Integrated report 2019
Exxaro Resources Limited
Group and company annual financial statements
for the year ended 31 December 2019
The audit committee (the committee) is pleased to present its report for the year ended 31 December 2019.
The committee is constituted as a statutory committee of the company in terms section 94 of the Companies Act and a committee of the board of directors of the company in terms of all other duties assigned to it by the board of directors. In terms of the Companies Act, this committee has an independent role with accountability to the board of directors and shareholders of the company. The committee does not assume the functions of management, which remain the responsibility of the executive directors, prescribed officers and other members of senior management, nor does it assume accountability of the functions performed by other committees of the board of directors.
The role of the committee is to fulfil the statutory duties as set out in section 94(7) of the Companies Act and, in addition, to assist the board of directors in providing independent oversight over the following:
The committee members are elected annually by shareholders at the AGM of the company on the recommendation of the board of directors (via the remuneration and nomination committee). The board of directors 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 year under review, the committee at all times consisted of a minimum of four independent non-executive directors. The board of directors is satisfied that the committee members have the necessary academic qualifications or experience in economics, law, corporate governance, finance, accounting, commerce, industry, public affairs, information technology or human resource management.
A standing invitation to meetings of this committee is issued to the:
Four quarterly meetings were held in 2019. Attendance of almost 100% throughout the year demonstrates 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% |
Bi-annually, two additional sessions (aligned with approval of the interim and annual financial results) are held with the independent external auditor and internal auditor, respectively, where management is not present to facilitate an exchange of views and concerns to further strengthen the independent oversight by the committee.
Finance director and finance function
The committee has reviewed an internal assessment of the expertise and experience of Mr PA Koppeschaar (CA)SA, 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.
External auditor
The independent external auditor is PwC. Fees paid to the external auditor are disclosed in note 6.1.3 to the group and company annual financial statements for the year ended 31 December 2019. Exxaro has an approved policy to regulate the use of nonaudit services by the independent external auditor, 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 million), which included R28 million (2018: R26 million) for the statutory audit and related activities as well as R8 million (2018: R6 million) for non-audit services, mainly for tax advisory and tax compliance services, management accounting services, sustainability assurance, agreed upon procedures and other advisory services. 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 assess 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 auditor, PwC was also requested to provide its accreditation information, as detailed in the JSE Listings Requirements.
Based on this assessment, the committee again nominated PwC as independent external auditor for the year ending 31 December 2020. 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 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 of directors, through this committee, decided to undertake a formal process to appoint a new firm as independent external auditor, which is 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 a new independent external auditor to the shareholders, as contained in the notice of the 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 ending 31 December 2020.
Internal auditor
The internal audit function is outsourced to EY and its responsibilities are detailed in an internal audit charter, which is reviewed and approved annually by the committee. Its main function remains to express an opinion on the effectiveness of risk management and the internal control environment. The committee is satisfied with the overall performance of the internal audit function provided by EY.
To allow for audit firm rotation (notwithstanding the fact that the board of directors is satisfied with the independence, conduct and quality of internal audit services being rendered by EY), the committee also recommended the appointment of a new, independent internal auditor 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 group and company annual financial statements 2019 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 reasonable.
Statement on effectiveness of internal financial controls
The committee, with input and reports from the independent external auditor and internal auditor, reviewed the system of internal financial reporting procedures, as underpinned by the enterprise risk management framework, during the year. The review included consideration of all Exxaro entities to ensure that the committee had access to all the financial information to allow for the effective preparation and reporting on the group and company annual financial statements 2019. 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.
Combined assurance
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. In addition, 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 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. The committee ensures alignment of the combined assurance plan, internal audit plans and external audit plans. New protocols have also been adopted dealing with risk acceptance, level 1 finding disclosure process and risk extension requests.
The combined assurance forum (the forum) has been constituted to coordinate the assurance activities within the group in compliance with the enhanced requirements of King IV™. The forum implements and embeds the combined assurance framework principles, as approved by the committee, within the organisation. This is a management meeting and permanent invitees to the forum are representatives of the independent external auditor, internal auditor, other major assurance providers as well as members of the committee and the sustainability, risk and compliance committee of the board of directors.
The committee is satisfied with the arrangements in place for ensuring an effective and efficient combined assurance model.
A two-phased approach with regard to the implementation of IFRS 16 was approved by the committee to ensure that the adoption of the new standard was executed appropriately. Phase 1 focused on the group reporting requirements and phase 2 focused on the subsidiary reporting in terms of the new standard.
Exxaro was selected to be reviewed by the JSE as part of the proactive monitoring: thematic review process, which focused on the application of IFRS 9 and IFRS 15. The committee received a letter containing the outcome as well as the detailed findings of the review. The committee noted that the JSE concluded that the adoption of IFRS 9 and IFRS 15 were at an acceptable standard and that Exxaro’s disclosure of the disaggregation criteria of IFRS 15 was listed as good reporting.
Tax compliance status and reporting
Reporting to the committee includes reporting on all tax matters, including tax audits, returns and payments. The committee was also appraised of the carbon tax implications for Exxaro during phase 1.
Internal audit report
A quarterly internal audit report was submitted to the committee, detailing progress made on the approved internal audit plan, audits being conducted, tracking of findings marked ready for audit as well as the close out of any internal audit findings.
External audit report
The external auditor submitted quarterly reports to the committee dealing with various financial, tax and compliance matters as
well as the implementation of IFRS 16. The external auditor submitted quarterly reports to the committee, where feedback was
reported on the audit of the statutory financial statements in terms of the Companies Act as well as the review of the interim
financial statements in accordance with the International Standards on Review Engagements
(ISRE 410).
Other key issues that received attention during the year included:
Other key issues that received attention during the year included, among others, the following:
| 2019 KPIs | Evaluation score |
| Review audit committee KPIs (including the new rand/tonne KPI) quarterly, understand management plans for out-of-appetite KPIs and periodically review management plans | Achieved |
| Oversee the splitting of the audit and risk functions to ensure the enhancement of corporate governance in Exxaro | Achieved |
| Review the macro-assumptions to be used for budgets | Achieved |
| Review the IT strategy and ensure alignment with the Exxaro strategy | Achieved |
| Approve the levels of materiality to be used for internal and external audit (including the audit protocols and the classification of findings) | Achieved |
| Ensure alignment of the combined assurance plan, internal audit and external audit plan | Achieved |
| Ensure that there is a link between internal audit findings and the Exxaro risk profile | Achieved |
| Track the closing of level 1 internal audit findings and understand the root causes attached to level 1 internal audit findings and repeat internal audit findings | Achieved |
| Sign-off of the integrity of the integrated report | Achieved |
| 2020 KPIs |
| Review audit committee KPIs quarterly and review management plans for out-of-appetite KPIs |
| Review the IM strategy in relation to deployment of new post-modern ERP solutions to ensure acceptable cost, risk and alignment with the Exxaro strategy |
| Ensure alignment of the combined assurance process, internal audit and external audit plan in terms of a risk-based approach |
| Review Exxaro’s future strategy in relation to insurance cover and self-insurance, taking into account global resistance to thermal coal and the impact on insurance markets |
| Track the closing of level 1 internal audit findings, understand the root causes of level 1 internal audit findings and repeat internal audit findings |
| Oversee the assurance process associated with disclosures in the integrated report |
| Oversee the project plan for financial and risk-based disclosures in terms of Exxaro’s aim to comply with Task Force on Climate-related Financial Disclosures |
| Guidance and assistance to the chief audit officer specifically in relation to the internal audit and external audit tender processes |
| 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 was 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 committee.
The themes that formed part of the assessment (a rating of 4 being the highest rating representing “in line with best practice” and a rating of 1 “needs significant improvement”) and the ratings achieved are as follows:
| Rating per theme |
 |
Highlights of the assessment were:
The recommendations made as well as other points to consider will be included in the annual work plan for 2020.
The committee, in carrying out its duties, has due regard to its terms of reference, the Companies Act, the JSE Listings Requirements as well as the principles and recommended practices of King IV™. The committee is satisfied that it has considered and discharged its responsibilities in accordance with its terms of reference and fulfilled its mandate in terms of the Companies Act and King IV™.
On behalf of the committee
Mr V Nkonyeni
Chairman
Centurion
20 April 2020
