Audit Committee Report

Introduction by Robert Macleod, Audit Committee Chairman

I am pleased to introduce the report of the Audit Committee for 2012.

In its recent report on Developments in Corporate Governance, the Financial Reporting Council asserted that reporting by audit committees remained 'generally uninformative'. For this reason, it is introducing a number of changes to the UK Corporate Governance Code. These centre on the audit committee's relationship with the external auditor and its review of financial statements.

Whilst these changes will only apply to financial years beginning on or after 1 October 2012, that is, not for this report, we hope that shareholders, whilst recognising that best practice in this area has yet to develop, will appreciate our attempt to address these issues and include rather more detail on what we do and what engages us at our meetings.

First, companies will be expected to put their external audit contract out to tender at least every 10 years or explain their reasons for not doing so. Aggreko last undertook a competitive tender for the external audit in 2006, following which PricewaterhouseCoopers were reappointed external auditor. We therefore have some time to review and agree a future process for the reappointment of the external auditor. Although it should be noted that we continue to assess the effectiveness and performance of the auditor on an annual basis (as described below).

Secondly, the report from the audit committee in the annual report will be required to disclose significant issues which the audit committee considered in relation to financial statements and how these issues were addressed, having regard to the matters communicated to it by the external auditor. We have included an explanation of what we think shareholders will find helpful in this year's report.

Thirdly, the audit committee report will be required to include an explanation of how it assessed the effectiveness of the external audit process but no firm guidance was given on how to carry out this assessment. Without further guidance, we continue to assess the effectiveness of the external audit process each year, including assessing the results of a questionnaire circulated to the Committee and senior management.

Whilst the oversight of the external auditor and the review of financial statements are often seen as the audit committee's main tasks, another important part of our remit involves reviewing Aggreko's internal controls. We regularly review the Group's financial controls – that is the systems to identify, assess, manage and monitor financial risk – and this year we were particularly keen to see that the Group was properly prepared for implementation of the new regional structure.

Our remit extends beyond just financial controls, so last year we also looked at:

• the implications upon the internal control environment associated with the rapid growth of the local business within Aggreko International; and
• the Group's IT risk management and governance framework.

This year we followed up with a more detailed review of the Group's business continuity plans. Real incidents in 2012, including two hurricanes in the US and a data network outage in the UK, illustrated why this is such an important area. Each of these issues is covered in more detail below.

There has been only one change to the Committee membership this year: in line with the UK Corporate Governance Code, Ken Hanna stepped down from the Committee following his appointment as Chairman of the Board on 25 April 2012.

Responsibilities and role of the Audit Committee

The Committee's main responsibilities are to oversee and monitor:

• the relationship with the external auditor, the external audit process, including the appointment of the external auditor, their audit and non-audit fees and independence; 
• the nature and scope of the external audit and its effectiveness; 
• the effectiveness of internal audit and ensure co-ordination with the activities of the external audit; 
• the adequacy and security of the Company's procedure for handling allegations from whistleblowers and for detecting fraud; 
• the effectiveness of systems for internal financial control, financial reporting and risk management; 
• the integrity of the Company's financial reports, including reviewing the findings of the external audit; and 
• making appropriate recommendations to the Board.

The full Terms of Reference of the Committee are available on our website at http://ir.aggreko.com/committee-terms-of-reference.

Membership of the Committee

The members of the Committee during the year were as follows:

Robert MacLeod	Chairman
David Hamill
Ken Hanna	(resigned from the committee on 25 April 2012)
Russell King

All members of the Committee are independent Non-executive Directors. Robert MacLeod, a chartered accountant and Group Finance Director of Johnson Matthey plc, brings a high level of current relevant financial experience to the Committee. Peter Kennerley is Secretary to the Committee. Ken Hanna, Rupert Soames, and Angus Cockburn, together with the Director of Finance and Director of Internal Audit generally attend meetings by invitation. We also ask other members of senior management to present to the Committee on a regular basis. The Group audit partner from our external auditor also generally attends the Committee.

