Audit, Risk and Compliance Committee's report

The Audit, Risk and Compliance Committee (ARCC) is pleased to present its report for the financial year ended 31 May 2017.

The Committee is an independent statutory committee appointed by the shareholders of the Company. In addition to its statutory duties, the Board has delegated further duties to the Committee. This report covers both these sets of duties and responsibilities.

Mandate and terms of reference

The Committee has adopted comprehensive and formal terms of reference which have been approved by the Board and which are reviewed on an annual basis. The responsibilities of the ARCC include:

  • examining and reviewing the Group's financial statements and reporting of interim and final results;
  • reviewing and considering, for recommendation to the Board, the consolidated budget for the ensuing financial year;
  • overseeing integrated reporting;
  • overseeing the Internal Risk and Compliance Committee function;
  • monitoring the risk management framework and assessing the risks that impact on the Group's ability to achieve its strategic objectives;
  • reviewing and satisfying itself of the expertise, resources and experience of the Blue Label finance function;
  • overseeing the internal audit function and internal financial control process;
  • recommending the appointment of the external auditor and overseeing the external audit process, including their audit fee, independence and nature and extent of any non-audit services; and
  • monitoring compliance activities.

Membership and meetings held

In accordance with the requirements of the Companies Act, No 71 of 2008 (the Act) JS Mthimunye, GD Harlow, P Mahanyele and SJ Vilakazi were appointed to the Committee by shareholders at the Annual General Meeting held on 8 December 2016.

Membership of the Committee for the year under review:

  • JS Mthimunye (Independent Non-Executive Chairman)
  • GD Harlow (Independent Non-Executive Director)
  • SJ Vilakazi (Independent Non-Executive Director)
  • P Mahanyele (Independent Non-Executive Director)

The members of the Committee collectively have experience in audit, accounting, commerce, economics, law, corporate governance and general industry. All of the members of the ARCC are Independent Non-Executive Directors.

The Committee meets quarterly and the quorum for each meeting is three members present throughout the meeting. Mandatory attendees at the meetings are the Joint Chief Executive Officers and the Financial Director of Blue Label. The external audit partner from PricewaterhouseCoopers Inc. (PwC) and a director from KPMG Services Proprietary Limited (KPMG), to whom Blue Label outsources its internal audit function, are also attendees. Both internal and external auditors are afforded the opportunity to address the meeting and have unlimited access to the Committee. During the year, the Committee met with the external and internal auditors respectively without the presence of management. The internal audit function reports directly to the ARCC and is also responsible to the Financial Director on day-to-day administrative matters.

Statutory duties discharged

In execution of its statutory duties during the year under review, the Committee:

  • nominated and recommended to shareholders the reappointment of PwC as independent external auditors, with Deon Storm the audit partner, as the registered independent auditor;
  • approved the fees to be paid to PwC and other external auditors, where applicable, and approved the terms of engagement;
  • maintained a non-audit services policy which determines the nature and extent of any non-audit services that PwC may provide to the Group;
  • discharged those statutory duties as prescribed by section 94 of the Act, acting in its capacity as the appointed audit committee of the subsidiary companies of Blue Label;
  • considered the Committee's report describing how duties have been discharged; and
  • submitted matters to the Board concerning the Company's accounting policies, financial controls, records and reporting, as appropriate.

Other duties discharged

Financial statements and reporting

The Committee:

  • ensured that the Group has established appropriate financial reporting procedures and that those procedures are operating (per JSE mandatory King IV practices);
  • monitored compliance with accounting standards and legal requirements and ensured that all regulatory compliance matters had been considered in the preparation of the financial statements;
  • reviewed the external auditor's report to the Committee and management's responses thereto and made appropriate recommendations to the Board of Directors regarding actions to be taken;
  • reviewed and commented on the annual financial statements, interim reports, paid advertisements, announcements and the accounting policies and recommended these to the Board for approval;
  • reviewed and recommended to the Board for adoption the consolidated budget for the ensuing financial year; and
  • considered the going concern status of the Company and Group on the basis of review of the annual financial statements and the information available to the Committee and recommended such going concern status for adoption by the Board. The Board statement on the going concern status of the Group and Company is contained in the Directors' report.

