Marks and Spencer 2016 Annual Report Download - page 49

47
ANNUAL REPORT AND FINANCIAL STATEMENTS 2016
FINANCIAL STATEMENTS OUR BUSINESSOUR PERFORMANCEGOVERNANCE
ACCOUNTABILITY
RISK IN ACTION
Internal Audit & Risk comprises both the
Group Risk function and Internal Audit.
Group Risk facilitates and manages the risk
process that is ultimately owned by the
Group Board. Internal Audit, accountable
to the Audit Committee, uses a risk-based
approach to provide independent
assurance over the adequacy and
e ectiveness of the control environment,
including controls related to key risks on
the Group Risk Profi le. The following
examples illustrate how Internal Audit
supports the business through driving
improvements to our control environment
and adding value in core business areas.
RISK: CLOTHING & HOME
TRANSFORMATION
Improving product availability to customers
in-store and online is a key priority and
Internal Audit reviewed the process to
allocate the stock available in our
warehouses. Our audit found opportunities
to improve the reconciliation of stock
data, to ensure that allocation decisions
are made based on the most current and
accurate stock data possible. We also found
that availability targets used within the
business are not wholly aligned with our
customers’ view of availability. These
challenges have led to manual intervention
in the allocation process, impacting the
e ciency of operations. The audit fi ndings
support the transformation activities
underway in Clothing & Home.
RISK: INTERNATIONAL
India is a key growth market for our
International business. Internal Audit
assessed the scalability of business
operations to support this growth, including
the clarity of plans to deliver against the
strategy, the adequacy of core logistics
processes and the management of new
store build and development projects.
We found the customer proposition to be
clearly defi ned, with a range of store formats
trialled prior to wider rollout. New tools
and processes have been implemented
at the India warehouse to improve stock
management and capacity controls,
although product labelling enhancements
are required to speed up the movement of
stock through the warehouse. Robust project
management controls are in place over new
store build and development projects.
RISK: CLOTHING & HOME SUPPLY
CHAIN AND LOGISTICS NETWORK
In April 2016 we began the phased
implementation of a new automated
warehouse in Bradford, as part of our wider
supply chain and logistics transformation.
Internal Audit reviewed governance over
the project testing phase supporting this
launch, including the adequacy of testing
standards and the management of
test exceptions. Our audit found the
governance over testing to be robust;
however, there were opportunities to
improve record keeping relating to defect
management and to incorporate the
re-testing of changes into resource plans.
The audit recommendations were applied
to the remaining testing phases, ahead of
the warehouse launch.
Management actions from all of our audits
are tracked to completion and the status
of these actions is reported to the Audit
Committee to ensure that the risks
identifi ed are appropriately addressed.
This will, in turn, further mitigate the risks
included in our Group Risk Profi le.
RISK AND THE ROLE OF INTERNAL AUDIT
As highlighted last year, the UK Corporate
Governance Code now requires us to issue
a ‘viability statement’ declaring whether
we believe the Company is able to continue
to operate and meet its liabilities, taking
into account its current position and
principal risks. The overriding aim is to
encourage directors to focus on the longer
term and be more actively involved in risk
management and internal controls; an
important part of stewardship. The Board
are required to assess the Company’s
viability over a period greater than 12
months. The M&S Board have selected a
three year assessment period as this aligns
with how we plan, measure performance,
and remunerate at a senior level.
The process adopted to assess the viability
of the Company involved collaborative
input from a number of functions across
the business to model a series of
theoretical ‘stress test’ scenarios linked to
the Group’s principal risks, in the context
of the three year plan. Examples include
signifi cant interruption to our business as
a result of a cyber-attack or infrastructure
failure, and brand impacting incidents
driven by product sourcing failures.
Consideration was also given to the
strength of the control environment and
its impact in mitigating risk, as well as
inevitable interdependencies. Scenarios
were then reviewed against the Group’s
current and projected liquidity position,
considering current committed lending
facilities. To support the fi nal conclusion
on viability, the assessment also took
account of additional potential mitigations
available to the business in the event of
further downside factors. An overview of
the process undertaken was provided to
the Audit Committee and reviewed for
completeness. The viability evaluation
was then provided to the Board to assist
in its assessment.
In assessing viability the Board has
considered a number of key factors,
including our business model (see page 10),
our strategy (see pages 6-8), risk appetite
(see page 48) and our principal risks and
uncertainties (see pages 28-29). These have
been reviewed in the context of our current
position and fi nancial planning process,
specifi cally the annual forecast and three
year plan. The directors also satisfi ed
themselves that they have the evidence
necessary to support the statement
in terms of the e ectiveness of the
internal control environment in place
to mitigate risk.
In making the statement, the directors
have applied the following assumptions:
> Capital markets will be closed and any
bond maturing during the assessment
period will be refi nanced through our
existing facility;
> Net capital investment will remain in
line with expectations; and
> In the event that the UK votes to leave
the European Union, the terms of exit
are such that the business would be able
to continue to operate broadly in line
with current operations.
The Board are in agreement that M&S is
a viable business. The Viability Statement
can be found on page 77.
OUR APPROACH TO ASSESSING LONG-TERM VIABILITY