“The Committee continues to focus on the standardisation of the internal controls and risk management framework across the Group and the integration of Al Noor into the Group’s structures, registers, reporting and processes.”

Dear Shareholder,

As Chairman of the Audit and Risk Committee (the “Committee”), I am pleased to present the Committee’s report for the year ended 31 March 2017. This report seeks to provide insight into the functioning of the Committee and its activities during the reporting period. It includes an overview of the key areas of activity and principal topics covered at each meeting, together with a review of the effectiveness of the Company’s external auditors, the Company’s internal controls, risk management and combined assurance systems, a review of the effectiveness of the Committee, and its priorities for 2017/18. The Committee’s terms of reference are available in the governance section of the Company’s website and are summarised in the Corporate Governance Statement.

COMMITTEE COMPOSITION AND MEETING ATTENDANCE

The composition of the Committee complies with the UK Corporate Governance Code (the “Code”), which provides that all members should be Independent Non-executive Directors. The Board regards each member of the Committee as having recent and relevant financial experience for the purposes of the Code and the Financial Reporting Council’s Guidance on Audit Committees. The Board is further satisfied that the Committee, as a whole, has the required sector-specific competence and that the combined knowledge and experience of its members is such that the Committee exercises its duties in an effective, in formed and responsible manner. The composition of the Committee and meeting attendance during the period under review are set out in Figure 1.

Notes

1 Committee members’ biographies can be found in the Board of Directors page. All members are Independent Non-executive Directors. The Committee Chairman, Desmond Smith, is also the Senior Independent Director.
2 One Committee meeting was held between the Company’s financial year end and the Last Practicable Date, which meeting was attended by all members.
3 Ian Tyler resigned as a Director and Committee member with effect from 21 February 2017 and therefore was only eligible to attend three Committee meetings during the year.

The Company Secretary is Secretary to the Committee and attends all meetings. Other attendees at Committee meetings may differ from time to time, and upon invitation from the Committee include Danie Meintjes (Chief Executive Officer), Jurgens Myburgh (Chief Financial Officer), Dr Edwin Hertzog (Company Chairman), Pieter Uys (alternate to Jannie Durand), Gert Hattingh (Chief Corporate Services Officer) and relevant management members. The Committee may also invite representatives from the internal auditors (Remgro Internal Audit) and external auditors (PricewaterhouseCoopers LLP and PricewaterhouseCoopers Inc.).

KEY AREAS OF ACTIVITY

INTEGRATION OF AL NOOR BUSINESS

The combination of the Al Noor business with the Group’s Middle East platform, effective from February 2016, continued to be a key area of focus for the Committee during the year. This included reviewing the progress on the integration of Al Noor into the Group’s Middle Eastern platform’s financial reporting; governance, risk and compliance processes; aligning business practices and embedding policies and procedures across the platform. In addition, the Committee considered and reviewed the purchase price allocation related to the reverse acquisition, reviewed the financial performance of the platform relative to budget, and monitored the realisation of efficiencies and synergies from the combination of the two businesses.

At the time of the combination ANHG held a 75% interest in Al Madar Medical Centre Group (“MMC”) with the remaining 25% held by the founding CEO. Prior to the combination, the MMC network was being run as a stand-alone business. With effect from 30 September 2016, MCME exercised the option to acquire the remaining 25% of the MMC Group and the MMC network came under the management and full control of MCME, which included aligning the RCM function of MMC with the rest of the business and, inter alia, centralising activities relating to insurance, coding, billing, submission and resubmission and engaging with Daman to identify corresponding billing details to facilitate the payment of claims and allocation of receipts.

FINANCIAL REPORTING

Key topics relating to financial reporting considered by the Committee during the year:

April 2016:

  • Financial review of each platform, including a review of any tax matters and debt covenants
  • Review of accounting policies
  • Integration of the Al Noor business into the Middle East platform
  • Finance function review
  • Viability statement and stress testing
  • Annual results planning

May 2016:

  • Financial review of each platform, including a review of debt covenants
  • Review of the significant accounting policies and judgements
  • Annual report and preliminary results announcement
  • Dividend policy, and final dividend and dividend access scheme
  • Going concern and viability assessment and stress testing
  • Fair balanced and understandable review
  • Integration of the Al Noor business into the Middle East platform
  • Tax matters for the Group

November 2016:

  • Financial review of each platform, including a review of debt covenants
  • Interim accounts and results announcement
  • Significant accounting policies and judgements
  • Going concern and viability assessment
  • Interim dividend
  • Fair and balanced review
  • Key tax considerations across the Group and new disclosure requirements

March 2017:

  • Review of pre year-end report by external auditors on accounting and auditing issues
  • Review of accounting policies
  • Review of tax risks and adoption of tax strategy
  • Integration of Al Noor business into the Middle East platform
  • Financial function review
  • Appointment of tax advisors
  • Review of viability assessment and stress testing
  • Group tax strategy
  • Review of FRC Conduct Committee correspondence

The Committee maintained a strong focus on the integrity of the Company’s financial reporting and its financial performance.