External audit plan, audit fees and non-audit services

The ARCC has satisfied itself as to the independence of the external auditor, PwC, as set out in section 94(7) of the Act, which includes consideration of compliance with criteria relating to independence or conflicts of interest as prescribed by the Independent Regulatory Board for Auditors. Requisite assurance was sought from and provided by PwC that internal governance processes within the firm support and demonstrate its claim to independence. D Storm is the individual registered auditor and member of the aforegoing firm who undertakes the audit with the rotation of the designated audit partner during 2019 for the 2020 financial year-end. PwC has been the auditor of the Group for 13 years. The Audit Committee confirms that it has executed its responsibilities in terms of paragraph 3.84(g)(iii) of the Listings Requirements in its assessment of the sustainability of the auditor. To assess the effectiveness of the external auditors, the Committee considered PwC's fulfilment of the agreed audit plan and variations from the plan, and the robustness and perceptiveness of PwC in its handling of key accounting treatments and disclosures.

The Committee, in consultation with Executive Management, agreed to the engagement letter, terms, audit plan and budgeted audit fees for the 2017 financial year.

Any non-audit services to be provided by the external auditors are governed by a formal written policy which incorporates a monetary delegation of authority in terms of non-audit services to be provided. The non-audit services rendered by the external auditors during the year ended 31 May 2017 comprised tax advisory services, tax compliance services and general advisory services. The fees applicable to the aforementioned services totalled R8.4 million (2016: R11.7 million), of which R6.0 million (2016: R9.3 million) relate to acquisition-related costs.

Appointment of PwC

The ARCC has nominated, for approval at the Annual General Meeting, the reappointment of PwC as registered auditors for the 2018 financial year. The Committee also satisfied itself that PwC is accredited and appears on the JSE List of Accredited Auditors as contemplated in paragraph 3.86 of the JSE Listings Requirements.

Internal audit and internal controls

Blue Label's internal audit function is outsourced to KPMG Services Proprietary Limited and the role of the Chief Audit Executive is fulfilled by the Engagement Director. The ARCC concludes that the Chief Audit Executive and internal audit arrangements are effective.

The Committee:

  • reviewed the co-operation and co-ordination between the internal and external audit functions in order to avoid duplication of work;
  • have requested the continued support from the internal and external audit teams to work towards an effective and efficient combined assurance approach;
  • examined and reviewed the progress made by internal audit against the approved 2016/17 audit plan;
  • approved the internal audit plan for the 2017/18 financial year;
  • considered the effectiveness of internal audit;
  • considered internal audit findings and corrective actions taken in response to such findings; and
  • reviewed the effectiveness of the systems of internal control, including internal financial control and risk management.

The ARCC has evaluated the internal audit function and satisfied itself to place reliance thereon.

The ARCC concludes that the design and implementation of internal controls, including financial controls and risk management, are effective.

Refer to here for the arrangements in place for combined assurance. The ARCC concludes that the combined assurance arrangement is effective and will continue to evolve as the Group grows.

Risk management and compliance

The Committee:

  • reviewed the integrity of the risk control systems and ensured that the risk policies and strategies of the Company are effectively managed;
  • made recommendations to the Board concerning the levels of tolerance and risk appetite;
  • monitored bi-annual risk assessments;
  • ensured that management considered and implemented appropriate risk responses;
  • reviewed legal matters that could have a material impact on the Group; and
  • reviewed developments in corporate governance and best practice and considered their impact and implications across the Group with particular reference to the principles of King IV.

Expertise and effectiveness of the Financial Director and finance function

The Committee considered the appropriateness of the expertise and effectiveness of the Financial Director and finance function in accordance with the JSE Listings Requirements and governance best practice.

The Committee confirms that it is satisfied that Dean Suntup possesses the appropriate expertise and experience to effectively discharge his responsibilities as Financial Director, and confirms the effectiveness of the finance function.

