Integrated report 2019
Exxaro Resources Limited
Environmental, social and governance report
Mr V Nkonyen
Chairman: audit committee
Dear shareholders,
I am pleased to present the audit committee report for the year ended 31 December 2019
The audit committee is constituted as a statutory committee in terms of section 94 of the Companies Act with additional duties assigned by the board to the committee. In terms of the Companies Act, this committee has an independent role with accountability to the board and the company's shareholders.
The committee therefore plays an essential role in providing independent oversight over the following:
The committee has in compliance with section 3.84 (g), performed the following duties:
The committee members are elected annually by shareholders at the AGM of the company on recommendation by the board (via the remuneration and nomination committee). The board ensures, through its recommendations, that there is a balanced blend of skills and experience, with specific focus on financial literacy, to enable the committee to discharge its functions.
For the period under review, the committee, at all times, consisted of a minimum of four independent non-executive directors. The board is satisfied that the committee members have the necessary academic qualifications or experience in economics, law, corporate governance, finance, accounting, commerce, industry, public affairs or human resource management.
A standing invitation to meetings of this committee is issued to the:
Four quarterly meetings were held by the committee during 2019. The committee attendance of almost 100% throughout the year illustrates high levels of engagement by our committee members.
The following table provides an overview of designations and attendance since appointment:
| Name | Designation | Attendance (%) | |
| Mr V Nkonyeni | Independent non-executive director and chairman | 100 | |
| Mr MJ Moffett | Independent non-executive director | 75 | |
| Mr LI Mophatlane | Independent non-executive director | 100 | |
| Mr EJ Myburgh | Independent non-executive director | 100 |
Annually, two additional sessions (aligned with approval of the interim and annual financial results) are held with the independent external auditors and internal auditors, respectively, where management is not present to facilitate an exchange of views and concerns to further strengthen the independent oversight by the committee.
The committee has reviewed an internal assessment of the expertise and experience of Mr PA Koppeschaar, the finance director, and is satisfied that he has the appropriate expertise and experience to meet his responsibilities. The evaluation also considered the appropriateness of the expertise and adequacy of resources of the finance function.
The group's independent external auditor is PwC. Fees paid to the auditors are disclosed in note 6.1.3 to the annual financial statements for the year ended 31 December 2019. Exxaro has an approved policy to regulate the use of non-audit services by the independent external auditors, which differentiates between permitted and prohibited non-audit services and specifies a monetary threshold against which approvals are considered. In the review period, PwC was paid R36 million (2018: R32.5 million/2017: R36 million), which included R28 million (2018: R26 million/2017: R26 million) for statutory audit and related activities as well as R8 million (2018: R6 million/2017: R10 million) for non-audit services, mainly for tax advisory and tax compliance services, management accounting services, assurance, other advisory services and agreed upon procedures mainly in respect of sustainability assurance. The committee is satisfied with the level and extent of non-audit services rendered during the year by PwC and that these did not affect its independence.
The committee annually assesses the independence of PwC and completed this assessment at its meeting on 6 March 2020. PwC was required to confirm that:
Included in its assessment of the suitability of the independent external auditors, PwC was also requested to provide the company with its accreditation information, as detailed in the JSE Listings Requirements.
Based on this assessment, the committee again nominated PwC as independent external auditors for the year ending 31 December 2020. Due to the importance of this appointment, shareholders will therefore be requested to re-elect PwC in this capacity for the 2020 financial year at the AGM on 28 May 2020, which is contained in the notice of the AGM for 2020.
Mandatory audit firm rotation will only become effective on 1 April 2023 in terms of section 10 of the Auditing Profession Act, 2005 (Act 26 of 2005). Notwithstanding the fact that the board of directors is satisfied with the independence, conduct and quality of audit services being rendered by PwC, the board, through this committee, decided to undertake a formal process to appoint a new firm of independent external auditors who are accredited on the JSE list of auditors.
Following an assessment process, this committee, with the endorsement of the board of directors, will recommend the appointment of new independent external auditors to the shareholders, as contained in the notice of AGM for 2020. The appointment will be in respect of the financial year ending 31 December 2021 and will be effective from the conclusion of PwC's external audit responsibilities for the financial year ended 31 December 2020.
The company's internal audit function is outsourced to EY and its responsibilities are detailed in an internal audit charter approved by the committee, which is reviewed annually. Its main function remains to express an opinion on the effectiveness of risk management and the internal control environment within the group. The committee is satisfied with the overall performance of the internal audit function provided by EY.
To allow for audit firm rotation and, notwithstanding the fact that the board is satisfied with the independence, conduct and quality of internal audit services being rendered by EY, the committee also recommended the appointment of new independent internal auditors through a formal process in the first quarter of 2020, and will propose the appointment of a replacement internal audit function with effect from 1 January 2021.