The financial results for the Group and individual operating platforms were reviewed regularly, taking into consideration tax matters and the Company’s debt covenants. The Committee considered the Company’s tax disclosure obligations, including the country-by-country tax reporting, and recommended the adoption of a Group tax strategy for approval by the Board.

Following the Al Noor Combination, the Committee reviewed and recommended an amendment to the dividend policy to target a pay‑out ratio of between 25% and 30% of underlying earnings. The amendment was included in the annual financial results published in May 2016. The Company also implemented a dividend access scheme for its South African shareholders as approved by the shareholders.

Significant accounting judgements and policies

As part of the process for monitoring the integrity of the financial information contained in the annual and interim reports, the Committee reviewed the significant judgements and significant accounting policies adopted by management and confirmed these were appropriate. The significant judgements identified by the management team, Committee and the external auditors are set out in the table below.

The Committee considered the following significant issues in relation to the Annual Report:

Fair, balanced and understandable reporting

The Committee considered whether the assessments of the Company’s position and prospects, as published in the annual, interim and other price-sensitive reports, were fair, balanced and understandable and provided the information necessary for shareholders to assess the Group’s performance, business model and strategy. The Committee reviewed the interim and annual financial statements in conjunction with the narrative sections of the reports to ensure that reported information was consistent, and that appropriate weight had been given to both positive and negative aspects of business performance.

The Committee is satisfied that one of the key requirements of the Group’s financial statements, for the Annual Report to be fair, balanced and understandable has been met, having reviewed a summary of the approach taken by management in the preparation of the report. Accordingly, the Committee recommended that the Board confirm that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

FRC Conduct Committee

The FRC Conduct Committee is authorised and appointed under the UK Companies Act to be responsible for reviewing and investigating the annual accounts, directors’ reports and strategic reports of public listed companies in the UK. The FRC Conduct Committee undertook a review of the Company’s Annual Report and Financial Statements for the year ended 31 March 2016. The outcome of their review was that there were no questions or queries to be raised with the Company. The FRC’s review was based on the report itself and not detailed knowledge of the Company or transactions it had entered into.

INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT PROCESS

Key topics relating to internal controls and risk management considered by the Committee during the year:

April 2016:

  • ERM framework and plan 2016/17
  • ERM policy and risk appetite
  • Risk registers of the Group and mitigation steps
  • ICT strategic risks: cybersecurity, project delivery, application, and control change architecture and skills
  • Fraud and ethics report

May 2016:

  • Enterprise-wide risk management policy
  • Review principal risks and uncertainties
  • Fraud and ethics report

November 2016:

  • Review of principal risks and uncertainties, including the impact of Brexit
  • Fraud and ethics report
  • Treasury policy and procedures

March 2017:

  • Review of tax risks
  • Detailed risk management review, including of framework and policies; top risks; fraud, ethics and compliance; and ERM plan for 2017/18
  • Review of viability assessment
  • Treasury policy and procedures

The Board is ultimately responsible for overseeing the establishment of effective internal control systems and risk management processes, which facilitate the delivery of and sustain the Group’s financial, operational and strategic objectives. The Committee maintained a strong focus on monitoring, evaluating and enhancing the internal control, risk management and internal audit processes for the Group and the integration of Al Noor into these processes.

The Board believes that effective risk management underpins a successful business and is integral to the objective of adding value to the Group. It has adopted an integrated and effective Enterprise-wide Risk Management (“ERM”) framework, at both an operational and strategic level. An optimal risk/reward profile is achieved by identifying, quantifying and managing risks. This was incorporated into the daily operational management processes, allowing management to focus on core activities. The Board has a clear process for identifying, evaluating and managing the principal risks, which includes current and emerging risks, faced by the Group for the reporting period. The Board annually reviews the process, which is in accordance with the FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and the requirements of the Code.

The Group’s ERM policy is benchmarked against the International Committee of Sponsoring Organisations of the Treadway Commission framework, which defines the risk management objectives, methodology, process and the responsibilities of the Group’s various risk management role-players. This policy provides structure within which Directors and management can operate to reinforce a strong risk management culture throughout the Group. It sets the tone and acts as a starting point for all other components of risk management and control in providing the necessary discipline and structure.

