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Financials
Audit Committee Report

for the year ended 31 March 2018

Introduction

The audit committee presents its report for the financial year ended 31 March 2018. The report is presented in accordance with the group's memorandum of incorporation, the requirements of the Companies Act of South Africa, 71 of 2008, as amended (Companies Act), as well as the recommendations contained in the King IV Report on Corporate Governance for South Africa, 2016 (King IV). The audit committee's operations are also guided by a formal charter in line with the JSE Listings Requirements.

In supporting the board's mandate of ensuring effective governance and integrity of financial information, the role of the audit committee in discharging its responsibilities was critical in this financial year, particularly following internal control weaknesses experienced in various divisions and subsidiaries of the group in the previous year and in the wake of the recent corporate governance failures experienced by various entities in the country and globally.

More effort was placed into strengthening the group's risk and control environment by building capability in this area across the group following an in-depth risk and control maturity assessment. This was accompanied by an improvement in the group's internal audit approach that aligns to our revised risk management approach and methodology.

These efforts are ongoing through continuous improvement of our systems and processes mainly in areas that support the business to achieve their strategic objectives. For example, various projects are underway in the group's finance function to improve systems through automation as well as optimise processes.

During the year under review, Telkom embarked on the implementation of a revised first and second line defence assurance model in order to embed a risk culture within the divisions and subsidiaries and thus enable an improved control environment.

Membership and meetings

The audit committee comprised the following independent non-executive directors and convened seven times during the financial year ended 31 March 2018 to discharge both its statutory and board responsibilities:

Member Attendance  
I Kgaboesele (chairman) 7/7  
KW Mzondeki 7/7  
LL von Zeuner 7/7  
RG Tomlinson 7/7  

The individual members satisfy the requirements to serve as members of an audit committee as stipulated in section 94 of the Companies Act, and have the adequate knowledge and experience required.

The group chief executive officer, group chief financial officer, group chief risk and compliance officer, group executive: Telkom Audit Services, the group legal counsel and the external auditors attend the audit committee by invitation. The audit committee also meets separately with joint external auditors and management after every meeting.

The audit committee also convened special meetings to discuss and evaluate various critical matters including an evaluation of the possible rotation of external auditors for the financial year ending 31 March 2019 (refer to the section on external auditors below).

Effective functioning of the audit committee

The audit committee independently oversaw the effectiveness of the organisation's assurance functions and services as well as the integrity of the annual financial statements. The committee is comfortable that it has discharged its responsibilities in accordance with its mandate as stipulated in its board approved terms of reference as well as in accordance with the Companies Act. To this end, the audit committee carried out the following duties and responsibilities during the year:

Execution of its mandate
  • In conjunction with the risk committee,
    • reviewed identified business risks’ (including IT and information security risks’) appropriateness, and their management and control
    • obtained regular updates from management regarding compliance to applicable laws, legislation and regulation
    • obtained regular updates on material open litigation, other proceedings and related reserves and their related impact
    • reviewed the adequacy and effectiveness of the IT and information security environment’s control framework and governance structures
  • Reviewed management’s corrective actions in response to significant internal and external audit findings
  • Reviewed the group’s statement on internal control systems prior to board endorsement
  • Satisfied itself that the internal audit coverage plans follow an approved risk-based approach for effectively addressing risk areas
  • Considered the results of work performed by, and the conclusions of the internal audit function, in relation to the effectiveness of governance, risk management and control processes and compliance to applicable laws, regulation and legislation
  • Assessed and evaluated the independence, effectiveness and skills of the internal audit function, in accordance with its mandate
  • Reviewed and was satisfied with the performance, expertise, competence and resourcing of the group chief financial officer and the finance function
  • Assumed responsibility for overseeing the work of the external auditors (who report directly to the committee)
  • Considered any material problems, reservations and observations, or any potentially contentious accounting treatments or judgements, or significant unusual transactions, or going-concern issues, arising from the external audit
  • Reviewed and recommended to the board the publicly disclosed interim and annual financial information, including the integrated report

Going concern and solvency review

The audit committee reviewed and assessed work conducted by management on the going concern status of the group. Based on the results and the committee's assessment that the going concern basis of accounting was appropriately applied, the committee is comfortable in recommending to the board that no material uncertainties existed to negatively impact the going concern status of the group and all its entities.

The committee also reviewed tests done to assess the solvency and liquidity position of the group as required by section 4 of the Companies Act, and based on the results, the committee is comfortable that the group meets the solvency and liquidity requirements after taking into account dividend payments.

External auditors

Telkom's joint external auditors during the year under review have been Ernst & Young (EY) and Nkonki Inc. In May 2018, Telkom terminated the appointment of Nkonki Inc as joint auditors of Telkom following that firm's filing for voluntary liquidation with the Master of the High Court.

The audit committee is satisfied that group's outgoing auditors, EY, are independent and were appointed in terms of the requirements of section 90(2) of the Companies Act, 71 of 2008.

The audit committee also considered controls relating to non-audit services, compensation as well as terms of engagement and ensured that these did not impair on the independence of the external auditors in discharging their duties.

On 18 August 2017, Telkom announced its intention to commence a procurement process for external audit services for the reporting period ending 31 March 2019 in light of the mandatory audit firm rotation rule set by IRBA, which is effective for the financial years commencing 1 April 2023. The company issued an request for proposal to select new set of external auditors for the group and followed a robust selection process in line with the company's policies and procedures, which included a thorough risk assessment of all firms. Following this process, the audit committee and the board will be recommending the appointment of PricewaterhouseCoopers and SizweNtsalubaGobodo as the new joint auditors at the annual general meeting.

Other key matters:

Yellow Pages (known as Trudon) fraud:

The Yellow Pages' internal control environment has been a focal area for the audit committee in the wake of extensive business transformation. A task team was appointed to oversee the implementation of processes and system improvements to strengthen the control environment. As part of our endeavours to strengthen the control environment, the group implemented the following:

  • appointed a chief risk and compliance officer responsible for group oversight;
  • strengthened the risk and control capability by appointing risk executives in each business unit and subsidiary;
  • reviewed the mandate and role of internal audit as a centralised group audit function;
  • continued the process of strengthening the general control and IT control environment; and
  • ensured that all agreements which were entered into fraudulently were cancelled, and legal proceedings are in process to recover funds.

Conclusion

Based on the results of the formally documented review of the group's system of internal controls and risk management, including the design, implementation and effectiveness of the internal financial controls conducted by Telkom Audit Services during FY2018 and considering information and explanations given by management and discussions with the external auditors on the results of the audit,

the audit committee has considered all significant control matters and associated action plans. Having regard to the aforementioned, nothing has come to the attention of the audit committee that leads it to conclude that the group's system of internal controls and risk management are not effective and that the internal financial controls do not form a sound basis for the preparation of reliable financial statements.

In terms of its mandate, the audit committee reviewed the integrated report including the consolidated annual financial statements for the year ended 31 March 2018 and recommended to the board for approval.

Itumeleng Kgaboesele

Chairman of the audit committee

25 May 2018