The Group's risk policy:
- sets out and explains Datatec's approach to risk and risk management;
- records the Board's evaluation of Datatec's risk appetite for the main categories of risk;
- explains the principles behind Datatec's risk management framework which contains the procedures by which the policy is implemented; and
- supports management in managing risk, allowing risk to be managed on a decentralised basis subject to Group overview.
The approach to risk management and internal control defined in the risk policy has applied throughout the year under review and up to the date of approval of this Integrated Report and Annual Financial Statements.
The risk policy is reviewed by the ARCC and approved annually by the Board. The latest update was approved on 14 March 2019.
The key risks faced by the Group are summarised in the risk report. While all risks are continually monitored, the ARCC paid particular attention to cyber security threats during FY19 as the Group's operations face ever increasing attacks by opportunist fraudsters through "phishing" emails and other malicious actions. The introduction of the EU General Data Privacy Regulation in May 2018 also highlighted the responsibilities of the Group for data privacy for which preparations had been made in the prior year. Board reporting from the Group's IT departments via an inter-divisional ICT Governance Committee and cyber—security assessments undertaken by internal audit both enhanced the ARCC's response to this risk.
During FY19, Datatec introduced supplier on-boarding guidelines across the Group to enhance effectiveness in this area addressing the risk of using suppliers who might compromise the Group's compliance and business values. Requiring suppliers to comply with the Datatec Code of Conduct is critical in this regard.
The key risks to the Group are set out in the risk report.
Board assessment of the Group's system of internal controls and risk management
Nothing has come to the attention of the Board or has arisen out of the internal control self-assessment process, internal audits or year-end external audit that causes the Board to believe that the Group's system of internal controls and risk management is not effective or that the internal financial controls do not form a sound basis for the preparation of reliable financial statements. The Board's opinion is based on the combined assurances of external and internal auditors, management and the ARCC.
|Technological market disruption||Internal technological risks||
of payment discounts, product rebates and allowances
|Risk of failure to fund working capital needs sufficiently|
The Group's operations focus on the higher value, faster growing products and services in the ICT supply chain. While the Group's portfolio does not include any manufacturing, it is essential to anticipate the impact of the rapid technological change which is a feature of the sector. This risk is addressed through careful partner selection in terms of vendors and by working closely with our vendor partners. In addition, the Group's operating divisions must pre—empt market changes resulting from new technology such as the provision of Infrastructure as a Service ("IaaS") enabled by the development of cloud computing.
The Group's internal systems are at risk, both from planned changes leading to business interruption and disruption by external "cyber" threats. The Group has high dependence on its key information systems and accordingly deploys significant resources on its own information security defences.
The Group enhanced its data privacy policies and procedures for the EU General Data Privacy Regulation introduced in May 2018.
The Group continued to face the threat of financial crime attempted by "phishing" emails and "social engineering". These are countered both by technological means and education/awareness campaigns among employees.
The Group receives significant benefits from purchase and prompt payment discounts, product rebates, allowances and other programmes from vendors based on various factors. A decrease in purchases and/or sales of a particular vendor's products could negatively affect the amount of discounts and volume rebates the Group receives from such vendors. Because some purchase discounts, product rebates and allowances from vendors are based on percentage increases in purchases and/or sales of products, it may become more difficult for the Group to achieve the percentage growth in volume required for larger discounts due to the current size of its revenue base. In addition, vendors may exclude the Group from time to time from participation in some of their programmes. As noted under the "dependence on key vendors" heading, a strong and transparent relationship with our vendor partners is crucial in managing product discounts, rebates and allowances.
The Group is dependent on certain vendors, particularly Cisco, whose product and services accounted for approximately 42% of the Group's revenue. If any one of the Group's principal vendors terminates, fails to renew or materially adversely changes its agreement or arrangements with the Group, it could materially reduce the Group's revenue and operating profit and thereby seriously harm the Group's business, financial condition and results of operations. The Group's management recognises the importance of its vendor partners as one of its key stakeholder groups and assigns the highest priority to maintaining close, transparent relationships with them for the mutually beneficial development of the business.
The Group's business is working capital intensive; this is particularly relevant for Westcon International. Westcon International's working capital is utilised to finance accounts receivable and inventories. Westcon International largely relies on revolving credit and vendor inventory purchase financing for its working capital needs. The availability of these facilities to particularly Westcon International, and any material changes thereto, will affect the business's ability to fund its working capital requirements.