The Committee reviewed the ERM framework, including the Group’s risk appetite and assurance model and policies. The Committee continued to progress the standardisation of the internal controls and risk framework across the Group and the integration of Al Noor into the Company’s ERM function, processes, risk registers and reporting.

Information and Communication Technology (“ICT”) risks remain a key area of focus for the Committee. The top five risks identified were cybersecurity; project delivery, application control and change, architecture and scarcity of ICT skills. The Committee receives regular presentations from senior management on these risks and their management and mitigation.

The Group’s hedging arrangements in respect of currency movements were also examined, resulting in the Committee reviewing and updating the Group’s treasury policy.

The Committee considered the applicability and implications for the Group regarding the new General Data Protection Regulation effective May 2018 and a proposed action plan.

Further details on the Company’s internal controls system and risk monitoring can be found in Risk Management, Principal Risks and Uncertainties.

Whilst the overall conclusion was that the control environment is effective in ensuring the consistent achievement of key control objectives, the following aspects were specifically highlighted as focus areas by management:

  • the ongoing centralisation and standardisation of the internal controls in the Hirslanden platform;
  • the Al Noor integration in the Middle East platform and conforming the legacy Al Noor control processes and operational practices to the Group’s standards;
  • the implementation of SAP and supporting policies and procedures;
  • the implementation of a standardised financial consolidation and reporting tool; and
  • the enhancement of the assurance processes for the Group, including ICT governance and compliance.

The Committee’s work on the Company’s financial reporting, internal controls and risk management systems underpins the long-term viability statement published by the Company in this Annual Report and Financial Statements.

INTERNAL AUDIT

Key topics relating to internal audit considered by the Committee during the year:

April 2016:

  • Establishment of an in-house internal audit function

May 2016:

  • Internal audit report for 2015/16 financial year

November 2016:

  • Establishment of an in-house internal audit function
  • Internal audit report and internal audit plan

March 2017:

  • Review of internal audit report, internal audit mandate and internal audit function

The Company’s internal audit function is carried out by Remgro Internal Audit, who regularly attended Committee meetings and reported on the findings of its investigations. It was responsible for measuring the effectiveness of the system of internal financial control throughout the Group. The establishment of an in-house internal audit function to transition away from the current outsourcing strategy will commence with the planned appointment of a Chief Internal Audit Executive during the 2017/18 financial year.

The Committee reviewed the internal audit reports and approved the internal audit plan and fees. The Committee reviewed the effectiveness of the internal audit function by having discussions with Remgro Internal Audit and key members of management, and is satisfied with the effectiveness and efficiency of the function, reliability of financial reporting, and compliance with applicable laws and regulations.

Remgro Internal Audit’s Quality Assurance and Improvement Process was reviewed during the current year by a Big Four Independent Audit Firm and found to be Generally Compliant with the International Standards for the Professional Practice of Internal Auditing.

The approved internal audit plan, which comprises a three-year review cycle following a risk-based approach and, where appropriate, integration with other combined assurance providers, focussed on the revenue and receivables cycle during the reporting period.

EXTERNAL AUDIT

Key topics relating to the external audit considered by the Committee during the year:

April 2016:

  • External audit plan reviewed and agreed
  • External auditors’ fees reviewed and agreed
  • Non-audit services expenditure for the 2016/17 financial year
  • A separate meeting was held between the external auditors and independent Non-executive Directors without the management team

May 2016:

  • External audit – Year-end audit report and opinion
  • Evaluation of the external auditors’ effectiveness of external audit process
  • Review of auditor’s independence
  • Non-audit services expenditure for the 2015/16 and 2016/17 financial years
  • Non-audit services thresholds for the 2016/17 financial year
  • A separate meeting was held with the external auditors and independent Non-executive Directors without the management team

November 2016:

  • External audit – Half-year review report
  • External audit plan for the 2016/2017 financial year
  • Review of FRC Audit Quality Review
  • A separate meeting was held with the external auditors and independent Non-executive Directors without the management team

March 2017:

  • Review of policy on independence and non-audit services by external auditors
  • Non-audit services expenditure for the 2016/17 financial year
  • Non-audit services thresholds for the 2017/18 financial year
  • Pre year-end update report from external auditors

PricewaterhouseCoopers LLP (“PwC”), the external auditors of Mediclinic International Limited prior to the Al Noor Combination, was appointed as the external auditors of the Company in December 2015. The lead audit engagement partner from PwC is Giles Hannam who was also appointed in 2016.