Annual financial statements
The committee reviewed the company and group annual financial statements and accounting practices in detail, and is satisfied that the information contained in these statements, as well as the application of accounting policies and practices, are appropriate.
Statement on effectiveness of internal financial controls
The committee, with input and reports from the independent internal and external auditors, reviewed the company's system of internal financial reporting procedures, as underpinned by the enterprise risk management framework, during the year. This included consideration of all Exxaro entities within the consolidated group IFRS financial statements, to ensure that the committee had access to all the financial information of the company to allow for the effective preparation and reporting on the annual financial statements. Informed by these reviews, the committee confirmed that there were no material areas of concern that would render the internal financial controls ineffective and that the reporting procedures are operating.
In terms of King IV, assurance has been broadened to cover all sources of assurance – including external assurance, internal audit, management oversight and regulatory inspectors. The combined assurance model has been expanded to incorporate and optimise all assurance services and functions so that, taken as a whole, these enable an effective control environment and also support the integrity of information used for internal decision making by management, the governing body and its committees, and of the organisation's external reports.
An annual audit plan is submitted for approval to this committee, detailing all proposed assurance activities within the group, including the level of assurance to be provided. This committee ensures alignment of the combined assurance plan, internal audit and external audit plans. New protocols have also been adopted dealing with risk acceptance, level one finding disclosure process and risk extension requests.
The combined assurance forum has been constituted as a working group coordinating the assurance activities within the group in compliance with no less than the enhanced requirements of King IVTM. The forum implements and embeds the combined assurance framework principles, as approved by the audit committee, within the organisation. This is a management meeting and permanent invitees include representatives from the external auditors, internal auditors, other major assurance providers, as well as members of the audit committee, and the sustainability risk and compliance committee of the board.
The committee is satisfied with the arrangements in place for ensuring an effective and efficient combined assurance model within the group.
The committee is aware of the subsidiary companies included in its mandate, and is comfortable with its oversight of these entities and its financial statements.
Other key issues that received attention during the year:
Key performance indicators
| KPIs in 2019 | Evaluation | KPIs in 2020 | |
| Review audit committee KPIs (including the new rand/tonne KPI) quarterly and understand management plans for out of appetite KPIs and periodically review management plans | Achieved | Review audit committee KPIs quarterly and review management plans for out of appetite KPIs | |
| Oversee the splitting of the audit and risk functions to ensure the enhancement of corporate governance in Exxaro | Achieved | Review the strategy in relation to deployment of new post-modern ERP solutions to ensure acceptable cost, risk and alignment with the Exxaro strategy | |
| Review the macros to be used for budgets | Achieved | Ensure alignment of the combined assurance process, internal audit and external audit plan based on a risk-based approach | |
| Review the IT strategy and ensure alignment with the Exxaro strategy | Achieved | Taking into account global resistance to thermal coal and the impact on insurance markets, review Exxaro's future strategy in relation to insurance cover and self-insurance | |
| Approve the levels of materiality to be used for internal and external audit (including the audit protocols and the classification of findings) | Achieved | Track the closing of level 1 findings and understand the root causes of level 1 and repeat findings | |
| Ensure alignment of the combined assurance plan, internal audit and external audit plan | Achieved | Oversee the assurance process associated with disclosures in the integrated report | |
| Ensure that there is a link between internal audit findings and the Exxaro risk profile | Achieved | Oversee project plan for financial and risk-based disclosures in terms of Exxaro's aim to comply with TCFD | |
| Track the closing of level 1 findings and understand the root causes attached to level 1 findings and repeat findings | Achieved | Guidance and assistance to chief audit officer specifically in relation to internal and external audit tender processes | |
| Sign-off on the integrity of the integrated report | Achieved | Ensure alignment with JSE proactive monitoring framework for financial reporting | |
| Benchmarking and measurement of the effectiveness of assurance spend | |||
| Proactive influencing rather than mere reporting of tier 3 assurance at business units |
The effectiveness and performance of the committee was independently evaluated during the reporting period. The general outcome of the assessment that the overall performance of the committee is more than satisfactory. The evaluation concluded that the committee was satisfied with the committee's overall responsibilities and there were only a few areas that warranted consideration and attention to further strengthen the performance and effectiveness of the audit committee.
Herewith the themes that formed part of the assessment (four being the highest rating representing "In line with best practice" and one "needs significant improvement") and the ratings achieved.
Highlights of the assessment were:
The recommendations made as well as points to ponder will be included in the annual work plan for 2020.
The committee, in carrying out its duties, has due regard to the Act, the JSE Listings Requirements, principles and recommended practices of King IV and its terms of reference. The committee is furthermore satisfied that it has discharged its responsibilities and fulfilled its mandate in terms of the Act, JSE Listings Requirements, King IV and its terms of reference.
On behalf of the committee
Mr V Nkonyeni
Chairman: audit committee
Pretoria
20 April 2020
