Dechra Pharmaceuticals PLC

Dechra Pharmaceuticals PLC

Annual Report and Accounts for the year ended 30 June 2012

Audit Committee Report

Neil Warner
Chairman of the Audit Committee

Dear Shareholder

On behalf of the Board I am pleased to present Dechra's Audit Committee Report for the year ended 30 June 2012.

The Committee continues to monitor and assess the integrity of the Group's financial statements and to review the effectiveness of the Company's internal controls and risk management systems. In carrying out these duties the Committee relies heavily on our Auditor and we remain confident in the quality and independence of their audit findings.

Following the Eurovet acquisition, the Committee has now formed the opinion that, given the increased size, complexity and geographical coverage of Dechra, an internal audit function is required. Work has commenced in relation to the scope of this appointment and recruitment will commence in the autumn.

The Committee also continues to closely monitor non-audit fees. During the year a decision has been taken to appoint Deloitte LLP to undertake tax and compliance work in substitution of the Auditor. It is considered that this will assist the Auditor's independence.

Following Bryan Morton's resignation, Mike Redmond has agreed to his temporary appointment as a member of the Audit Committee in order to ensure compliance with our Committee's terms of reference. I can confirm that, once a replacement Non-Executive Director has been recruited they will be appointed as a member of the Audit Committee and Mike Redmond will step down as a member of the Committee.

Finally, following over nine years' service with Dechra it is likely that I will stand down as a Non-Executive of the Group at the 2013 Annual General Meeting. The recruitment for an additional Non-Executive Director with recent and relevant experience has commenced. This will allow the opportunity for the incoming Non-Executive to sit as a member of the Committee for the rest of my tenure and allow a smooth and orderly handover of duties prior to my retirement.

Neil Warner
Audit Committee Chairman

MemberIndependentMeetings eligible
to attend
Meetings attended
Neil WarnerYes22
Bryan Morton (resigned 9 July 2012)Yes21
Dr Chris RichardsYes22
Mike Redmond (appointed 19 July 2012)*YesN/AN/A

Secretary
Zoe Goulding

* Mike Redmond has been appointed to the Audit Committee until a new Non-Executive Director is appointed in due course.

Role and Responsibilities

The main role and responsibilities of the Audit Committee (the "Committee") are set out in the written terms of reference which are available on the Company website at www.dechra.com. The Committee's terms of reference are reviewed on an annual basis and during the 2011/2012 financial year this took place at the February meeting. Following this review no material changes to the terms of reference were made. The main responsibilities of the Committee are:

  • to monitor the integrity of the financial statements of the Company, reviewing the annual and half-year reports in detail to ensure they present a balanced assessment of the Company's position and prospects which is understandable to Shareholders and potential investors;
  • to review the effectiveness of the Company's internal controls and risk management systems as described in Risks and Uncertainties and, in conjunction with the Auditor, consider the accounting policies adopted by the Company;
  • to oversee the relationship with the Auditor. The Committee makes recommendations to the Board on the appointment of the Auditor, approves their remuneration and their terms of engagement, monitors their independence and objectivity, and sets the policy for non-audit work;
  • to make recommendations to the Board on the requirement for an internal audit function;
  • to review the arrangements for employees to raise concerns about wrongdoings, the Company's systems and controls for prevention of bribery and procedures for detecting, monitoring and managing risk of fraud.

In the performance of its duties the Committee has access to the services of the Auditor and is at liberty to obtain outside professional advice as necessary. During the year, no legal or independent professional advice was sought. The Auditor also has direct access to the Committee Chairman outside the formal committee meetings.

Membership, Meetings and Attendance

The membership of the Committee and meeting attendance is stated in the table above. Following the resignation of Bryan Morton, Mike Redmond was appointed as a temporary member to the Audit Committee until a new Non-Executive Director is appointed to the Company. The Board considers that Neil Warner has recent and relevant financial experience as recommended by the UK Corporate Governance Code as a result of his financial background. He has held a number of financial positions throughout his career including most recently Finance Director of Chloride Group PLC (a position he held from 1997 until end of December 2010) and as Chairman of the Audit Committee of Vectura Group plc (to which he was appointed in February 2011). No members of the Committee have links with the Auditor.

The Auditor attends meetings of the Committee other than when their appointment or performance is being reviewed. The Chief Executive, Chairman, Group Finance Director and other senior finance staff attended as and when appropriate. The Committee has discussions at least once a year with the Auditor without management being present. During the year the Committee Chairman meets informally and has access to the Group Finance Director, Group Financial Controller and the senior audit engagement team. This group generally meets before the Committee meetings that consider the full and half-year results.