Independence and effectiveness

The Committee is committed to ensuring that the Group receives a high-quality and effective statutory audit. It is responsible for monitoring the performance, objectivity and independence of the external auditors and undertakes a formal evaluation process annually. This process involves an examination of four main performance criteria, namely: robustness of the audit process, quality of delivery, quality of reporting, and quality of people and service.

On completion of the audit, all members of the Committee, as well as key members of the senior management team and those who regularly provide input to the Committee or have regular contact with the external auditors, were required to complete a questionnaire seeking their views. The feedback from the questionnaire was collated and discussed by the Committee at the meeting held on 22 May 2017, together with opportunities for improvement. Overall, responses to the questionnaire were very positive, indicating an effective external audit process.

The external auditors receive copies of all relevant Committee papers and minutes of all Committee meetings. As part of the Committee’s assessment of the external auditors, separate meetings were held between the Non-executive Directors and the external auditors, without management present.

The independence of the external auditors is further enhanced by the FRC’s Ethical Standard for Auditors, requiring PwC to inform the Company about any significant facts and matters that may reasonably be thought to bear on its independence or on the objectivity of the lead partner and the audit team. The lead partner must change every five years and the quality review partner, who reviews the judgements of the audit team, rotates every seven years. The auditor’s independence is further safeguarded by the non-audit services policy discussed below.

External audit plan

During the year, the Committee reviewed and approved the 2016/17 external audit plan, including the proposed materiality threshold, the scope of the audit, the significant audit risks and fees.

Non-audit services

The Committee believes that it may be appropriate in certain circumstances for the Company to engage its external auditors to provide non-audit services. A policy governing the provision of such services is in place to ensure the independence and objectivity of the external auditors is not compromised. During the year, the Committee considered the implementation of the European Union Audit Directive and Regulation in conjunction with the FRC’s Ethical Standard for Auditors, effective for the Company from 1 April 2017, in respect of prohibitions, as well as the new provisions set out in the 2016 version of the Code in relation to non-audit services, and updated the Group’s non-audit services policy accordingly.

As a consequence, from 1 April 2017, the Company is no longer making use of PwC’s tax services. Deloitte LLP has been appointed to provide tax advice for the Company and its Southern African operations, and KPMG has been appointed to provide tax advice for the Company’s Swiss and Middle Eastern operations.

The Committee determines the pre-approved monetary thresholds for each category of non-audit services at the beginning of each financial year. The nature of the non-audit services, the individual fee levels of each category and the aggregate fee amount relative to the external audit fee are taken into account in determining these thresholds. From 1 April 2017, any individual assignment with a fee exceeding £50 000 requires the Committee’s prior approval.

To help maintain independence and objectivity, the policy requires that an independent partner is appointed to lead any non-audit services.

Fees

Refer to note 22 to the consolidated financial statements for detail on the remuneration of the auditor for both audit and non-audit services undertaken during the year.

Re-appointment

The Committee concluded that the services provided by the external auditors were high quality and that the external audit process in respect of the 2017 Financial Statements was effective and that the auditor remains objective and independent. Accordingly, it recommended to the Board that the re-appointment of PwC as the Company’s external auditors is proposed to shareholders at the 2017 AGM.

Audit tender

As a result of the UK’s implementation of the European Union’s mandatory firm rotation requirements, and in accordance with the Committee’s terms of reference, the Company is required to ensure that the external auditors’ contract is put out to tender at least every 10 years, with the proviso that no single firm may serve as the Company’s external auditors for a period exceeding 20 years. PwC was appointed as the Company’s auditors in December 2015. It is intended that the external audit will be put out to tender no later than for the financial year commencing 1 April 2023, which is 10 years after the Company’s initial listing.

Competition and Markets Authority Statutory Audit Services Order 2014 (“CMA Order”)

As disclosed above, the Company complied with the mandatory audit processes and the Committee complied with the responsibility provisions set out in terms of the CMA Order relating to (a) putting the audit services engagement on tender every 10 years; and (b) strengthening the accountability of the external auditors to the Committee, including requiring that only the Committee is permitted to agree to the external auditors’ fees and scope of services; influence the appointment of the audit engagement partner; make recommendations regarding the appointment of auditors; and authorise the auditors to carry out non-audit services.

FRC Audit Quality Review

The Committee considered the findings from the review, undertaken by the FRC’s Audit Quality Review (“AQR”) team, of PwC‘s audit of the Group’s financial statements for the year ended 31 March 2016, which had been selected by the AQR team as part of their 2016 annual inspection of audit firms. The focus of the review was to identify areas where improvements were required, rather than highlighting areas where work was performed at or above the expected level. The Committee considered the findings and discussed these with PwC. The Committee noted that no significant areas for improvement were identified by the FRC and that it is satisfied that there is nothing in the FRC findings which might have a bearing on PwC’s re-appointment.

