Integrated Report 2021
Exxaro Resources Limited
Annual Financial Statements 2021
The audit committee (the committee) is pleased to present the audit committee report for the year ended 31 December 2021.
The committee is an independent, statutory committee whose members are appointed annually by Exxaro’s shareholders in compliance with Section 94 of the Companies Act and the principles of good governance. 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. In addition to the Companies Act, the committee’s duties are guided by the Listings Requirements, King IVTM and its terms of reference.
The committee is governed by its terms of reference that codifies its roles and responsibilities. To assist the board of directors, the committee plays an essential role in providing independent oversight over the following:
The committee’s terms of reference were reviewed by external assurance providers and are aligned with legislation, regulations and King IVTM.
The committee members are elected annually by the shareholders at the AGM of the company on recommendation by 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 function. Members of this committee consist only of independent non-executive directors.
The committee had four independent non-executive directors throughout the year under review. 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 or human resource management.
In this regard, Ms CJ Nxumalo was appointed as a new member to the committee at the 2021 AGM, being the first female director to become a member of the audit committee.
The CEO, CEO – designate and finance director together with members of the executive team and senior management representing areas relevant to the discussions at the audit committee, as well as the independent external auditor, the chief audit officer and chief risk officer attend meetings either by standing invitation or as and when required. The internal and external auditors both have unrestricted access to the audit committee.
The committee held four scheduled meetings as determined by its terms of reference during 2021 and four special meetings. The committee’s attendance of 100% throughout the year illustrates high levels of engagement and commitment by our audit committee members.
The following table provides an overview of designations and the members’ attendance at meetings held during the period under review:
| Name | Designation | Attendance | ||||
| Mr V Nkonyeni | Chairperson of the audit committee and independent non-executive director | 100% | ||||
| Mr MJ Moffett1 | Independent non-executive director | 100% | ||||
| Mr LI Mophatlane | Independent non-executive director | 100% | ||||
| Mr EJ Myburgh | Independent non-executive director | 100% | ||||
| Ms CJ Nxumalo2 | Independent non-executive director | 100% |
| 1 | Resigned on 11 May 2021. |
| 2 | Appointed as a member from 27 May 2021. |
Two additional sessions are held annually with the independent external auditor and independent 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.
The committee has considered and 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 experience and expertise to meet his responsibilities. The evaluation also considered the appropriateness of the expertise and adequacy of resources in the finance function.
The independent external auditor is PwC. The committee having assessed the suitability of the appointment of the external auditor and designated audit partner, is satisfied that PwC is independent of the group as per section 94(8) of the Companies Act.
The committee executed its responsibility in assessing the suitability of the external auditor and designated individual auditor as required by paragraph 3.84(g)(iii) of the Listings Requirements by considering the relevant information pursuant to paragraph 22.15(h) of the Listings Requirements and has been provided with all decision letters and/or explanations issued by IRBA and any summaries relating to monitoring procedures and deficiencies issued by the external auditor.
Fees paid to PWC are disclosed in note 6.1.3. Exxaro has an approved policy to regulate the use of non-audit 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 R38 million (2020: R38 million), which included R30 million (2020: R30 million) for statutory audit and related activities as well as R8 million (2020: R8 million) for non-audit services, mainly for advisory and tax compliance services, management accounting services, assurance 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 audit committee has satisfied itself that Mr Dion Shango, as designated individual auditor is accredited to appear on the List of Accredited Auditors, in compliance with section 22 of the JSE Listings Requirements.
During 2021, PwC continued its partnership with Ngubane & Co, a Level 1, broad-based black economic company as part of its audit team to extend Exxaro’s commitment to transformation.
