Oversight of the relationship with the external auditor
The Committee places great importance on the quality, effectiveness and independence of the external audit process.
The Committee is responsible for evaluating the performance of the external auditor. To assist the Committee in fulfilling these responsibilities, an assessment of the external auditor was carried out with feedback collected from key stakeholders by way of a questionnaire. The content of the questionnaire was prepared in accordance with the FRC’s guidance comprising four criteria: mindset and culture; skills, character and knowledge; quality control; and judgement. There was no significant change in the overall perceived quality of the 2015 audit and feedback did not identify any areas of significant concern. Areas for improvement identified were communicated to PwC who responded appropriately.
Audit effectiveness is also assessed throughout the year using a number of measures including: reviewing the quality and scope of the proposed audit plan and progress against the plan; responsiveness to changes in our businesses; and monitoring the independence and transparency of the audit. The assessment of the auditor’s effectiveness forms part of the Committee’s annual consideration of whether the auditor should be recommended to the Board for reappointment. We continue to believe that PwC are performing effectively and their reappointment will be recommended to shareholders at the 2017 AGM. There are no contractual or similar obligations restricting the Group’s choice of external auditors. Following the audit tender process EY will be recommended to shareholders for appointment as the Group’s external auditor for the 2018 financial year at the 2018 AGM.
In order to help safeguard the independence and objectivity of the auditor, the Committee maintains a policy on their engagement to provide non-audit services. This precludes the provision of certain non-permitted audit services and contains rules regarding the approval of permitted non-audit services. In November, the Committee reviewed the following Group policies developed to help ensure the continued independence of the external auditor: the provision of non-audit services by the Group’s external auditor, the personal use of the external auditor and the employment of former employees of the external auditor. The relevant policies were also updated to reflect the proposed appointment of EY as the Group’s external auditor to ensure that no engagements would restrict their appointment. The policy on the provision of non-audit services was updated to comply with the new EU audit reform regulation which was effective from 1 January 2017 and all non-audit services provided to the Group now require pre-approval from the Committee. In addition, non-audit services provided to Schroder & Co. Limited, the Group’s UK bank, must also first be approved by the WMARC and non-audit services provided to Schroder Pension Management Limited, the Group’s Life Company*, must also be first approved by that company’s board.
The approach that has been adopted is more restrictive than the legislation requires but it reduces the risk of independence breaches and allows a practical application of the policy. The scope of the policy has also been extended to incorporate both consolidated and non-consolidated pooled fund vehicles. As the permitted choice of non-audit service providers will be limited during the transition period from PwC to EY, certain non-audit services that are not permitted under the new policy but which are permitted under the rules, will be allowed to continue, with prior approval from the Committee.
Prior to undertaking any non-audit service, PwC, and now also EY, complete their own independence confirmation processes which are approved by the senior statutory auditor. To provide the Committee with oversight in this area, it will receive six-monthly reports on the non-audit services provided by each of the firms.
Details of the total fees paid to PwC are set out in note 5 to the accounts. Non-audit fees, excluding audit related assurance services required under regulation, were equivalent to 37% (2015: 50%) of audit fees.
The Committee was satisfied that the quantity and type of non-audit work undertaken throughout the year did not impair PwC’s independence or objectivity and that their appointments were in the best interests of shareholders due to PwC’s pre-existing knowledge of the Group’s operations and practices. The Group’s overall approach is only to use PwC where there is a strong case to do so in preference to obtaining the services from an alternative supplier. Other non-audit services are put out to tender as appropriate.
The Committee confirms that the Company has complied with the provisions of the Competition Markets Authority Order 2014 throughout the year under review and as at the date of this report.
Audit tender process
PwC, or its predecessor firms, have been the Company’s auditor since Schroders became a listed company in 1959. As a consequence of new EU audit regulations, Schroders is required to replace PwC as its statutory auditor by 2020. In order to minimise the disruption to the business the Board, on the recommendation of the Committee, agreed to replace PwC as external auditor at the conclusion of the 2017 audit. This coincides with the end of tenure for the current lead engagement partner Andrew Kail who, having been the lead engagement partner for five years, in accordance with audit regulations, is required to rotate off the Schroders account at that time.
The Committee initiated an audit tender process which it owned from the outset. The process was designed to be transparent, effective and efficient and give each participating firm an equal opportunity to tender for the services. Prior to the tender, the participating firms had been given an equal opportunity to meet with Schroders employees and had provided some non-audit services to Schroders to enable them to develop their understanding of the business. Procedures for managing potential conflicts of interest, including gifts and hospitality, were communicated to each participating firm and access to certain employees and the Board was restricted.
The main elements of planning for the tender began in May 2016 when the proposed process was approved by the Committee. The Chairman of the Audit and Risk Committee took the principal role in overseeing the work of management, who supported the Committee in developing and implementing the planned approach. The Chairman met with the tender project team regularly and received and commented on the main materials prior to them being issued, either to the Committee or to the participating firms. Except for PwC no other firms were prevented from participating in the tender. However, the Committee agreed that only Deloitte, EY and KPMG should be issued with the Request For Proposal (RFP). This recommendation was made on the basis of the tender process experience in 2012, when it was concluded that no other firms outside of the ‘Big 4’ had the geographical reach necessary to respond effectively to an RFP for the Schroders’ audit. The Committee recognised that since 2012, although there had been some changes with respect to these other firms, none were transformative with regards to their ability to conduct the global audit of Schroders.
In addition, no other firms had maintained significant relationships with Schroders.
Therefore, it was concluded that no other firms should be issued with the RFP as there was not a reasonable expectation of any other firm performing well when judged against the agreed evaluation criteria determined by the Committee.
In line with FRC guidance the evaluation criteria for the process were agreed as:
- Organisation and capability
- Audit approach and delivery
- Audit quality and value-add
- Resourcing and engagement team
- Fees and contracts.
In order to evaluate each of the firms against the criteria the Committee oversaw a number of activities including:
- Analysis of the RFP responses
- Management presentations, including technical queries
- Presentations to the Committee and the WMARC
- Assessment of performance on non-audit services provided in the preceding 24 months
- Due diligence including reviewing Audit Quality Review Team reports published by the FRC, references and media searches.
At the conclusion of the process the Committee recommended a first and second placed firm to the Board, supported by the rationale for the recommendation. In summary, the Committee concluded that EY had: a strong team proposition in each of the key regions where the Group’s finance operations were located; good knowledge of the business’s and sector’s key risks; had performed well on non-audit engagements during the past 24 months providing the Committee with reassurance around delivery, planning and culture; and through certain other actions demonstrated their commitment to providing Schroders with a high quality focused audit. Accordingly, the Board agreed to recommend to shareholders the appointment of EY at the 2018 AGM.
The Committee continues to oversee a detailed transition plan and will receive regular reports through 2017, including an ‘initial observations’ report on our systems and controls from EY.
* See glossary.