ETHICAL CONDUCT, GOVERNANCE AND COMPLIANCE

Key topics relating to governance and compliance considered by the Committee during the year:

April 2016:

  • Regulatory developments and updates as relevant for each platform
  • European Union Audit Directive and Regulation and review of the non-audit services policy
  • Annual review of policies and procedures: terms of reference of the Committee, legal and compliance policy and internal audit mandate

May 2016:

  • Regulatory developments and updates as relevant for each platform
  • European Union Audit Directive and Regulation and review of the non-audit services policy

November 2016:

  • Regulatory developments and updates as relevant for each platform
  • Review of FRC’s Ethical Standard for Auditors and non-audit services policy
  • Review of Committee’s terms of reference

March 2017:

  • Annual review of policies and procedures: terms of reference of the Committee; legal and compliance policy; and internal audit mandate; provision of Non‑audit Services by the external auditors; Fraud Risk Management Policy

The Group remains focussed on conducting its business in an honest, fair and ethical manner, a principle which is actively endorsed by the Board and management. The Committee oversees the Group’s processes for handling the Group’s Code of Business Conduct and Ethics and Anti-bribery Policy, which are available in the governance section of the Company’s website. This includes receiving regular feedback from the Group General Manager: Risk Management regarding incidents reported on the ethics lines and the effectiveness of the lines. The Board established a Clinical Performance and Sustainability Committee, details of which can be found in the Corporate Governance Statement.

The Group’s Code of Business Conduct and Ethics provides a framework for directors and employees within the Group of the standards of business conduct and ethics that is required of them, and which applies to all business divisions within the Group. It serves to ensure that the highest ethical standards are maintained in all dealings with the Group’s stakeholders. It is available to all staff and communicated to new employees during their induction. This code contains the Group’s whistle-blowing arrangements, which sets out the details of the Group’s ethics lines. Any employee or external stakeholder can report any wrongdoing in the Group confidentially and anonymously via the ethics lines. All complaints are investigated in accordance with the code.

The Group adopts a zero‑tolerance policy regarding unethical business conduct, in particular fraud and corruption, which is addressed in the Code of Business Conduct and Ethics. The Anti‑bribery Policy supports its commitment to ensure compliance with all anti‑bribery and anti‑corruption laws and regulations, and strictly governs the receipt of any invitations, gifts or donations from suppliers or any other party. Directors and employees throughout the Group are compelled to declare these to management for approval. Staff members involved in the contracting, negotiating and purchasing of equipment or consumables are also bound to strict ethical principles, ensuring that an impeccable standard of integrity is maintained in the Group’s business relationships. During the year, the Committee also adopted a Fraud Risk Management Policy, which facilitates the development of controls which will assist in the prevention of fraud and corruption.

The Committee reviewed reports of all material cases reported to the Group’s whistle‑blowing line resulting investigations.

The Committee is responsible for ensuring Group-wide standards are set for achieving compliance with relevant laws and regulations. During the year, a compliance consultant was appointed to assist the Group with implementing a standardised risk-based compliance monitoring process across all business units in the Group.

COMMITTEE EVALUATION

The Committee’s performance was internally evaluated by the Board, following discussion of the results of a self-evaluation questionnaire completed by the Committee members. The questionnaire focussed on the Committee’s role, composition and expertise and the effectiveness of Committee meetings. The outcomes of the survey were subsequently considered and reviewed by the Committee and certain actions were agreed for implementation, aimed at enhancing the overall effectiveness of the Committee. The results of the Committee’s performance evaluation were reported to the Board at the March 2017 meeting. Progress on the agreed actions and their outcomes will be monitored by the Committee and incorporated into the following performance evaluation.

PRIORITIES FOR THE COMMITTEE IN 2017/18

  • Review various ICT and other significant projects across the Group.
  • Review of ongoing integration of Al Noor’s operations and systems.
  • Implementation of new IFRS standards.
  • Monitoring of Group tax compliance matters.
  • Review internal audit work plan for 2017/18, which will focus on the procurement and payment cycle plus platform projects and the platform internal financial control process.
  • Monitor progress against the 2018 ERM plan.
  • Appointment of Chief Internal Audit Executive.

Signed on behalf of the Audit and Risk Committee.

Desmond Smith

Chairman of the Audit and Risk Committee

23 May 2017