Audit Committee report

Annual Financial
Statements

Telkom SA SOC Ltd | Integrated Report

For the year ended 31 March 2020

Introduction and Mandate

The Audit Committee has formal terms of reference which are updated on an annual basis, or as and when required. The Board is satisfied that the Audit Committee has complied with these terms, and with its legal and regulatory responsibilities as set out in the Companies Act, King IV and the JSE Listings Requirements.

The primary role of the Audit Committee is to ensure the integrity of Telkom SA SOC Ltd (“Telkom” or “Company”) and the Telkom Group’s financial reporting and the audit processes and that a sound risk management and internal control system is maintained. In pursuing these objectives, the Audit Committee oversees relations with the external auditors and reviews the effectiveness of the internal audit function.

The Audit Committee consisted of six independent non-executive directors from 1 April 2019 to 31 March 2020. Mr KA Rayner was appointed chairperson with effect from 27 August 2019, following the resignation of Mr GW Dempster with effect from 27 August 2019 as the Committee chairperson, and as a director of the Board with effect from 30 November 2019.

The Board believes that the members collectively possess the knowledge and experience to supervise Telkom’s financial management, internal and external auditors, the quality of Telkom’s financial controls, the preparation and evaluation of Telkom’s audited Company and consolidated financial statements and Telkom’s periodic financial reporting.

Attendance and membership

The attendance of Audit Committee members at Audit Committee meetings during the financial year was as follows:

Member			Attendance

KA Rayner (chairperson)*			6/6
GW Dempster (chairperson)**			2/2
PCS Luthuli			8/8
DD Mokgatle***			1/1
KW Mzondeki			8/8
F Petersen-Cook***			1/1
RG Tomlinson****			7/8
LL von Zeuner			8/8

*		Mr Rayner was appointed Audit Committee chairperson with effect from 27 August 2019 following the resignation of Mr GW Dempster and attended all Audit Committee meetings thereafter.
**		Resigned from the Audit Committee with effect from 27 August 2019.
***		Not members, attended a special Audit Committee meeting by invitation on 12 February 2020.
****		Apology

The Telkom Group has established and maintains internal controls and procedures, which are reviewed on a regular basis by internal audit which then reports to the Risk Committee and Audit Committee respectively. These reporting responsibilities are designed to manage the risk of business failures and to provide reasonable assurance against such failures. However, this is not a guarantee that such risks are eliminated.

Responsibility

It is the duty of the Audit Committee, inter alia, to monitor and review and where applicable, approve:

the effectiveness of the internal audit function;
the appointment and/or termination of the joint external auditors (refer to “external auditors” below for details and definition), including their audit fee, independence and objectivity;
the nature and extent of any non-audit services performed by the external auditors; • the auditor suitability and recommendation for appointment and reappointment;
the reports of both internal and joint external auditors;
the expertise and experience of the chief financial officer;
financial reporting systems to ensure that reporting procedures are functioning properly;
the governance of information technology (IT) and associated risks;
the internal financial control compliance, combined assurance and enterprise risk management effectiveness;
interim results and report, audited Company and consolidated annual financial statements for the financial year ended 31 March 2020 (audited Company/ consolidated AFS), integrated report and all other widely distributed financial documents and announcements;
the quality and acceptability of the Telkom Group’s accounting policies and practices;
the compliance with applicable legislation, requirements of appropriate regulatory authorities and Telkom’s Group Ethics Handbook;
the integrity of the integrated report and associated reports (by ensuring that its content is reliable and recommending it to the Board for approval); and
policies and procedures for preventing and detecting fraud.

Annual financial statements

The Committee has reviewed and is satisfied that the audited Company/consolidated AFS, including accounting policies are appropriate and comply with the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) and in compliance with the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, the Financial Pronouncements as issued by the Financial Reporting Standards Council, the JSE Listing Requirements and the requirements of the Companies Act of South Africa 2008.

