Report of the Directors

Audit Committee Report

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Independence of the External Auditor

Both the board and the external auditor have for many years had safeguards in place to avoid the possibility that the auditor’s objectivity and independence could be compromised. The issue of auditor independence is taken very seriously and is reviewed annually.

Our policy in respect of services provided by the external auditor is as follows:

To the extent consistent with the above policy, services likely to cost less than £25,000 may be approved by the Group Finance Director. Services above this amount must be approved by the Chairman of the Audit Committee, unless they are likely to be in excess of £100,000, when they must be approved by the Audit Committee.

During the year ended 31st March 2013 the Chairman of the Audit Committee authorised the use of KPMG to support the group in its due diligence prior to the acquisition of Axeon and, following a competitive tendering process, to advise the group on the establishment of a special purpose vehicle which holds certain corporate bonds used to fund the group’s UK pension scheme.

The split between audit and non-audit fees for the year ended 31st March 2013 and information on the nature of non-audit fees appear in note 5 on the accounts.

External Audit Quality and Tendering

The board is committed to maintaining the highest standards of audit quality. Management receives regular feedback from the businesses on the audit process. When assessing the effectiveness of the external audit process, the Committee combines formal and informal processes. As part of the formal processes the Committee considers feedback on the auditor provided by management and by external parties. Informal processes are centred around how the audit team, and the lead partner in particular, interact with management and the Committee. A constructive, open and challenging approach supported by knowledge of the business and sound judgment are important criteria in making this assessment.

KPMG (and its predecessor entities) have been the external auditor of the company since 1986. The last full tendering process was conducted in 1985 although annual performance reviews have been carried out as well as a more substantial review in 2003. The current lead audit partner at KPMG rotates after finalisation of the current year’s audit and earlier in the year the Committee worked closely with KPMG to identify his successor. In light of the changes introduced in the 2012 Code, which requires the external audit contract to be put out to tender at least every ten years (and which apply to Johnson Matthey for its year commencing 1st April 2013), and the FRC’s transitional guidance, the Committee spent some time considering the merits of putting the audit out to tender in 2013/14. The Committee decided against this for a number of reasons including the fact that it is very comfortable with the performance of KPMG and is looking forward to working with the newly appointed lead audit partner, who will bring new perspectives to the audit. In addition there is the possibility of further changes in the relevant governance frameworks pending the conclusion of the Competition Commission’s market investigation into the supply of statutory audit services to large companies in the UK, and best practice around the tendering process is also developing. Whilst the Committee does not propose that a tendering process should be undertaken in 2013/14 it is committed to tendering the audit sometime during the new lead audit partner’s five year tenure, at a time which is right for Johnson Matthey.

Internal Audit

Internal audit independently reviews the risks and control processes operated by management. It carries out independent audits in accordance with an internal audit plan which is agreed with the Audit Committee before the start of the financial year. As part of this process the Committee looks at the resources devoted to the function to ensure they are adequate to deliver the plan.

The plan provides a high degree of financial and geographical coverage and devotes significant effort to the review of the risk management framework surrounding the major business risks.

Internal audit reports include recommendations to improve internal controls together with agreed management action plans to resolve the issues raised. Internal audit follows up the implementation of recommendations and reports progress to senior management and the Audit Committee.

The Audit Committee reviews the findings of the internal audits completed during the year.

The effectiveness of the internal audit function is reviewed and discussed on an annual basis.

The major focus of internal audit in the year was a review of the audit planning and reporting processes following the arrival of the new Head of Internal Audit and Risk in April 2012. This resulted in changes to the audit plan to focus on core processes, testing of key controls and the introduction of group wide themed audits together with a revised self assessment exercise and refreshed approach to risk assessment and management.

On behalf of the Audit Committee:

Alan Ferguson
Chairman of the Audit Committee

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