Annual financial statements

The Committee has reviewed the accounting policies and financial statements of the Company and the Group and is satisfied that they are appropriate and comply with International Financial Reporting Standards, the JSE Listings Requirements and the requirements of the Act.

The Committee has evaluated the Group and Company financial statements of Blue Label Telecoms Limited for the year ended 31 May 2017 and based on the information provided to the Committee, the Committee recommends the adoption of the annual financial statements by the Board.

The significant audit matters considered by the Committee were:

1. the impairment assessment of goodwill arising from business combinations;

2. the impairment assessment of the investment in BLM; and

3. the fair value assessment of the investment in Oxigen, Oxigen Online and 2DFine.

These matters were addressed as follows:

The impairment assessment of goodwill arising from business combinations

For the year ended 31 May 2017, management performed an impairment assessment over the goodwill balance as follows:

  • assessing the recoverable amount as being value-in-use, as entities are held for trading and not for sale;
  • calculating the value-in-use for each cash-generating unit (CGU) using a discounted cash flow model; and
  • performing a sensitivity analysis over the value-in-use calculations, by varying the assumptions used (growth rates, terminal growth rate and WACC, i.e. discount rate) to assess the impact on the valuations.

Management concluded there was no need for any impairment.

The impairment assessment of the investment in BLM

For the year ended 31 May 2017, management performed an impairment assessment over the investment in BLM as follows:

  • assessing the recoverable amount as being value-in-use, as BLM is held for trading and not for sale;
  • calculating the value-in-use for BLM using a discounted cash flow model;
  • performing a sensitivity analysis over the value-in-use calculations, by varying the assumptions used (growth rates, terminal growth rate and WACC, i.e. discount rate) to assess the impact on the valuation; and
  • as a final check, comparing the carrying value of the Group's investment in BLM with the calculated value-in-use.

Management concluded there was no need for any impairment.

The fair value assessment of the investment in Oxigen, Oxigen Online and 2DFine

The investments in Oxigen Services India, Oxigen Online Services India, collectively (Oxigen Services India), and 2DFine Holdings Mauritius (2DFine) were historically accounted for as investments in associates and joint venture, applying the equity method up until 30 November 2016. From that date, the exemption available in IAS 28 - Investments in Associate and Joint Ventures for venture capital organisations has been applied to these investments and accounted for in accordance with IAS 39 - Financial Instruments: Recognition and Measurement at fair value with changes in fair value recognised in profit or loss. The difference between the carrying value of the investments as previously determined using the equity accounting method and their fair value is reflected as a fair value gain on a financial instrument through profit and loss for the year ended 31 May 2017. In order to determine the fair value, management used an independent third party with the requisite expertise in assisting it with the determination of the fair value of the investments.

These investments were initially of a long-term nature as they were expected to emulate the business model of the South African distribution operations. However, their profile has changed from that of the traditional Group business model to one of generating growth in the market value of the investments with a view to unlocking the Group's share thereof. With the advent of the change in focus to financial services through wallet subscription, they are no longer strategically aligned with the other business units of the Group and are unlikely to generate profitability in the short to medium term. This in turn creates the potential to unlock the investment values in the future and the Group is pursuing this new strategy with respect to these investments.

Integrated annual report

The Committee considered the integrated annual report, incorporating the annual financial statements for the year ended 31 May 2017. The Committee considered the sustainability information as disclosed in the integrated annual report and assessed its consistency with operational and other information known to its members. The Committee recommended the approval of the integrated annual report to the Board.

The ARCC is satisfied that it has complied with its legal, regulatory and other responsibilities as per its terms of reference and that it has executed its responsibilities in terms of paragraph 3.84(g)(iii) of the Listings Requirements in its assessment of the suitability of the auditor. The contents of the ARCC report was discussed at the Committee meeting and were approved by the Committee members on 23 November 2017.

On behalf of the Audit, Risk and Compliance Committee

JS Mthimunye

Chairman

23 November 2017