Significant matters that were addressed by Management and by the Audit Committee on a review basis are as follows:


Adoption of IFRS 16			The Group adopted IRFS 16 Leases with effect from 1 April 2019. The new standard requires lessees to recognise nearly all leases on the balance sheet which will reflect their right to use an asset for a period and the associated liability for payments. The right of use (ROU) assets and lease liabilities represent the present value of future minimum lease payments discounted at an appropriate rate after taking the lease term into account. The adoption of IFRS 16 resulted in the Company recognising a ROU asset of R4.2 billion and related lease liability of R4.2 billion at adoption date of 1 April 2019. As at 31 March 2020, the ROU asset and liability were reflected at R4.5 billion and R4.8 billion respectively, with related depreciation and interest of R954 million and R368 million for the 12-month period then ended. The exercise resulted in the recognition of approximately 10 500 leases, with major lease categories that gave rise to a ROU asset and related liability including the mast and tower infrastructure lease agreements/co-location agreements, property leases and vehicle fleet leases.
Interim and Final Dividend and Future Dividend consideration			The review and recommendation to the Board, after confirmation that the Company and Telkom Group passed the solvency and liquidity test, to pay the interim dividend of 71.52636 cents per share to shareholders. The Board approved the dividend and effected payment on 2 December 2019 in accordance with the Company’s Dividend Policy. The review and recommendation to the Board, after confirmation that the Company and Telkom Group passed the solvency and liquidity test, to pay the final dividend of 50.08410 cents per share to shareholders. The Board approved the dividend and payment will be effected on 13 July 2020 in accordance with the Company’s Dividend Policy. The review and recommendation to the Board to suspend the declaration and payment of dividends for three financial years commencing 1 April 2020.
Tax Matter			The noting of the court order regarding the required payment to the South African Revenue Service of R861 million, the payment terms agreement with SARS and the correct treatment thereof in the audited Company/consolidated AFS.
Actuarial Assumptions			The review and approval of the Actuarial Assumptions for recommendation to the Board for both the interim period end and financial year end for financial computation and compilation purposes.
Impairment testing			The review of the impairment testing of Telkom Group Cash Generating Units (“CGUs”), resulting in no impairment adjustments.
Provisions			The review of provisions relating to the restructuring programme of R1 186 million and the additional impairment of trade receivables and contract assets due to COVID-19 of R626 million.
Key Audit Matters			The review and consideration of the Key Audit Matters detailed in the joint Independent Auditors Report on the audited Company/consolidated AFS .

Execution of Audit Committee mandate

The Audit Committee discharged all responsibilities and functions delegated to it in terms of the Audit Committee mandate, the Companies Act, King IV and the JSE Listings Requirements.

During the year the Audit Committee:

In respect of the joint external auditors:

Considered and satisfied itself that the joint external audit firms and their two engagement partners are independent;
Considered and satisfied itself with respect to the Auditor Suitability Review required by the JSE Listings Requirements (refer below);
Reviewed the nature of non-audit services that were provided by the joint external auditors during the year;
Approved the fees paid to the joint external auditors for the 2020 financial year;
Approved and confirmed non-audit services and attendant fees which the external auditors performed during the year under review; and
The Audit Committee chairperson held separate meetings with the external auditors prior to Audit Committee meetings.

In respect of financial reporting:

Considered the appropriateness and experience of the Group chief financial officer as required by the JSE Listings Requirements;
Reviewed the audited Company/consolidated AFS;
Reviewed the appropriateness of any amendments to accounting policies and internal financial controls; and
Reviewed the integrated reporting process.

In respect of internal audit:

Approved the internal audit plan for the year;
Monitored and provided oversight of the internal audit function; and
The Audit Committee chairman held separate meetings with the CAE of internal audit prior to Audit Committee meetings.

In respect of the Audit Committee:

Ensured the Audit Committee complied with the membership criteria as set out in the Companies Act, King IV and the JSE Listings Requirements; and
Reviewed and approved the Audit Committee terms of reference.

In respect of information technology governance:

Monitored Telkom’s technology governance framework and processes including that of information security.

External auditors

The Audit Committee has primary responsibility for overseeing the relationship with, and performance of, the joint external auditors. This includes making the recommendation on the appointment, reappointment and removal of the joint external auditors, assessing their independence on an ongoing basis and for reviewing and approving the audit fee.