Management of working capital through inventory control and effective accounts receivable management is also crucial for the business and is a key focus of management and of the review processes in the risk management framework.
|Value generation: disposals and acquisition risk||
Execution risk of major
Risk of overdependence
on key personnel
The execution of the Group's strategy requires:
Both these goals will continue to place additional demand on management, customer support, administrative and technical resources. If the Group is unable to manage its restructuring and growth effectively, its business operations or financial conditions may deteriorate.
The Group will continue to consider further acquisition opportunities. If the Group is unable to successfully integrate an acquired company or business, such acquisition could lead to disruptions to the business. To mitigate this risk, the Group undertakes extensive due diligence of potential acquisitions, including detailed integration planning. These processes are managed and directed by Datatec's central team.
The implementation of major new systems such as the ERP system at Westcon International carries particular risks which the Group seeks to mitigate by careful planning of phased introduction. This approach allows time to identify problems encountered during the roll out to be rectified before continuing with the deployment in remaining jurisdictions. Despite this phased introduction approach the Group did not mitigate the disruption to the Westcon International business resulting from the ERP implementation in EMEA. This was not implemented effectively until FY19.
The Board has resolved to improve the risk assessment of major projects at the planning stage.
The Group's future success depends largely on the continued employment of its executive directors, senior management and key sales, technical and marketing personnel. Certain key employees have relationships with principal vendors and customers which are particularly important to the business of the Group. The executive directors, senior management team and key technical personnel would be difficult to replace and the loss of any of these key employees could harm the business and prospects of the Group. The Group's employees are a key stakeholder group and a high standard of employment conditions and working environment are seen as essential for the business.
The Group's customer base is much larger than its vendor base but nevertheless includes large individual customers in specific regions. Accordingly, the exposure to credit risk must be noted as a key risk of the business. Management's response to this risk is to maintain close relationships with key customers of the Group and to operate rigorous credit assessment and control procedures.
Risk management framework
The Group's risk management process has three key steps:
- Identify key risks — document in risk registers
- Implement controls to mitigate risk — monitor through continuous review
- Obtain assurance that controls are effective — combined assurance programme
Within this framework, the specific responsibilities of different designates and the processes they follow are set out below:
Information available elsewhere in the risk report
Audit, Risk and Compliance Committee
Group Chief Risk Officer
Divisions — divisional boards and executive committees
Head office — Datatec Risk Committee
Divisional Chief Risk Officers
Financial and internal control
The Group's internal control and accounting systems are designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial information and to safeguard, verify and maintain accountability of its revenues and assets. These controls are implemented and maintained by skilled personnel.
The operation of key internal controls is assessed annually using an internal control questionnaire ("ICQ") which is completed by all group subsidiaries with operational accounting functions. The results of the ICQ are critically assessed by divisional and Group management and assist in harmonising controls and setting standards across the business.
A combined assurance framework for monitoring and evaluating the effectiveness of the internal controls is in place throughout the Group. This framework deploys and coordinates internal and external assurance providers to report on the effectiveness of the Group's internal controls.
A combined assurance model aims to optimise the assurance coverage obtained from management, internal assurance providers and external assurance providers on the risk areas affecting the Group. Within Datatec there are a number of assurance providers that either directly or indirectly provide the Board and management with certain assurances over the effectiveness of those controls that mitigate the risks as identified during the risk assessment process. Collectively, the activities of these assurance providers are referred to as the combined assurance framework.
As the nature and significance of risks vary, assurance providers are required to be equipped with the necessary expertise and experience to provide assurance that risks are adequately mitigated. External assurance providers include external audit, internal audit, regulators, sustainability assurance providers and other professional advisers.
In the combined assurance model, each control is linked to a specific assurance provider, where applicable, to enable the following to be identified:
- risk areas where no/insufficient controls have been identified;
- risk areas where controls have been identified, yet insufficient assurance is provided (gaps); and
- risk areas where duplicate or "excess" assurance is provided (duplication).
Combined assurance framework
- Management-based assurance: Management oversight, including strategy implementation, performance measurements, control self—assessments and continual monitoring mechanisms and systems.
- Local management is required to complete and submit the ICQ annually and this is monitored against internal control norms. Action is taken where ratings are considered to be inadequate. Ratings are also reviewed by the Audit, Risk and Compliance Committee.
- In addition, the Board obtains a formal letter of assurance twice a year from each of its subsidiary divisions (supported by similar representations from the divisions' own subsidiaries) which provides the Board with assurance over the operation of the risk management processes described above, including the operation of internal controls over financial and IT risks, compliance with legislation, and the ethical and sustainable management of the business.
- Internal assurance: Risk management (adopting an effective enterprise risk management framework), legal, compliance, health and safety, and quality assurance departments are included. They are responsible for maintaining policies, minimum standards, oversight and risk management performance and reporting.