Although mandatory audit firm rotation becomes effective on 1 April 2023 in terms of section 10 of the Auditing Profession Act of 2005, the board of directors, through this committee, resolved to undertake a formal process to appoint a new firm as independent external auditor prior to the 2023 effective date. Following an assessment process which included an independent and sustainability assessment, the committee, with the endorsement of the board of directors, recommended the appointment of KPMG and its delivery partner, AM PhakaMalele, as the group’s new independent external auditor at the AGM dated 27 May 2021. The appointment was approved in respect of the financial year ending 31 December 2022 and will be effective from the conclusion of PwC’s external audit responsibilities for the financial year ended 31 December 2021.
The internal audit function is partially outsourced to EY under the management control of Exxaro’s Chief Audit Officer. Their responsibilities are detailed in an internal audit charter approved by this committee, which is reviewed and approved annually. The main function of internal audit remains to express an opinion on the effectiveness of governance, risk management and systems of internal controls as well as the internal control environment within the Exxaro group of companies. Furthermore, the internal audit function provides an independent, objective assurance and consulting service designed to add value and improve the organisation’s operations. The committee is satisfied with the overall performance of the internal audit function services provided by EY.
To allow for audit firm rotation and, 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 recommended the appointment of a new independent internal auditor through a formal process. Following an open tender process, the board of directors, on recommendation of the audit committee, have appointed PwC as the group’s new internal auditor from 1 July 2022. In continuing to strengthen the internal audit function, to be fit for purpose, adding value and given Exxaro’s evolving business model, the internal audit approach was refreshed with key features. In line with Exxaro’s commitment to transformation PwC will partner with a Level 1, broad based black economic company, Ngubane & Co, to fulfil the internal audit function.
The group and company annual financial statements for 2021 were prepared by management, reviewed by the committee and the board of directors, and were audited by the independent external auditor. The committee is satisfied that the group and company annual financial statements for 2021 comply with the relevant provisions of the Companies Act, IFRS, interpretations issued by the IFRIC, the Listings Requirements as well as the applicable accounting policies and practices. The committee is also satisfied that the group and company annual financial statements for 2021 fairly present a balanced view of the group and company’s financial position, financial performance and cash flows for the year then ended.
The committee, with the input and reports from the independent internal and external auditor, reviewed the system of internal financial reporting procedures, as underpinned by the enterprise risk management framework, during the year. This review included consideration of all Exxaro entities within the consolidated group, to ensure that the committee had access to all the financial information to allow for effective preparation and reporting on the group and company annual financial statements for 2021. Informed by these reviews, the committee confirmed that there were no material findings that came to the attention of the committee to indicate ineffectiveness of internal financial reporting controls during 2021.
As required by King IVTM, assurance has been broadened to cover all sources of assurance, including external assurance, internal audit, management oversight and regulatory inspections. 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 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 plans and external audit plans. Risk acceptance, level 1 finding disclosure process and risk extension requests are adopted as protocols.
It is the committee’s role to review the effective establishment and operation of combined assurance within the group. To this end, the company established the CAF. The committee is satisfied that the CAF, constituted as a working group, serves as a platform to coordinate Exxaro’s assurance functions specifically the internal assurance functions, including internal audit, and externally sourced independent assurance functions. In addition, the CAF coordinates assurance coverage for Exxaro’s risk exposure as identified and ranked by Exxaro’s risk management functions including optimisation of assurance functions aligned to King IVTM recommended practices for assurance. The CAF is an internal management structure and forms part of the internal governance structure of the entity and, along with the rest of the internal governance structure, falls under executive oversight.
The committee is satisfied with the arrangement in place for ensuring an effective and efficient combined assurance model within the group.
In terms of King IVTM, the committee exercises oversight of technology and information governance. In addition, the committee governs technology and information in a way that supports the organisation in setting and achieving its strategic objectives.
During the period under review, IM major initiatives included a new IM balanced scorecard for service delivery, renewing services contracts, rolling out projects enhancing the control environment especially with the increased risk of cyber security and investigating a new fit for purpose ERP system. The progress was monitored by the committee with management providing comprehensive quarterly updates, challenges and steps taken to address the challenges. Furthermore, to ensure Exxaro’s full compliance with the Protection of Personal Information Act, the committee recommended the revised Acceptance usage of ICT Equipment policy which was approved by the board.
Areas of focus that the committee provided oversight on during the year under review included:
The company was faced with unprecedented circumstances as the business incurred unforeseen costs in implementing additional protocols to respond to COVID-19 restrictions and regulations. The impact of the COVID-19 pandemic on the ability of the business to operate as a going concern was also continuously monitored by the committee. This included an assessment and monitoring of the group’s cash resources, credit facilities, accordion facility and ensuring compliance with borrowing covenants in the dynamic economic environment.
As it is increasingly challenging for companies with a large carbon footprint to obtain insurance cover at competitive terms this is a focal point for the committee. A formal memorandum is submitted quarterly to the committee, setting out the main activities of the insurance company. The committee considered regulatory compliance, financial position, external audit plan for the 2021 financial year audit, investment strategy, insurance renewal programme, and the associated cost and exclusions during the period under review.
The committee considered various accounting implications regarding the disposal of Exxaro’s investments in Tronox and the ECC operation.
Reporting to the committee includes reporting on all tax matters, including tax audits, returns and payments.
The committee considered the guidance issued by SAICA regarding the calculation of headline earnings during the year under review.
During the year under review, the committee reviewed and was satisfied with the key macro-economic indicators and assumptions used to compile the 2022 budget.
As recommended by the JSE, the committee reviewed the JSE guidance letters in respect of the responsibilities of committee members as set out in paragraph 3.84(g) of the Listings Requirements.
The committee is satisfied with the group’s hedge effectiveness and loan covenants position applicable to each facility within the group.
The committee approved the revised dealer and counterparty limits for the group’s treasury operations in the financial markets.
The committee was intimately involved in finalising the revised group governance framework and energy delegation of authority to ensure that the energy business is governed effectively and fit for purpose.
The committee ensured that corrective measures were put in place where internal control deficiencies were identified by internal audit or through forensic investigations. The committee will continue to monitor the efficacy of these measures.
The committee continuously monitored the transition plans for the outgoing and incoming external and internal auditors to ensure seamless transition.
The committee authorised the CEO and finance director to sign the management representation letter for the interim and final period.
Other key issues that received attention during the year included, amongst others, the following:
The below table shows the key focus areas for the committee:
| 2021 key focus areas | Status | ||
| Review the strategy in relation to deployment of new post-modern ERP solutions to ensure acceptable cost, risk and alignment with the Exxaro strategy. | Ongoing | ||
|---|---|---|---|
| Ensure alignment of the combined assurance process, internal audit plan and external audit plan based on a risk-based approach. | Achieved | ||
| Review Exxaro’s future strategy relations to insurance cover and self-insurance, taking into account global resistance to thermal coal and insurance markets. | Ongoing | ||
| Oversee the project plan for financial and risk-based disclosures in terms of Exxaro’s aim to comply with TCFD. | Achieved | ||
| Approve the levels of materiality to be used for internal audit (including the audit protocols and the classification of findings) and consider levels of materiality for the independent external auditor. | Achieved | ||
| Oversee the transition plans for the internal and external audit functions | Achieved |
There is currently neither a legal nor regulatory requirement for the committee to complete annual performance evaluations and, while King IV™ recommends regular performance evaluations for all board subcommittees, it has become a governance practice at Exxaro to have the subcommittee’s performance and effectiveness evaluated every two years. Our next board evaluation will be conducted during the last quarter of 2022.
The committee, in carrying out its duties, has due regard to its terms of reference, the Companies Act, the Listings Requirements, as well as the principles and recommended practices of King IVTM. 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 IVTM.
The committee would like to thank management for all the hard work done during these unprecedented times and circumstances.
On behalf of the committee
Vuyisa Nkonyeni
Audit committee chairperson
4 April 2022
Report Index