The Audit Committee, after taking account of the audit approach, materiality and audit risks, reviewed and agreed both the interim period review plan and financial year end audit plan from the joint external auditors, and agreed both the interim and financial year end audit fees. The Audit Committee received updates during the year on the audit process, including how the auditor had challenged the Telkom Group’s assumptions on the significant matters noted in this report.

In terms of section 90(1) of the Companies Act and in accordance with its Board charter, each year at its annual general meeting (“AGM”), the Company must appoint two external audit firms and two designated engagement partners that comply with the requirements of section 90(2) of the Companies Act and with the JSE Listings Requirements. The Board delegated to the Audit Committee the responsibility to review the Company’s current appointed joint external auditors for reappointment. The Board would then make a recommendation to the shareholders in the notice of AGM, based on the outcome of the review and report of the Audit Committee to the Board. The current appointed joint external audit firms are PricewaterhouseCoopers (PwC) and SizweNtsalubaGobodo (SNG) Grant Thornton and the respective current appointed engagement partners are messrs KJ Dikana and GM Hafiz (“joint external auditors”).

In compliance with paragraph 3.84(g)(iii) of the JSE Listings Requirements, the Audit Committee assessed the respective audit firms as well as the related engagement partners’ suitability for appointment, taking into account the quality of the audit work and related reporting to the Audit Committee, industry expertise of the firm and its designated partners, findings by the IRBA ,results of the most recent Public Company Accounting Oversight Board (PCAOB) and statements relating to independence as well as the representations made by the external auditors to the Audit Committee including those under ISQC 1 International Standard on Quality Control 1 (“the Auditor Suitability Review”) .

Based on the results of the Auditor Suitability Review and a review of the joint external auditors independence, the Committee recommends the reappointment of the joint external auditors for the March 2021 financial period at the annual general meeting. The Board concurred with the recommendation.

Auditor independence

The Audit Committee is also responsible for determining that the joint external auditors have the necessary independence. A key factor that may impair any such independence is a lack of control over non-audit services provided by the joint external auditors.

Telkom addresses this issue by ensuring prior approval by the chairperson of the Audit Committee of all non-audit services. Fees paid for non-audit services to the joint external auditors amounted to R3.2 million for the financial year end 31 March 2020 (2019: R9 million). Fees accrued for audit work performed for the financial year end 31 March 2020 by the joint external auditors’ amounted to R88.5 million (2019: R87.9 million). The Audit Committee chairperson met with the joint external auditors prior to each Audit Committee meeting to discuss and review the content of the joint external auditors report to the Audit Committee.

The Audit Committee has reviewed and assessed the independence of the external auditor, and has confirmed that the criteria for independence, as set out in the rules of the Independent Regulatory Board for Auditors, the Public Company Accounting Oversight Board, and other relevant international bodies, have been followed. The Audit Committee is satisfied that the joint auditors are independent of the Telkom Group.

Internal auditors

The Internal Audit function adopts a co-source operating model to supplement its internal audit activities and execute on its mandate. During the financial year, the co-source agreement with Deloitte & Touché and Sekelaxabiso CA Incorporated (“SkX Protiviti”) ended. Following a fair and transparent process, a new co-source agreement was entered into with KPMG Services Proprietary Limited (“KPMG”) and SkX Protiviti for a period of three years. The co-source service providers form part of Telkom’s Internal Audit function and report directly into the CAE.

The internal control systems of the Company are monitored by Internal Audit, which reports findings and recommendations to the Audit Committee and to senior management. The Audit Committee determines the purpose, authority and responsibility of the Internal Audit function in the Internal Audit Charter.

The Internal Audit function is headed by the CAE, who may be appointed or dismissed by the Audit Committee. The CAE resigned with effect from 31 May 2020, and the Audit Committee appointed a new CAE with effect from 1 May 2020. The Audit Committee is satisfied that the incumbent CAE has the requisite skills and experience and that he is supported by a sufficient staff complement with appropriate skills and training.