- Independent assurance: Independent and objective assurance of the overall adequacy and effectiveness of risk management, governance and internal control within the organisation is predominantly the role of internal audit, external audit and other expert assurance providers required from time to time.
- Oversight committees: Appropriate assurance providers under each of the above categories have been identified:
- The Audit, Risk and Compliance Committee
- The Social and Ethics Committee with regard to oversight of the Group's controls in the sphere of ethics, corporate social responsibility and sustainability
- The Remuneration Committee with regard to controls in the remuneration sphere
- The Nominations Committee in relation to Board diversity and corporate governance structures.
- Management has used this model to conclude on the completeness and appropriateness of the current assurance activities for each risk identified and that the level of assurance provision is satisfactory. It continues to maintain the framework as part of the ongoing risk management process.
- The ARCC has reviewed the combined assurance frameworks for the Group and the three divisions to satisfy itself with management's conclusions and will continue to review them as part of its role in oversight of risk management.
- In light of its review of the combined assurance framework, the ARCC has recommended to the Board that appropriate assurance activities are in place in relation to the controls operating over each risk identified in the risk management process.
The governance of ICT
The Board has the responsibility to govern technology and information in a way that supports the organisation in setting and achieving its strategic objectives (King IV™ Principle 12). To achieve this, the governance of ICT is firmly embedded in the Group's risk management framework. ICT risk is managed across all operations with controls and assurance provision to be maintained and reviewed in the same way as for other risks. The Board has adopted an ICT governance policy setting out the Group's approach to ICT governance. Within this policy an ICT Governance Committee has been established comprising divisional ICT risk management and ICT executives with the aim of reinforcing the integration of IT risk issues into the Group's risk management framework.
The Board includes a review of ICT governance procedures operated by the Group's major divisions in its annual timetable to assist in its ICT governance role.
There are documented and tested procedures in the major subsidiaries which will allow them to continue their critical business processes in the event of a disastrous incident impacting their activities. Such business continuity planning procedures are reviewed annually and, where weaknesses are identified, the relevant subsidiaries are required to rectify them.
The Group operates management reporting disciplines which include the preparation of annual budgets by operating entities. Monthly results and the financial status of operating entities are reported against approved budgets. Profit projections and cash flow forecasts are reviewed regularly, while working capital, borrowing facilities and bank covenant compliance are monitored on an ongoing basis.
All financial reporting by the Group, including external financial reporting and internal management reporting, is generated from the same financial systems which are subject to the internal controls and risk management procedures described alongside.
Compliance framework and processes
The Board governs compliance with applicable laws and adopted non-binding rules, codes and standards in a way which supports the organisation being ethical and a good corporate citizen (King IV™ Principle 13). Each division manages compliance with relevant laws and regulations, which the ARCC has divided into the following broad categories for the purposes of monitoring. These are considered to be the main themes/classes of legislation which pose the biggest risk to Datatec in the event of breach:
- Corporate law — companies acts, financial reporting
- Financial law — anti-money laundering and fraud
- Export regulations — trade sanctions and foreign corrupt practices
- Import regulations — including duty and VAT
- Securities law — insider dealing and stock exchange compliance
- Employment law — unfair dismissal, employment practices, health and safety
- Intellectual property, trademarks and patents
- Competition legislation
- Customer protection legislation
Each category is considered in the risk assessment process and, if appropriate, a risk is recorded on the relevant risk register and managed in accordance with the risk management framework set out in this report. The divisions' audit, risk and compliance committees report on each category of legislation above, noting whether any breaches of compliance have been identified.
Internal audit is an independent appraisal function which examines and evaluates the activities and the appropriateness of the systems of internal control, risk management and governance. The internal auditor is the key assurance provider in the Group's combined assurance framework described in the Financial and internal control. The function provides the Board with a report of its activities which, along with other sources of assurance, is used by the Board in making its assessment of the Group's system of internal controls and risk management.
During FY19, Datatec transitioned the internal audit function from an outsourced EY team to an in—house team which had been developed in Logicalis Group over the past few years. EY oversaw the transition and reviewed the milestones required for the in-house team to develop to full effectiveness. EY then formally ceased the internal audit role on 28 February 2019 and the in—house team took over from 1 March 2019. FY19 was therefore a transitional year in which both EY and the in-house team worked together on the internal audit programme and collaborated on providing assurance to the ARCC.
Internal audit operates within defined terms of reference as set out in its charter and the authority granted to it by the ARCC and the Board, and reports to the ARCC with notification to the Chief Risk Officer.