Activities during 2011/2012

The Committee normally meets three times during the year, timed to coincide with the financial reporting timetable of the Company, however, it was decided that the audit strategy meeting be deferred from May to July following the completion of the Eurovet acquisition. The table below sets out a number of the matters which were discussed (and where necessary approved) at the three meetings:

MeetingMatters discussed/approved at the meeting
August 2011
  • Auditor's Report on the 2010/2011 financial results
  • Draft preliminary statement
  • Draft Annual Report
  • External audit effectiveness
  • Audit Committee effectiveness review
  • Auditor independence confirmation
  • Level of non-audit fees
  • Going concern confirmation
  • Internal controls
  • Proposed final dividend
  • Auditor representation letter
February 2012
  • Auditor's report on half-year results
  • Draft half-year report and announcement
  • Terms of reference
  • Interim dividend
  • Going concern confirmation
  • Senior Accounting Officer requirement
  • Auditor representation letter
  • Level of non-audit fees
  • Requirement for an internal audit function
  • Whistle-blowing Policy
July 2012*
  • Review of the requirement for internal audit function
  • Non-Audit fee update
  • IFS review update
  • Audit strategy for the year ended 30 June 2012 (including timetable, scope and fees)
  • Auditor independence
  • Company expectations of the audit

* Meeting postponed from May 2012.

Internal Control and Internal Audit Function

The Board retains overall responsibility for establishing the systems of internal control, monitoring their ongoing effectiveness and also for the identification and management of risk. The Committee monitors and reviews the effectiveness of the Group's internal control activities and further detail in respect of the internal controls are provided within the Corporate Governance Section. The requirement for an internal audit function was discussed at the committee meeting in July 2012. In light of the Eurovet acquisition it was agreed that the Group was now of sufficient size to warrant an internal audit function. The Committee is in the process of defining the role and responsibilities for the function and intends to commence the recruitment process in autumn 2012.

Auditor Independence and Non-Audit Fees

The Auditor annually confirms their policies on ensuring audit independence and provides the Committee with a report on their own audit and quality procedures. This report was reviewed during the audit strategy meeting held in July 2012 and the Committee remain satisfied of the Auditor's independence.

In line with the ethical standards of the Audit Practices Board the Group Audit Engagement Director is rotated every five years. The current Group Audit Engagement Director was appointed during the 2010/2011 financial year. The Committee has discussed the various changes which have been proposed by the FRC to the UK Corporate Governance Code and the Guidance on Audit Committees, in particular the recommendations relating to the expectation of external audit being put to tender every ten years and the increased reporting obligations of the Committee. The Committee will keep this matter under review during the forthcoming year.

With respect to non-audit assignments undertaken by the Auditor, the Company has a policy to ensure that the provision of such services do not impair their independence or objectivity. Safeguards are in place to ensure continued audit independence including utilising separate teams to undertake the audit and non-audit work. When considering the use of the Auditor to undertake non-audit assignments, the Chief Executive and Group Financial Director do at all times give consideration to the provisions of the FRC Guidance on Audit Committees with regard to the preservation of independence. Deloitte LLP have recently been appointed to undertake tax and compliance work in substitution for the Auditor; it is considered that this will assist the Auditor's independence.

The policy in respect of non-audit fees was reviewed and amended during the year ended 30 June 2009, whereby it was agreed that the non-audit fee be capped at 50% of the audit fee. Prior approval of the Committee is required should non-audit fees exceed the cap and an explanation of the reasons for exceeding the limit is provided to the Committee, who assess the qualification, expertise, independence and objectivity of the Auditor prior to granting approval.

The Committee believes that there are certain non-audit services where it is appropriate for the Group to engage the Auditor. During the year, the Auditor was commissioned to carry out extensive due diligence, working capital and reporting accountant work in respect of the Eurovet acquisition. The Auditor was considered most appropriate to perform this work given both their knowledge of the existing business and the requirement to report on the existing as well as the enlarged Group. This is consistent with the ethical standard recommended by the Accounting Practices Board. The fees paid to the Auditor for this work were in excess of the limits above, prior Board approval was therefore obtained.

A summary of audit and non-audit fees in relation to the year is provided in note 6 to the Group's financial statements. All non-audit work has been monitored at each meeting and approved by the Committee.

Effectiveness Review

During the year, the Committee reviewed its own effectiveness as a part of the overall board evaluation process. The Committee considered that it acted transparently and given the number of committee and board meetings scheduled throughout the financial year, maintained a thorough understanding of the Group and its business. The Committee also considered it had the skills to perform its responsibilities. The results of the review were advised to the Board.

The performance, cost and independence of the Auditor is reviewed annually by the Committee, together with a review of the level of service provided by the Auditor to the Group. Based on the Committee's review of the performance of the Auditor and on the planning and execution of the annual audit, the Committee has recommended to the Board that a resolution to reappoint KPMG be proposed at the forthcoming Annual General Meeting.

Neil Warner
Chairman — Audit Committee
4 September 2012

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