management. We aim to ensure that the same high standards are applied throughout the business with the framework set at Group level. Across the Group, there is a strong focus on training and development and this helps to underline the standards that we require. We then monitor this process through regular financial control reviews and a financial control checklist. This also enables us to set targets and identify and monitor areas for improvement.

We agreed financial control deliverables for 2013, as proposed by the Chief Financial Officer, including addressing countries with lower financial control checklist scores and ensuring sufficient support at Group or regional level for our less mature businesses. At the end of the year, we reviewed progress for 2013 and agreed proposed targets for 2014. Our priorities for 2014 included developing an integrated assurance model, leveraging the Global Controls Group to further standardise and share good practice around the Group and continuing to support our less mature businesses in the development of their financial control environments.

We look, on a regular basis, in some depth into the Group's risk management processes. We have a rolling schedule of agenda items covering the business regions and central functions. In 2013 we received a detailed presentation from Group Tax on our tax strategy, environment, risks, control framework and priorities for 2014. We also received regular updates from the Chief Information Officer throughout the year to enable the Committee to monitor progress during the upgrade and implementation of our Movex enterprise resource planning system. Once the upgrade and implementation of Movex was complete, a final update covering lessons learnt was delivered to the Committee.

Whistleblowing
Part of our remit is to oversee Aggreko's processes for handling allegations from whistleblowers. Aggreko's Ethics Policy, supported by a separate Speaking Up Policy, encourages all employees to report any potential improprieties in financial reporting or other matters. As part of this, Aggreko has an independent compliance hotline, operated by an external agency. The hotline is available to all employees, in all of the languages used throughout the Group, and callers can remain anonymous if they wish. All complaints are followed up, and in turn we receive regular reports analysing complaints. Where appropriate, Group Internal Audit is asked to investigate the issue and report to us on the outcome. We review these processes each year, and can confirm that they remain adequate for addressing the Company's obligations under the Code.

Audit Committee effectiveness
Each year the Committee's effectiveness is reviewed as part of the Board's evaluation process. This year was the first Board evaluation undertaken since the Financial Reporting Council issued their guidance in September 2012 on the role of the Audit Committee. Therefore we used the guidance as a basis for the Committee evaluation and produced a questionnaire, designed to stimulate thought and discussion, rather than a series of questions to be answered one by one, to assess how we measured up to the guidance.

We sent the questionnaire to all members of the Committee together with those Directors who attend by invitation, then Peter Kennerley, Director of Group Legal and Company Secretary, held individual face to face meetings with each of them to discuss the recommendations in detail and identify areas for improvement.

The responses were positive, confirming that the Committee is well run, has the right balance of skills and has a good working relationship and good processes with both the external auditor and internal auditor. Following the evaluation we reviewed the effectiveness of the external auditor, including a detailed review of our non-audit services policy. The responses also reinforced our approach to risk management and it was noted that the presentations received by the business areas were particularly helpful in this area.

Robert MacLeod

Chairman of the Audit Committee
6 March 2014