The Committee met three times during the year.

Main activities of the Committee during the year

External Auditor

At each of our three regular meetings during the year, the Group audit partner from PricewaterhouseCoopers presents a report. The first one in the audit cycle is presented to the meeting when we review Aggreko's Half Year results. This report contains the results of PricewaterhouseCoopers' review of our Half Year Report, and also the core of the Group audit strategy and plan for the year end. This is generally followed up with a report in December, providing an update on the plan presented to the previous meeting, together with an early assessment of some of the issues identified at that stage. Finally, when the Committee meets to review the draft Annual Report, PricewaterhouseCoopers present a commentary report on their audit. At the end of this meeting we generally hold a separate session with the external auditor without members of management present.

Integrity of financial reports – Annual Report

At our March 2013 meeting, we reviewed salient features arising out of PricewaterhouseCoopers' audit of the 2012 Annual Report. We discussed these with management and satisfied ourselves that the issues raised had been properly dealt with. We reviewed the draft Annual Report, and after consideration of a paper on going concern prepared by the management, agreed to recommend the approval of the 2012 Annual Report to the Board.

Amongst the matters we considered in relation to the Annual Report were:

Contract provisions

One of the biggest risks facing the Group is non-payment by customers under some of the larger contracts in our Power Projects business (see Principal Risks and Uncertainties – Failure to collect payments or to recover assets). Consequently, contract receivables and associated previsions within Power Projects is a key risk of the Group which the audit focuses on as one of its key risk areas. The Group policy is to consider each debtor and customer individually, within the relevant environment to which it relates, taking into account a number of factors, in accordance with appropriate accounting standards. We assessed the Group's processes for calculating contract risk provisions and considered the external auditor's findings arising from their audit, before reviewing the overall level of contract provisions held at year end.

Eskom/EDM project

Aggreko's contract, announced in June 2012, to supply 107MW of power to Eskom, the South African power utility, and Electricidade de Mozambique is thought to be the first of its kind. Working with local companies, Aggreko was responsible for building gas connections, a major substation and 1.5km of transmission line. The total value of the project is estimated to be in the region of $279 million over two years, including fuel costs. Given the nature and size of the project, we assessed the relevant financial measurement and disclosure of the contract, including revenue and cost recognition and considered the auditor's views.

Other issues

The other issues we considered, which the external auditor also addressed in their report, included provisions for direct and indirect tax and the accounting treatment for the Poit Energia acquisition. In particular we considered the accounting measurement and disclosure of the exceptional items in the Note 7 to the Group Accounts. 

Going concern

In assessing whether the Company is a going concern, and accordingly making a recommendation to the Board, we considered a paper prepared by management based on guidance published by the Financial Reporting Council. The assessment was made for the period of 16 months to 30 June 2014, in accordance with accepted practice. Based on internal forecasts, we reviewed the Group's debt maturity profile, including headroom and compliance with financial covenants. We stress tested this by adjusting the January 2013 internal Full Year forecast cash flow by a combination of two of the principal risks we have identified – an economic downturn leading to loss of revenue and customer default. (See Principal Risks and Uncertainties – Economic conditions; and Failure to collect payments or to recover assets).

Integrity of financial reports – Half Year Report

At the July 2012 meeting the Committee reviewed PricewaterhouseCoopers' report on their Interim review. We also reviewed and recommended to the Board the Group's Half Year Report. The matters we discussed in our review were similar to those discussed when reviewing the Annual Report, except that, since the Poit Energia acquisition had recently been completed, we discussed with PricewaterhouseCoopers the accounting for the transaction, including the consideration paid and fair values.

Non-audit services policy and external auditor independence

We reconfirmed our policy on non-audit services provided by the external auditor: individual fees in excess of 50% of the annual audit fee and any in excess of the aggregate fees above 100% of the audit fee require the Committee's specific approval. Each year, we receive an analysis of the actual level and nature of non-audit work, and this year we were again satisfied that all non-audit work undertaken was in line with our policy and did not detract from the objectivity and independence of the external auditor. Further details of the fees paid to the external auditor are set out in Note 6 to the Group Accounts.