Telkom’s Internal Audit operates in accordance with the International Standards for the Professional Practice of Internal Auditing as prescribed by the Institute of Internal Auditors. Internal Audit activities carried out during the year were identified and planned through a combination of the Telkom risk management framework and the risk-based methodologies adopted by Internal Audit. The Audit Committee approves the annual internal audit assurance plan presented by Internal Audit and monitors progress against the plan.

Internal Audit reports deficiencies to the Audit Committee every quarter together with recommended remedial actions, which are then followed up. Internal Audit provided the Audit Committee with a written report, which assessed as adequate the internal controls over financial reporting, IT governance and the risk management process during the financial year.

The chairperson of Audit Committee met with the CAE prior to each Audit Committee meeting to discuss and review the content of the internal report to the Audit Committee.

Internal audit and the joint external auditors have unrestricted access to the Audit Committee, the Audit Committee chairperson and the chairperson of the Board, thereby ensuring the maintenance of independence.

Risk management

Reviews of the Telkom Group’s risk management, enterprise risk management programmes, business continuity and forensic services are performed by the Telkom Group’s Risk Committee. The top principal risks, being those risks that will prevent the Telkom Group from achieving its strategic objectives in the short and medium term are reported to and considered by the Risk Committee and the Board. All principal risks are currently managed within the risk appetite statements. The key focus areas, risk appetite and further details of the Telkom Group’s principal risks are reported in the risk management report included in the Telkom Group’s integrated report.

The internal audit department has conducted a review on the effectiveness of the risk management function in accordance with the approved risk management framework. The results of the review indicated that the risk management process was satisfactory as at 31 March 2020.

Combined assurance

The Telkom Group assessed risks based on principal risks as indicated above. The current combined assurance model in place is representative of how the risks are currently being managed between the three lines of assurance. Management and internal audit have implemented a coordinated structure for planning, executing and reporting on internal audit, compliance and risk activities. The Committee is satisfied that the Group has optimised the assurance obtained from the three lines of assurance in accordance with the approved combined assurance model and that the model is effective in achieving the objectives of coordinating assurance and reporting to provide management and the Board with a clear view on what the Telkom Group risks are; what the effective risk mitigations are; and the resultant acceptable level of residual risks.

Audit Committee statement

Based on information from, and discussions with, management and the joint external auditors, the Audit Committee is of the opinion that the financial records may be relied upon as the basis for preparation of the audited Company/consolidated AFS.

The Audit Committee has considered and discussed the audited Company/consolidated AFS with both management and the external auditors. During this process, the Audit Committee:

evaluated significant judgements and reporting decisions;
determined that the going-concern basis of reporting is appropriate;
evaluated the material factors and risks that could impact on the audited Company/consolidated AFS and associated reports;
evaluated the Telkom Group’s solvency and liquidity and ensured the financial sustainability and disclosures of the Telkom Group; and
discussed the treatment of significant and unusual transactions with management and the joint external auditors.

A key requirement of our audited Company/consolidated AFS is for the audited Company/consolidated AFS to be fair, balanced, understandable and provide the information necessary for stakeholders to assess the Telkom Group’s position, performance, business model and strategy. The Audit Committee and the Board are satisfied that the audited Company/consolidated AFS meets this requirement.

The Audit Committee considers that the audited Company/consolidated AFS comply in all material respects with the statutory requirements of the various laws and regulations governing disclosure and reporting of the audited Company/consolidated AFS and that the audited Company/consolidated AFS comply in all material respects with IFRS, as issued by the IASB, the SAICA Financial Reporting Guides issued by the Accounting Practices Committee and Financial Reporting Pronouncements issued by the Financial Reporting Standards Council, as well as the requirements of the South African Companies Act 2008 and the JSE Listings Requirements. The Audit Committee has recommended to the Board that the audited Company/consolidated AFS be adopted and approved by the Board.

Keith Rayner CA(SA)
Chairperson: Audit Committee

19 June 2020

Annual Financial Statements

Telkom SA SOC Ltd | Integrated Report

For the year ended 31 March 2020