The internal audit team reports to the Chief Risk Officer on day—to—day matters, and to the Chairman of the ARCC and, in addition, has unfettered access to the Group CEO and CFO as required.
Audit plans are presented in advance to the ARCC for approval. The plans are based on an assessment of risk areas involving an independent review of the Group's own risk assessments which are recorded in the risk registers. Audits include Group—wide reviews of specific risk areas as well as "baseline control" audits of key controls applying to business processes at specific locations. Baseline control audits include an independent assessment by the internal auditor of the ICQ responses of the entity being audited for the controls in scope for the audit in order to validate the ICQ self—assessment.
During FY19, EY undertook a cyber security maturity assessment of Westcon International which generated a series of management actions required to increase the level of cyber security maturity within Westcon International. The in-house internal audit team will monitor and follow up on management's actions arising from this assessment in the same way as is done for all internal audit exercises.
The internal audit team attends and presents its findings to the ARCC. Management is responsible for acting on the findings of internal audit and implementing remedial action to correct identified control weaknesses. Internal audit reviews management's actions on the findings and reports back on the effectiveness of the response. An example of an internal audit finding which is being addressed by management across the Group is weakness in access controls to IT systems. The internal audit process and management's response to the findings thereby contribute to a continuous improvement culture in the Group's risk management function.
The ARCC is satisfied that internal audit has met its responsibilities for the year with respect to its terms of reference.
The ARCC is responsible for recommending the external auditor for appointment by shareholders and for ensuring that the external auditor is appropriately independent.
Shareholders have appointed Deloitte & Touche as the external auditor to the Group and their reappointment will be sought at the upcoming AGM. The external auditor carries out an annual audit of all the Group's subsidiaries in accordance with international auditing standards and reports in detail on the results of the audit both to the audit, risk and compliance committees of the Group's divisions and to the Group ARCC. The external auditor is therefore the main external assurance provider for the Board in relation to the Group's financial results for each financial year.
The ARCC regularly reviews the external auditor's independence and maintains control over the non—audit services provided, if any.
Pre-approved permissible non-audit services performed by the external auditors include taxation and due diligence services. The external auditor is prohibited from providing non-audit services such as valuation and accounting work where its independence might be compromised by later auditing its own work. Any other non—audit services provided by the external auditor are required to be specifically approved by the Chairman of the ARCC or by the full committee if the fees are likely to be in excess of 50% of the audit fee.
The external auditor has a policy of rotating the lead audit partner and those of South African subsidiaries every five years and the other subsidiary audit partners with a maximum of every seven years. The ARCC has adopted the same policy.
The Company will initiate a process after the AGM to appoint new auditors for the year ending 28 February 2021. The Company is therefore seeking one more reappointment for Deloitte & Touche.
Audit, Risk and Compliance Committee constitution and operation
The committee operates within defined terms of reference as set out in its charter which has been approved by the Board.
The ARCC during FY19 consisted of the following independent non—executive directors:
- Johnson Njeke (Chairman)
- Ekta Singh—Bushell
- John McCartney
The ARCC meets at least three times a year and the external auditors, the internal auditors, Chief Executive Officer, Chief Financial Officer, Chief Risk Officer and Group Legal are invited to attend.
Directors' attendance at ARCC meetings during FY19 and subsequently to the date of this report (all meetings were scheduled) is as follows:
Notes: Stephen Davidson stood down from his role as ARCC member and was not proposed for election to the ARCC at the Company's 2018 AGM. He continues to attend the ARCC as an invitee as shown.
The principal functions of the committee are to:
- review the annual financial statements, the half—yearly results announcement and other financial reports;
- ensure the Group has established appropriate financial reporting procedures and that those procedures are operating effectively;
- assess the risks facing the business and review the Group's risk management procedures;
- monitor the effectiveness of internal controls and comment on the state of the internal control environment;
- review the internal and external audit plans and discuss the findings and recommendations of the internal and external auditors; and
- review the effectiveness of the external auditors including considering the findings of: the inspection performed by the auditors' regulatory body; the auditors' internal engagement monitoring inspection; the outcome of any legal or disciplinary procedures; and review the effectiveness of the internal auditors.
The committee reviews its performance annually by means of questionnaires completed by individual committee members and attendees which are then discussed at Board and committee meetings. These appraisals enable the committee to evaluate its effectiveness objectively and to conclude that it is operating effectively under the terms of reference set down in its charter.
The committee is satisfied that it has met its legal and regulatory responsibilities for the year under review and to the date of this report with respect to its terms of reference as set out in its charter.
The Chairman of the committee will be available at the AGM to answer queries about the work of the committee.
- Integrated Report 2019