External auditor effectiveness

Following completion of the 2011 year end process, the Committee assessed the audit process and the strategy for the 2012 audit and considered the performance of the external auditor.

Reappointment of external auditor

The Committee is again recommending to the Board that a proposal be put to shareholders at the 2013 Annual General Meeting for the reappointment of PricewaterhouseCoopers as external auditor. There are no contractual restrictions on the Company's choice of external auditor, and in making our recommendation we took into account, amongst other matters, the objectivity and independence of PricewaterhouseCoopers, as well as their continuing effectiveness and fees.

Internal audit

The internal audit team undertake financial, operational and strategic audits across the Aggreko Group using a risk based methodology. Group Internal Audit is also responsible for IT related audits, and these services are provided by an outsourced provider. Each year we agree the scope of work and coverage levels as part of the annual internal audit plan and review its progress during the year through reports at each meeting. During 2012 130 audits were completed. Audits cover all parts of Aggreko, from Group level down to individual project sites, and all aspects of the business, for example, finance, purchasing, contract management and service and repair. Results are graded, and where audits are given a low score, Group Internal Audit agree appropriate remedial actions with the businesses concerned and report to us on progress.

We also considered all internal control issues raised in the internal audit reports, the adequacy of internal audit resources and the effectiveness of the internal audit function.

At least once each year we hold a private session with the Director of Internal Audit without other members of management being present.

Financial control and managing risk

Aggreko's objective is to have a strong control environment that minimises financial risk, and as part of our responsibilities we review the effectiveness of systems for internal financial control, financial reporting and risk management. We aim to ensure that the same high standards are applied throughout the business with the framework set at Group level. Across the Group, there is a strong focus on training and development and this helps to underline the standards that we require. We then monitor this process through regular financial control reviews and a financial control checklist. This also enables us to set targets and identify and monitor areas for improvement.

We agreed a list of financial control deliverables for 2012, including further improvements in the financial control checklist scores and driving greater standardisation throughout the Group. At the end of the year, were viewed progress and set targets for 2013. Our priorities included addressing countries with lower financial control checklist scores and ensuring that there was sufficient support at Group or regional level for our less mature businesses.

The reorganisation of our regional structure presented fresh challenges. These included putting a new finance organisation in place, agreeing workflow and responsibilities for the Power Projects businesses under the new structure, reconfiguring reporting systems, processes and templates and reviewing delegations of authority and segregation of duties. Ernst & Young were also engaged to assess the tax impact of the reorganisation.

We aim, on a regular basis, to look in some depth into the Group's risk management processes. In 2012 we received a presentation on the Group's business continuity planning from the Chief Information Officer. Following a recent review, we now have plans in place for all major locations. We were given details of a recent simulated incident played out at a regional office and the National Rental Centre in Cannock, UK. Information on the lessons learnt from the exercise and plans for similar exercises at other locations was included in the report. We also discussed the other main information technology risks facing the Group, including the integration of the Poit Energia acquisition and the proposed upgrade of our Movex enterprise resource planning system.

Whistleblowing

Part of our remit is to oversee Aggreko's processes for handling allegations from whistleblowers. Aggreko's Ethics Policy encourages all employees to report any potential improprieties in financial reporting or other matters. As part of this, Aggreko has an independent compliance hotline, operated by an external agency. The hotline is available to all employees, in all of the languages used throughout the Group, and callers can remain anonymous if they wish. All complaints are followed up, and in turn we receive regular reports analysing complaints. Where appropriate, Group Internal Audit is asked to investigate the issue and report to us on the outcome. We review these processes each year, and can confirm that they remain adequate for addressing the Company's obligations under the Code.

Governance

Each year the Committee's effectiveness is reviewed as part of the Board's evaluation process. We also reviewed our terms of reference and recommended revised terms to the Board, which were approved in July.

Robert MacLeod
Chairman of the Audit Committee
7 March 2013