Integrated report 2020
Exxaro report selector 2020
Exxaro Resources Limited
ESG report 2020
REPORT SELECTOR
Vuyisa Nkonyeni
Audit committee chairperson
Dear shareholders,
I am pleased to present the audit committee report for the year ended 31 December 2020.
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 IV 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 recommendations for improvements are in the process of implementation.
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.
For the year under review, the committee had 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 or human resource management.
The CEO 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.
Four quarterly and three special meetings were held by the committee during 2020. The committee member's attendance of almost 100% throughout the year demonstrates high levels of engagement by the 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 | Independent non-executive director and chairperson of the audit committee | 100% | ||||
| Mr MJ Moffett | Independent non-executive director | 100% | ||||
| Mr LI Mophatlane | Independent non-executive director | 85% | ||||
| Mr EJ Myburgh | Independent non-executive director | 100% |
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.
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 (2019: R36 million), which included R30 million (2019: R28 million) for statutory audit and related activities as well as R8 million (2019: 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 committee annually assesses the independence of PwC and completed this assessment at its meeting held on 12 March 2021, 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 Listings Requirements.
Based on this assessment, the committee again nominated PwC as independent external auditor for the year ending 31 December 2021. Due to the importance of this appointment, the shareholders will therefore be requested to re-elect PwC in this capacity for the 2021 financial year at the AGM on 27 May 2021, which is contained in the notice of the AGM for 2021.
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, this committee, with the endorsement of the board of directors, will recommend the appointment of a new independent external auditor at the AGM for 2021. The appointment will be 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 ending 31 December 2021.
During the current year, PwC continued its partnership with Ngubane & Co, a level 1, B-BBEE company as part of its audit team to extend Exxaro's commitment to transformation.
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 request for proposal process, the board of directors, on recommendation of this committee, have appointed PwC as the group's new internal auditor, effective from 1 April 2022. As part of the tender process the committee also ensured that the preferred bidder partnered with a 51% or more black owned exempted micro-enterprise (EME)/qualifying small enterprises (QSE).
In continuing to strengthen the internal audit function, to be a fit for purpose, adding value and given Exxaro's evolving business model, the internal audit approach had been refreshed with key features.
The group and company annual financial statements 2020 were prepared by management, reviewed by this 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 2020 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 2020 fairly present a balanced view of the group and company's financial position, financial performance and cash flows for the financial year ended 31 December 2020.
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. 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 2020. 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 2020.
As required by the 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 of the organisations 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.
As the committee's role to review the effective establishment and operation of combined assurance within the group and 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 IV 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 IV, the committee exercises an ongoing oversight over 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.
In fulfilling management's responsibility to implement and execute effective technology and information management, a strategic Information Management (IM) Committee will be established in the first half of 2021 to formally review items such as IM strategy alignment to business strategy, IM performance metrics, IM risks, investment priorities, IM operating model implementation and budget guidance.
Areas of focus that the committee provided oversight on during the year under review included:
Assessing and monitoring the group's cash resources, credit facilities, accordion facility and ensuring compliance with borrowing covenants in the dynamic economic environment.
The committee is satisfied with results of the benchmarking of the process to leading business practice and the Committee of Sponsoring Organisations (COSO) fraud risk management guide which indicated that most elements which contribute to an effective whistleblowing mechanism are in place.
A formal memorandum is submitted quarterly to the committee, setting out the main activities of the insurance company. Appointment of independent non-executive directors and insurance renewal processes were amongst items considered by the committee during the period under review.
The committee considered various accounting issues, in terms of IFRS 3 Business Combinations, regarding the accounting for the Cennergi business combination.
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 2021 budget.
As recommended by the JSE, the committee reviewed the JSE guidance letter from the Committee Forum in respect of the responsibilities of committee members as set out in paragraph 3.84 (g) of the Listings Requirements.
The company brought to the attention of the group's independent auditor a possible reportable irregularity relating to a perceived breach of fiduciary duties by a prescribed officer of the group. Prior to this disclosure of the possible reportable irregularity to the independent auditor, the company had taken various steps and implemented measures to address the issues concerned. The independent auditor has confirmed that the reportable irregularity was not ongoing and had been duly addressed, and reported accordingly to the Independent Regulatory Board of Auditors.
Other key issues that received attention during the year included, among others, the following:
The below table shows the KPIs for the committee:
| 2020 KPIs | Evaluation score | ||
| Review audit committee KPIs quarterly and review management plans for out-of-appetite KPIs | Achieved | ||
| Review the IM strategy in relation to deployment of new post-modern ERP solutions to ensure acceptable cost, risk and alignment to the Exxaro strategy | Achieved | ||
| Ensure alignment of the combined assurance process, internal audit plan and external audit plan in terms of a risk-based approach | Achieved | ||
| 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 | Achieved | ||
| Track the closing of level 1 internal audit findings, understand the root causes of level 1 internal audit findings and repeat internal audit findings | Achieved | ||
| Oversee the assurance process associated with disclosures in the integrated report | Achieved | ||
| Oversee the project plan for financial and risk-based disclosures in terms of Exxaro's aim to comply with the Task Force on Climate-related Financial Disclosures | Achieved | ||
| Provide guidance and assistance to the chief audit officer specifically in relation to the internal audit and external audit tender processes | Achieved | ||
| Ensure alignment with JSE proactive monitoring framework for financial reporting | Achieved | ||
| Benchmarking and measurement of the effectiveness of assurance spend | Achieved | ||
| Proactive influencing rather than mere reporting of tier 3 assurance at BUs | Achieved |
There is currently neither a legal nor a regulatory requirement for the committee to complete annual performance evaluations and, while King IV recommends regular performance evaluations for all board of director subcommittees, it has become a governance practice at Exxaro to have the subcommittee's performance and effectiveness evaluated biannually. The board of directors embarked on a significant transformation journey in 2020 with regards to the terms of reference and structures of its board committees, as detailed in the governance section of this report.
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 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.
The committee would like to thank management for all the hard work done during these unprecedented times and circumstances.
On behalf of the committee
Audit committee chairperson
19 April 2021