AUDIT, RISK AND COMPLIANCE COMMITTEE LETTER
DIANE RADLEY Audit, risk and compliance committee chair
The volatile environment precipitated by the COVID-19 pandemic has tested the resilience of our people, business model, systems and processes. It has required agility in key aspects of our operations, specifically in our support for clients and customers, in our responses to emerging risks and opportunities, and in actively managing our capital structure to maintain financial flexibility. To this end, the ARC committee has intensified our input and oversight to ensure the group weathers current market conditions, and that it maintains appropriate capital and liquidity to enable the business to return to our long-term earnings growth trend.
The augmented internal audit structure was largely bedded down before the operational disruption of the pandemic. With oversight from the ARC committee, the internal and external audit functions continued to operate efficiently, supporting the group’s ability to ensure a strong internal control environment within a fluid context.
This combination of stability and agility has been true of our risk, finance and governance functions, placing the group in a strong position to weather the turbulence, and to ensure the integrity of key governance and operational processes. With the enhanced risk methodology largely in place, the group (and by extension, the board and its sub-committees) has benefitted from deep insight into the risk landscape and its impact on our operations, and an enhanced ability to adapt to shifts in our markets and the broader socioeconomic context.
The enhanced risk management and policy framework introduced this year provides a more complete view of our risk universe, and provided a sturdy foundation to mitigate specific material risks. For example, we were able to move the majority of the workforce to a work-from-home basis to maintain productivity and customer service levels without unduly affecting IT security. This involved activating aspects of business continuity plans.
The group also integrated material environmental, social and governance (ESG) risk factors into the risk management framework, arising from the development of divisional ESE frameworks.
Our conservative capital strategy has ensured a robust group balance sheet, despite the broad economic impact of the pandemic. Through the asset and liability committee (ALCO), which reports to the ARC committee, our focus on maintaining good governance processes has remained strong. This included ensuring provisioning and amortisation methodology was relevant and applied correctly, and supporting management in making informed judgements on technical factors such as weighing permanent versus COVID-19 related credit impairments.
In highly uncertain conditions, our initial assumptions of recovery in collections activity in each of the divisions’ markets – which informed the provisioning levels announced at half-year – were delayed. This resulted in additional provisions being raised in the second half. The assumptions underlying the group’s conservative approach in accounting for the anticipated impact of COVID-19 on future cash flows have thus been updated. Note that all adjustments are non-cash and relate only to assets held at 30 September 2020.
A quick and effective response as the pandemic unfolded ensured the group was well protected from a liquidity and funding perspective. Through early engagement with our local and international funder groups, the capital management team secured debt funding and put sufficient facilities in place. This demonstrates the confidence of the group’s funders in our businesses – both in their resilience and the relevance of their business models – even in the face of a black swan event and the market trends it has amplified and accelerated. I extend thanks to our funding partners for their ongoing support. By securing sufficient liquidity in partnership with our funders, the group’s divisions have been able to extend support to their clients and customers when they have needed it most.
Moreover, the group’s strong capital position has enabled us to continue funding our existing strategic growth initiatives, albeit with greater scrutiny and revised hurdle rates that reflect current market dynamics. The finance and capital management teams have provided ongoing and meticulous modelling, which is assessed continually by the ARC committee and executive management. These assessments also test the robustness and accuracy of the models applied. This has provided the basis for informed capital allocation that balances the need for enhanced liquidity in a challenging operating environment with our continued focus on growth, including investments.
The accelerated bookbuild completed in June 2020 and the issuing of new share capital partially funded the group’s investment in a 49.9% non-controlling interest in WeBuyCars. These two share issues bolstered our equity base by almost R1 billion, demonstrating Transaction Capital’s good standing among investors and supporting our ability to pursue attractive opportunities, even in difficult conditions.
The deployment of R900 million of cash resources in WeBuyCars has been immediately value-accretive, converting interest income on undeployed capital into operating earnings, with further growth potential. The group’s balance sheet remains well capitalised and liquid following the acquisition, with ample capacity to fund the organic growth initiatives under way in our divisions.
As alluded to earlier, the market disruption of COVID-19 has not lessened the requirement for effective governance – on the contrary, it has required elevated levels of oversight and engagement. The ARC committee continues to ensure that accounting assumptions are applied consistently. We also monitor market disclosures to ensure they meet the needs of shareholders and continue to engender trust in the group, including compliance-related disclosures to the JSE Limited and other regulatory bodies. We continue to scrutinise the group’s tax affairs and advise on managing significant risk areas such as information and technology (IT) and cybersecurity, especially in the context of our work-from-home strategy.
We will be looking to rotate auditors prior to the mandatory 2024 financial year end and have commenced discussions in this regard. The committee also continues to oversee the adoption of new accounting standards, namely IFRS 16 – Leases and IFRS 17 – Insurance contracts.
The operating environment will remain volatile in the short to medium term. Consequently, the ARC committee considers the group’s conservative approach to risk, compliance and capital management to be appropriate. We remain steadfast in our focus on risk management and compliance, supported by the internal audit function.
For the year ahead, the focus areas for the ARC committee include: