REG - Serco Group PLC - Annual Financial Report <Origin Href="QuoteRef">SRP.L</Origin> - Part 1

SercoAnnouncement

24/03/2016 13:52

RNS Number : 2025T
Serco Group PLC
24 March 2016
Serco Group plc - Annual Financial Report
24 March 2016
The following documents have today been published and are available on the Company's website at www.serco.com:
2015 Annual Report and Accounts 
Notice of Annual General Meeting
In accordance with Listing Rule 9.6.1 copies of the above documents, along with the Form of Proxy for the Company's 2016 Annual General Meeting have been uploaded to the National Storage Mechanism and will be available for viewing shortly at www.morningstar.co.uk/uk/NSM
Compliance with Disclosure and Transparency Rule 6.3.5 ("DTR 6.3.5") - Extracts from the 2015 Annual Report and Accounts
The information below, which is extracted from the 2015 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. It should be read in conjunction with the Company's Full Year results announcement published on 25 February 2016. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2015 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers in the 2015 Annual Report and Accounts.
Principal Risks and Uncertainties (pages 16 to 25)
Sercofacesmanyrisksand uncertaintieswhichwemitigateand managethroughriskmanagement processes(seepages97to102). TheGroupRiskRegistersets outtheprincipalrisksfacingthe GroupandissetbytheExecutive Committeeaftertakinginto considerationthevariousdivisional riskregisters.TheGroupRisk RegisterisreportedtotheBoard viatheCorporateResponsibility andRisk Committee.
Following the completion of the Strategic Review, a robust and systematic assessment of the principal risks facing the Group was carried out. These include the principal risks that would threaten the execution of Serco's strategy, business model, future performance, solvency and liquidity.
The resulting principal risks areeachclassifiedasstrategic, reputational,financial,operational, legal or compliance. They are described on the following pages, together with the relevant strategic business objectives, key risk drivers; the Group-wide material controls, which are explained in more detail on pages 26 to 29, which have been put in place to mitigate the principal risks, and the mitigation actions to improve the effectiveness of the controls.
Therisksareconsideredwithinthe timeframeofthreeyearswhichis thesametimeperiodthathasbeen usedintheViabilityStatement(see page30).TheViabilityStatement takesintoaccounttheprincipal risksinitsassessment.
Risk appetite
In 2016, the Executive Committee will undertake an exercise to assess the risk appetite for each of the principal risks. The risk appetite represents the nature and amount of risk that the Group is willing to accept and facilitates decision making as to the level of resource that should be expended to mitigate the principal risks.
Risk appetite statements are being developed which will be reviewed and endorsed by the Corporate Responsibility and Risk Committee. These statements will beusedto definetherisk tolerance levels throughout the business, and along with our values, Code of Conduct and mandatory ethics training will provide clarity on the risk culture of the Group.
Strategic and reputational risks
Risk: Failure to attract and retain leaders fit for the future
Impact on business objectives:
 Winning good business
 Executing brilliantly
 A place people are proud to work
 Profitable and sustainable
People are at the core of our business at all levels of the organisation. Our success depends on the continued service and performance ofhighlyqualifiedandexperienced operational management and business development teams and their leaders.
Ifourleadersarenotabletomeetthe needsofthebusiness,thiscouldimpact ourintegrity,brandandreputation,and couldhaveamaterialadverseimpact onourfinancialconditionandresultsof operationsaffectingtheprospectsof thebusiness.
Key risk drivers
Good leadership underpins our ability to develop and deliver the services we provide to customers. The ability to plan for management succession and to attract, train and retain good leaders and other employees is a key driver for our success.
Failure to maintain a robust framework of people processes, systems and controls to enable attraction, selection, development and retention of the appropriate calibre of employees and leaders would compromise our ability to execute our strategy and achieve our business objectives. This would adversely affect employee pride in the organisation and prevent Serco from becoming an employer of choice for talented people.
Employee engagement is also critical to our success; engaged employees deliver better service to our customers, are more productive, and want to stay with us. Failure to attract, motivate and engage employees can create a decline in morale and an increase in staff turnover, which may adversely affect our ability to win new and retain existing contracts owing to a lack of appropriate skills and a reduction in customer satisfaction.
Mitigation
Material controls:
 Serco Management System
 Serco Leadership Model
 Centres of Excellence
 Appropriately skilled / trained resources
Current mitigation actions:
 Implementation of Serco Leadership Model
 Implementation of talent and succession processes
 Implementation of a robust framework of people processes and procedures that supports the acquisition and retention of the right calibre of staff
Future actions:
 Continued improvements to our Leadership Model
 Resourcing of the Centres of Excellence and functions with the intent to support the delivery of the Group strategy
 Improvements to our talent pooling capability
 Improvements to the 'on boarding' and induction processes and systems
 Improvements to short- and long- term incentive arrangements
 Establishment of our Leadership Academy
Risk: Failure to transform and deliver the Group strategy
Impact on business objectives:
 Winning good business
 Executing brilliantly
 Profitable and sustainable
We have put in place transformation programmes to achieve lasting change in the way Serco operates. Concurrent programmes are being delivered in Finance, IT, HR, Procurement, Contract Management and Business Development.
Successful delivery of these in an integrated fashion will drive greater standardisation, achieve critical efficiencies and cost reductions, improve transparency and reinforce continuous improvement in our operational delivery.
Key risk drivers
Delivery of the Group strategy could be placed at risk because of too many competing programmes with complex interdependencies, poor programme and solution design, poor integration across activities (leading to operational inefficiency or incompatibility), or in the failure to achieve lasting cultural change (due to failure of buy-in or the setting of unrealistic or unclear expectations).
Affordability may place a constraint on resources, which could jeopardise or delay the transformation of the Group.
Note: The risk drivers and controls associated with achieving the objectives of the Group strategy are covered under other principal risk, for example the risk 'Failure to grow profitably' reflects the risk associated with failing to maintain a healthy pipeline of new contracts. The risk of failure to transform and deliver the Group strategy focuses on the delivery of the Group transformation programmes.
Mitigation
Material controls:
 Group strategy
 Transformation programme design
 Governance structure
 Standardised Divisional Performance Reviews
Current mitigation actions:
 Establishment of a central ProgrammeManagementOffice (PMO) to monitor and coordinate the programmes
 Implementation of governance for transformation programmes. PMO reports delivery constraints to the GroupChiefOperatingOfficerand the Executive Committee
Future actions:
 Coordination of a communication strategy to engage all individuals in the business so that they buy into the longer-term goals of the Group
 Ongoing review of Group strategy and internal delivery structures to ensure Serco is set to excel in its chosen markets and sectors
Risk: Failure to build our reputation or act with integrity
Impact on business objectives:
 Winning good business
 Executing brilliantly
 A place people are proud to work
 Profitable and sustainable
Falling below our expected high standards with respect to operational performance and our behaviour will negatively impact our reputation with customers and other stakeholders. Operating effectively but without integrity will generate mistrust and scrutiny; conversely, acting with integrity but operating ineffectively will raise uncertainty in our ability to sustain and grow our business.
Both these are key to our reputation, failing on either one could therefore significantly impact the economic value of our business, increase the risk of regulatory intervention, and impact on our ability to attract and retain talent.
Key risk drivers
Central to building our reputation are two key drivers - our operational performance and our behaviour.
Anumberof factorscan influenceour ability to mitigate this risk effectively, including: how we effectively manage ouroperational,safetyandfinancial risks; how we ensure compliance with contractual, legal and regulatory requirements; how we ensure that those who work for us behave with integrity and in an ethical manner; how we continually manage our reputation and stakeholder relationships; and how we ensure that we respond to incidents in a transparent and truthful manner.
The critical area of risk for us is where operational weakness or failure and / or unethical behaviour intersects with a highly charged political environment resultinginasignificantnegative impact on the Group's reputation.
Mitigation
Material controls:
 Our Values and Code of Conduct
 Assurance - three lines of defence
 Serco Management System
 Contract / legal review and documentation of Service Delivery Requirements
 Standardised Divisional Performance Reviews
 Appropriately skilled and trained resources
Business continuity, disaster recovery, crisis management and communication plans
Current mitigation actions:
 Enhancement of policies on business standards and ethics, including anti- bribery and corruption, protection of human rights, sanctions, adherence to competition law, avoidance of money-laundering,conflictsof interest, and employment of ex-governmentofficials
 Provision of mandatory ethics training to make it clear that Serco does not engage in and will not tolerate unethical behaviour
 Provision of guidance and tools on how our people can avoid this risk
 Embedding of ethical and human rights reviews in our bidding process
 Implementation of processes to monitor and react to emerging issues and developed divisional contingency communication plans
 Implementation of tactical programmes centred on effective reactive responses to operational issues and proactive customer and stakeholder engagement programmes
Future actions:
 Continue to strengthen procedures on due diligence of third parties and ongoing monitoring of those relationships
 Our Values have been refreshed and will be communicated in 2016
Financial risks
Risk: Failure to grow profitably 
Impact on business objectives:
 Winning good business
 Profitableandsustainable
We depend heavily on large contracts with a relatively limited number of major government customers and other public sector bodies and agencies for a substantial proportion of our revenue.
If such customers decrease the amount of business they outsource to us for any reason, or if the relationship with such customers were to deteriorate, or we sustained damage to our reputation, or we were subject to negative publicity, then we could lose business across ourcustomerbase andfacesignificant economic damage. Such damage could also include losing renewals and extensions of existing contracts.
Shortly after this report is published, the UK will hold a referendum on continued membership of the EU. We have contracts worth around 130m a year with European institutions such as the European Commission and the European Space Agency, and it is part of the strategy to build the business we do with European institutions. We believe that if Britain left the EU, it wouldbe moredifficult for usto win EU Government contracts, and we regard this as a risk to the business.
Key risk drivers
Thesustainabilityofour existing andfuturebusinesswithgovernments isdependentonafavourablepolicy ofprivatesectorprovisionof publicservices.
Our government customers are affectedbyfinancial,regulatoryand political constraints or policy changes. A substantial part of our business is, therefore, linked to changes in the globaleconomy,fiscaland monetary policy, political stability, political leadership, budget priorities, and the perception and attitude of governments and the wider public to outsourcing. These could result in decisions not to outsource services or delays in placing work which might adversely impact our pipeline.
Where a healthy pipeline of new business exists, Serco needs to effectively compete for business. Failure to have the critical skills and references, a value proposition thatcustomerswillfindcompelling and a risk appetite appropriate for the markets in which we compete will put Serco at a disadvantage, and put the sustainable growth necessary in our business at risk.
In addition, failure to execute our bids in a professional manner by not understanding the strategic needs of a client, or by mispricing bids, developing unworkable solutions, misunderstanding risks and other bidding failures will also prevent us from achieving our growth ambitions.
Mitigation
Material controls:
 Group strategy market sectors and geographical regions
 Centres of Excellence
 Serco Management System
 Business Lifecycle Gates Process
 Appropriately skilled / trained resources
 Standardised Divisional Performance Reviews
 Contract / legal review and documentation of service delivery requirements
Current mitigation actions:
 Set up Centres of Excellence to critically review the markets and geographies we operate in globally and develop compelling value propositions in each market
 Implemented improved bid management procedures
 Strengthened the criteria, processes and level of scrutiny for management's review of all bids and rebids, and ensured stronger risk management earlier in the bid process to help identify potential onerous performance criteria or contract terms, and transition and operational risks, in advance
 Continued to invest in appointing high calibre people for our key bids, and training our bidding teams to improve competency and performance
Future actions:
 Implement regular pipeline and market reviews
 EmbedCentresofExcellence andreviewsectordrivers,market propositionsandresourceallocations
 Review of Business Development processes, capability and resourcing
 Review governance cycle to ensure lessons learned are embedded
Risk: Financial control and finance IT systems failure
Impact on business objectives:
 Executing brilliantly
 Profitableandsustainable
 A place where people are proud to work
Strongfinancialsystemsandcontrols are critical to the Group's success and underpin many key aspects of our business, from transaction processing to both internal and external reporting.
Financial control failure or prolonged lossoffinancial ITsystemsmay result in: an inability to accurately reporttimelyfinancialresultsand meetcontractualfinancialreporting obligations; a heightened risk of error and fraud; poor quality data leading to poor business decisions and an inability to forecast accurately; and an inability to make critical financialtransactionsthatwould leadtofinancialinstability,potential business losses and negative reputational impact.
Key risk drivers
There are a number of critical elementsdrivingthe riskoffinancial controlandfinance ITsystemsfailure. Theseinclude:afinancegovernance structure that sets the right tone fromthetop;adequatefinancial controls, including access controls to IT systems, which prevent instances of sabotage, fraud and error; the design and subsequent availability of critical financialITsystems; andthe riskof information security breaches (see 'major information security breach' risk below).
Serco must communicate a clear Group Finance strategy supported by robustfinancepoliciesandstandards that are embedded consistently throughout the Group.
Theriskof financialcontroland systems IT failure is largely driven by inadequate controls and processes. If these are poorly designed and complex, they may lead to potential inaccuracies, fraudulent behaviour andinefficientuseofresources.
Thedesignof financialsystemsand access controls should ensure that key financialprocessesandsystemsare adequately protected from sabotage, fraud and error, and that instances of criticalfinancialsystemsorlocations not being available at critical times for prolonged periods is minimised.
Mitigation
Material controls:
Standardisedfinancesystems, processes and controls, and reporting
 Group strategy - Finance Transformation Programme
 Serco Management System
 Business Lifecycle Gates Process
 Appropriately skilled / trained resources
 Standardised Divisional Performance Reviews
 Contract / legal review and documentation of Service Delivery Requirements
 Business continuity, disaster recovery, crisis management and communication plans
 Assurance - three lines of defence
 IT security infrastructure, processes and controls
Current mitigation actions:
Embarked upona majorfinance transformation programme to strengthenthefinancialcontrol environment and to transform financeas awhole, withthe goalof implementing standard processes and data hierarchies and common reporting language
 Updatedthe Group'sfinance strategy and policies
Roll out of the Serco Finance Academy to articulate the future directionoffinanceandset expectations
 Updated the delegated authorities matrix
Reshaped thedesign offinancial systems and access controls
Strengthenedthe financeteam and developed of a new Finance Compliance Assurance programme
Future actions:
 Financetransformationprogramme willcontinuetoaddressthe Group'sprocesses,targetingthe improved effectiveness ofits sharedserviceoperation
 Reviewofcontingencyplansinplace, includingdatarecoveryprocedures andbusinesscontinuityplans
 Create of a Corporate Shared Services Crisis Management Team and Business Continuity Plan
 Ensure regulartestingof back-upsystems
Operational risks
Risk: Major information security breach
Impact on business objectives:
 Winning good business
Executing brilliantly
Profitableandsustainable
Weandourappointedthirdparty serviceprovidersandsub-contractors arevulnerabletoamajorinformation securitybreachresultinginthelossor compromiseofsensitiveinformationor wilfuldamageresultinginlossofservice.
A major information security breach couldhavea significantnegativeimpact on our reputation and on the security of our customers. This impact could result in the loss of new or existing business bydisqualificationfromfuturework, contractterminationandheavyfinancial penalties causing a negative impact on our strategic objectives.
Suchbreachesarecostlyto rectify andcoulddiluteshareholder returns and result incriminalorcivilaction; contractandbusiness external accreditationsbeingwithdrawn;and significantmediascrutiny, all ofwhich could materiallyadverselyaffectthe business,financialcondition,results ofoperationsandprospects.
Key risk drivers
Thisisaheightenedrisk,particularlywith respecttogovernmentcontracts,dueto thesensitiveandconfidentialnatureof governmentdatathatwehandle.
Wecollectandretainconfidential information in computer systems regarding our business dealings and those of our customers, service end- users and suppliers. We provide high profileservices,which addstoour attractiveness as a potential target.
The threats facing sensitive information managed by the Group have increased withmaliciousandhighprofile attacks against major brands around the globe by well-known 'hacktivist' groups. Alongside this threat is the moreinsidiousand lowprofileattack instigated by certain foreign bodies and their proxies to obtain information for defence or economic advantage.
The secure processing, maintenance and transmission of information, and compliance with restrictions on the handling of sensitive information (including personal and customer information) is critical to our operations.
Mitigation
Material controls:
 Serco Management System
 Governance structure
 IT security infrastructure, process and controls
 Business Lifecycle Gates Process
 Business continuity, disaster recovery, crisis management and communication plans
 Appropriately skilled / trained resources
Current mitigation actions:
 Implemented information security policies and standards
 Implementation of Cyber Defence Programme
 Attainment of Cyber Essentials Plus (CES+)certificationintheUK
 Mandatorysecurityawarenesstraining andsecurityawarenesscampaigns
 Internal and external vulnerability scanning, risk and security impact assessments, and third-party due diligence assessment and penetration testing
 Implemented Computer Security Incident Response teams
Future actions:
Continued investment in Cyber Defence Programme to provide:
 Better visibility, monitoring and control of our security infrastructure
 A Global Security Operations Centre equipped with security software and tools to monitor network and systems, and to prioritise, remediate and repel attacks and then report and manage response on a Group-wide basis
 Feedback and monitoring of activities to drive user awareness and behaviour
 Enhanced awareness training to key personnel globally
Risk: Catastrophic event
Impact on business objectives:
 Winning good business
 Executing brilliantly
 A place people are proud to work
Due to the nature of the services that the Group provides, many of our operations, if not properly managed, entailtherisk ofsignificant harmto employees, third parties, members of the public or the environment.
In the event that such a catastrophic event is found or perceived to be caused by the negligence of the Group, this could result in claims for personal injury, wrongful death or property damage by customers, subcontractors, governments, employees or members of the public, which could lead to the payment of extensive damages and result in significantadversepublicity and reputational harm.
Certain events, including those arising as a result of third party acts such as acts of terrorism or war, are not within the Group's control, but may still result inlossesand significantimpacton customers and the public.
Prolonged disruption to service delivery due to an ineffective response to catastrophic events will adversely impact the Group's reputation. Such adverse publicity and reputational harm could lead to loss of business.
Key risk drivers
Some of our operations are particularly high-risk; these include nuclear operations, aviation, rail, marine and custodial services. Although these are highly regulated, these carry inherentsignificanthealth,safetyand environmental (HSE) risks, and the Group is exposed to the risk of material losses, liabilities and reputational damage from a catastrophic event, for example a major incident or accident.
Anumberof factorsmayinfluence this risk, including: capability and experience in delivering services in high-risk sectors; an organisational culture that prioritises HSE management; robustness of safety management to support safety critical industries; ability to assess, prepare for and manage safety requirements; and the impact of external factors (for example regulatory change, war, terrorist act); and robustness of business continuity plans and crisis management.
Mitigation
Material controls:
 Group strategy
 Safety management systems
 Serco Management System (SMS)
 Business Lifecycle Gates Process
 Governance structure
 Business continuity, disaster recovery, crisis management and communication plans
 Appropriately skilled / trained resources
 Contract / legal review and documentation of service delivery requirements
 Assurance - three lines of defence
 Our Values and Code of Conduct
 Insurance
Current mitigation actions:
 Implementation of HSE strategy withclearlydefinedobjectivesand performance targets and safety oversight structures and governance
 Policies, systems and procedures embedded in the SMS
 Implementation of competency framework and mandatory training programmes
 External and internal audits to confirmtheeffectivenessof these controls
Future actions:
 Regular review of processes and assurance of the controls to ensure continuous improvement
 Review and update of crisis management plans
Risk: Misreporting of performance 
Impact on business objectives:
 Winning good business
 Executing brilliantly
 A place people are proud to work
There may be incidents of employees not complying with the Group's policies, which might result, for example, in accounting irregularities or accounting misstatements, and failures in the accurate monitoring and reporting of contract performance. This may result in inaccurate performance and billing information being provided to Serco management, our customers and other stakeholders.
If the misreporting is deliberate, it may constitute fraud, and the Group may be subject to litigation, inquiries or investigations that could divert management time and resources, and resultinpenalties,fines,sanctions, variation or revocation of permissions and authorisations, suspension or debarment from doing business with government customers.
Accidental or deliberate misreporting ofoperational,regulatoryandfinancial performance, both internally and externally, would result in reputational damage, loss of goodwill or contracts.
Key Risk Drivers
The reporting of operational performance and its accuracy is an inherent risk that is increased due to the large number of employees, geographical diversity and the diversity of the operations that we run.
As a result, we are exposed to reputationalandfinancialrisks associated with employee errors, system errors, misunderstanding of requirements, inadequate quality of service provision and deliberate acts of misreporting of performance.
Mitigation
Material controls:
 Serco Management System
 Our Values and Code of Conduct
 Business Lifecycle Gates Process
 Contract / legal review and documentation of service delivery requirements
 Assurance - three lines of defence 
 Appropriately skilled / trained resources
Current mitigation actions:
 Following allegations in 2013, in relation to the Company's prisoner escort and electronic monitoring contracts with the Ministry of Justice, that the Group had overcharged the UK Government as a result of misreporting, the Group entered into a process of corporate renewal designed to mitigate the underlying risks of misreporting. Through the Corporate Renewal Programme, Group-wide controls that mitigate this risk are being implemented and are being embedded. These measures were introduced to reinforce the importance of data integrity and factual reporting down to the individual level, and diminish the risks in interpretation and understanding of our obligations.
Future actions:
 Contract management obligation mapping process to be implemented and used by all material contracts
 Compliance assurance programme to include review of data integrity compliance
 Review of annual performance review process to ensure incentives are aligned with our Values
Legal and compliance risks
Risk: Contract non-compliance and contract non-performance
Impact on business objectives:
 Winning good business
 Executing brilliantly
 Profitableandsustainable
Our success depends on our ability to win and successfully deliver contracts that balance risk and reward. If we fail to negotiate performance criteria and contract provisions that can be delivered at the right price, or we do not fully understand and mitigate the risks involved, or we do not put in place appropriate capabilities required to deliver against our contractual obligations, contracts that we win are more likely to suffer from poor performance and may result in compliance challenges.
Not meeting our contractual obligations through either non-compliance with contractual requirements and / or failure to meet agreed service levels may resultinsignificantfinancialorother penalties being levied, and in extreme circumstances, the termination of a contract with related compensation arrangements, which could extend to regulatory or other investigations. Apartfromfinancialdetriment,such failures could adversely affect our reputation and our ability to win new business.
Key risk drivers
There are a number of critical elements driving the risk of contractual non- compliance and non-performance, these include: failing to negotiate service levels and contract provisions that are appropriate for the level of reward; misunderstanding and / or not complyingwithcontractualobligations, changes of scope, or incorrectly evaluating contractual assets; failure to properly manage contractual and operationalrisks;havinginsufficient transparency of performance and lack of capability (systems and people) to continually deliver against agreed service levels; and failure of sub-contractors and other suppliers in the performance of their obligations.
Contracted services are delivered through direct delivery of services, through the use of sub-contractors, or through joint venture consortium partners. As a result, these drivers apply to us as well as our sub-contractors or consortium partners, where they do not have the right expertise, tools and resources to manage and monitor compliance with contract obligations and expectations adequately.
These drivers span the full business lifecycle, including the bidding, transformation and operational phase through to contract close, and can resultfrominsufficientdiscipline with respect to the development, implementation and adherence to corporate business processes, and inadequate programme governance.
Mitigation
Material controls:
 Serco Management System (SMS)
 Our Values and Code of Conduct
 Assurance - three lines of defence
 Business Lifecycle Gates Process
 Contract / legal review and documentation of Service Delivery Requirements
 Appropriately skilled / trained resources
 Standardised Divisional Performance Reviews (DPR)
Current mitigation actions:
 Revision of Group policies and governance for bidding, transition, contract management, risk management and compliance
 Implementation of a new Compliance Assurance Programme to monitor compliance of contracts with respect to the SMS requirements
 Roll-out of SMS self-assessment questionnaires to check compliance against SMS requirements
 Business lifecycle gates process updated to include a requirement for make versus buy decisions (i.e. hire of staff versus use of sub-contractors)
 Targeted investment in the recruitment and training of staff to improve the capability of bid and contract management staff. This training provides contract managers with awareness of contract management requirements and the SMS requirements
 Trained key staff on the new risk management life cycle processes
 Roll-out of standardised DPRs
Future actions:
 Currently implementing the contract management obligation mapping process across the Group. This will be used to document and track all material contractual obligations across all contracts globally
Risk: Material legal and regulatory compliance failure
Impact on business objectives:
 Winning good business
 Executing brilliantly
 A place people are proud to work
 Profitableandsustainable
Operating across different sectors and geographies and working with national and local governments, public sector bodies and agencies, and government-regulated customers, the Group is required to comply with a complex and ever changing legal and regulatory environment. Failing to comply materially with these laws and regulationsmaycausesignificantloss to the Company.
Legal proceedings (including class actions) may be costly and if they are not determined in the Group's favour, may divert management's attention away from the running of the business. Lossesorfinancialpenaltiesresulting from any current or threatened legal actions may have a material adverse effectontheGroup'sfinancial condition, results of operations andcashflows.
Key risk drivers
As a government contractor, the Group is subject to a greater risk of investigation, criminal prosecution, civil fraud, whistle-blower lawsuits and other legal actions and liabilities than companies with exclusively commercial customers.
As we have disclosed before, we are under investigation bythe SeriousFraud Office. InNovember 2013, theUK's SeriousFraud Officeannounced that ithad openedan investigation, which remains ongoing, into our Group's Electronic Monitoring Contract. We are cooperating fully withthe SeriousFraud Office's investigationbut it isnot possible to predict the outcome. However, in the event that theSerious FraudOffice decides toprosecute, the rangeof possible adverse outcomes is any one or a combination of the following:
(i) thattheSeriousFraudOfficeprosecutestheindividuals and/ortheSercoGroupentitiesinvolved-whichmay resultintheindividualsorentitiesinvolveddefending theactionsuccessfully;ortheindividualsandtheentities involvedbeingconvicted,whichmayresultinsignificant financialpenalties,animpactonexistingcontractswith theUKGovernmentandSercobeingsubjecttoaperiod ofdiscretionarydebarmentfromfuturecontractswithUK Governmententities;or
(ii) thatthe SeriousFraud Office andthe relevantSerco Group entities enter into a deferred prosecution agreement(DPA)-whichmay resultinsignificantfinancial penalties and a period of discretionary debarment from future contracts with UK Government entities.
Suchdebarmentwouldbediscretionaryinthesensethat acontractingauthoritymayconsideritnottoberelevant toagivenbidorrebidorthatSercohasprovidedsufficient evidencethatithasaddressedanyissuesidentifiedinaDPA, butwouldalsoinanyeventbelimitedintimeundertheterms ofthePublicContractRegulations2015.
Upon any such conviction or DPA, the amount of additional work given to the Group by the UK Government may be reduced, and the Group may be subject to enhanced scrutiny with respect to its other contracts with the UK Government.
It is possible that further actions beyond those being implemented under the Corporate Renewal Programme may need to be taken by us under the terms of any DPA.
If the Group faces any criminal convictions, debarment consequences or enters into a DPA, any such outcome could resultinsignificantfines andhavea materialadverseimpact on the Group's ability to contract with the UK Government and its reputation which would, in turn, materially adversely affectits business,financial condition,results ofoperations and prospects.
In addition, a criminal conviction of a Serco entity or of one or more of the Group's current or former employees would in certain circumstances allow the Ministry of Justice to re-open the 64.3m settlement agreed in respect of certain issues arising under the Electronic Monitoring Contract. In those limited circumstances, the UK Government may seek additional payments from Serco.
We will continue to cooperate with the Serious Fraud Office'sinvestigation
Mitigation
Material controls:
 Serco Management System
 Assurance - three lines of defence
 Business Lifecycle Gates Process
 Contract / legal review and documentation of Service Delivery Requirements
 Appropriately skilled / trained resources
 Standardised DPRs
Current mitigation actions:
 Improvements to the capability of the organisation to interpret and implement these requirements correctly including accessible legal expertise, subject matter experts and knowledgeable staff and clear policies and procedures on how we manage our legal and regulatory requirements
 Update to the business lifecycle gate process to include a requirement to identify the key material legal and regulatory requirements, and gain legal sign-off by contract and legal and contracts teams augmented by external legal counsel as appropriate
 Identificationofpolicyownersand subject matter experts responsible fortheidentification andtrackingof new and existing requirements
 Staff training on key material legal and regulatory requirements
Future actions:
Anumberofcontrolsarecurrentlybeing putinplacetoincreaseourabilityto mitigatethisrisktheseinclude:
 Review of mechanisms for the identificationandmanagementof key material legal and regulatory requirements
 Development of policy and guidelines on management of key material legal and regulatory requirements
 Implementation of Contract Management App (CMA) used to document and track all material contractual regulatory requirements and seek to ensure our requirements are met at all stages of the contract lifecycle including contract exit
MaterialControls- definedas the Group-wide controlsimplemented across the Groupto mitigate the principal risks:
Appropriately skilled / trained resources
We continue to invest in appointing high calibre people for our bids and our contracts, providing training to improve competency and performance. The recruitmentprocess usesSuccess Profiles thatprovide a globaltemplate for specifyingand presenting therequirements of ajob role andperson specification, making it easier to record and interpret role requirements during each stage of the sourcing and selection process.
Where appropriate, training is provided to inform employees and provide the necessary knowledge and skills to understand and deliver our commitments.
Training needs are analysed and reviewed periodically to ensure training and skills remain up to date and staff are aware and knowledgeable in best practice approaches to their work. Training is provided as a series of learning modules depending on the grade of the employee within the organisation, and specialist training, provided depending on the role.
Assurance - three lines of defence
The Serco Management System (SMS) standards specify the controls with clear definitionof thoseresponsible for ensuringcompliance. To provideassurance that these controls are implemented and effective, we have implemented the three lines of defence, i.e. the business, management assurance and audit.
At the business level, an SMS self-assessment tool is provided to enable managers to assess their compliance with the SMS controls, and plan actions to close gaps. A programme of management assurance then provides comfort that the divisions and functions are managing risks effectively and in compliance with the SMS. Contract reviews are carried out on a periodic basis at contract, business unit and divisional levels so as to ensure greater visibility of contractual performance issues. Operationalimprovement plans arethen updated toreflect the resultsof these reviewsand ensure thecapability of staff andsystems remains fitfor purpose to ensure all contractual obligations continue to be met.
Internal Audit is the third line of defence and provides an independent review (sometimes carried out by independent external parties) of the design and operating effectiveness of controls in place to manage key risks, as well as feedback on risk management and governance processes.
Business continuity, disaster recovery and crisis management plans
All Serco divisions are required to have crisis, business continuity and / or disaster recovery plans that describe the actions to be taken to address crisis situations and the loss or unavailability of physical, personnel and / or information assets. Development of the plans is prioritised by risk exposure and other relevant requirements including high risk or high continuity dependency, contractual, regulatory or legal requirements.
Business Lifecycle Gates Process
Application of the Business Lifecycle Gates Process is mandatory for all bids and contracts.The GateSign-off checklistsdetail the specificsign-off requirements from Gate 0 to Gate 9. To pass through each Gate, the Business Lifecycle Review Team(BLRT) confirms thatthe requirements ofeach relevant SMS Standards have been met and every activity has been completed to the necessary standard. In addition to the BLRT, all bids and contracts are required to carry out independent reviews (such as Black Hats and Gate Reviews) to provide an appropriate standard of assurance and governance across the business.
One of the gate requirements is the development of a contract business plan, which includesthefinancialbudget,defineddeliverables, successmeasuresand key milestones; delivery and progress is monitored and reported against the business plan, with monthly contract reviews with the Client. In addition, a formal Gate 8 (ServiceDelivery, Transformationand Benefits Realisation) Review isrequired to internally review and agree that the contract is delivering its business plan.
Centres of Excellence
To support the delivery of the Group strategy, Centres of Excellence (CoEs) have been set up with the objective of critically reviewing the markets and geographies we operate in globally, our sales propositions and the resources required to be successful. The CoEs develop a compelling value proposition in each market so asto developa sufficientlyrobust pipeline ofnew business.
Contract / legal reviewand documentation of service delivery requirements
Operational teams are required to understand and document all service delivery requirements, including customer, contractual, regulatory or internal Serco requirements. Each operating contract is required to maintain a clear summary of current contractual requirements, prepared by the contracts / legal team. Changes to operating contracts are required to be reviewed, approved by the customer, documented, recorded and stored, managed and maintained by the divisional contract / legal team. 
We are currently implementing the Contract Management Application (CMA) across the Group; this will be used to document and track all material obligations including material contractual and regulatory obligations across all material contracts globally.
Governancestructure
Ourgovernance structure clearly defines rolesand responsibilities at Boardlevel and below to ensure that decisions throughout the organisation are soundly based and risks are appropriately controlled and monitored. The Board is responsible, among othermattersfor,theGroupvisionandstrategy;annualfinancialandoperatingplans; effectiveness of the Group's system of internal control and risk management. Key Board responsibilities are referred to by the Board committees.
The Executive Committee reviews risks, internal control and business assurance to ensure they are effectively managed and reviewed. Our processes of business review are intended to ensure that we meet customer expectations, regulatory requirements and performance criteria. The effectiveness of these processes is the focus of the Corporate Renewal Programme; the implementation of which is overseen by the Board Oversight Committee, which continues to monitor the embedding of the policies and procedures.
Divisional Executive Management Teams ensure appropriate governance and oversightof allaspects ofstaff, operational, financial,business development, customer relations, risk management, ethics and strategic performance of the Division. The Investment Committee provides governance for large or high risk bids, re-bids, acquisitions, disposals and strategic investments that are outside the delegated approval authority of the divisions.
A Global Information Assurance Board provides security leadership and oversight and Enterprise Architecture Boards ensure systems and information security controlsarefitforpurpose
Group strategy
TheGroup strategy setsout the specificsectors and geographicmarkets that Serco will operate in and the key areas we need to focus on in order to deliver our core competencies and become the best run business in our sector.
Aligned with the Group strategy are divisional strategies and functional strategies including the health, safety and the environment, People, IT and Finance strategies.
These strategies outline the vision, the performance targets we have set ourselves and an overview of how we intend to deliver our business objectives. The strategies provide the basis of our business and operating plans, and also the various divisional continuous improvement programmes, rationalisation programmes, and global transformation programmes such as the Finance Transformation and IT Transformation programmes.
Theoverallcoordinationoftheprogrammesisprovidedbya GroupProgramme ManagementOffice(PMO)withinthe office oftheChiefOperatingOfficer,which ensureseffectiveprioritisationandtrackingofbenefitsrealisationtoensure we aredeliveringouroverall Groupstrategy.ThePMOseekstoensure near-term financialanddeliverytargetsare reviewed;programmesareexecutablewithin settimescales;andmilestones,risksand interdependenciesare identifiedand appropriately managed.
Insurance
We maintain insurance policies against losses arising from circumstances such as damage or destruction of physical assets, theft, legal liability for third-party loss and professional advice, and we review the adequacy of our insurance cover at regular intervals to ensure alignment with our operational risks.
IT security infrastructure, process and controls
TheChief InformationOfficer is responsiblefor ensuring thatsystems, processes andcontrols are inplace seek toensure the confidentiality,integrity and availability of sensitive information and the associated information systems that support our business activities. The controls include access control policies to prevent fraud, errors, sabotage and system design and change control procedures to ensure the integrity of data.
Serco has been accredited with the UK Government Cyber Essentials Plus certification;thisprovides confidencetoa numberof ourstakeholdersthat weare appropriately prepared and protected.
We are currently delivering the Cyber Defence Programme which will provide improvements to the UK IT security infrastructure to provide better visibility, monitoring and control of UK security infrastructure, and a Global Security Operations Centre for monitoring and dealing with cyber-attacks across the Group.
Our Values and Code of Conduct
OurValues and Codeof Conduct define thebehaviours we expectfrom staff to ensure we operate in a manner that is aligned with these principles and drives an organisation culture that enforces the Serco brand. The Code of Conduct is supported by corporate guidelines, mandatory training modules (Serco Essentials and Serco Essentials Plus training programmes), the 'Say No' Tool Kit, and the Decision Making Guidance.
Our policies are supported by our Code of Conduct (codeofconduct.serco.com), which applies to all employees from Board Directors to every member of front line staff, and also to suppliers.
Assurance that the Code of Conduct is deployed and is complied with is provided by the divisional in-country ethics teams as are the issues highlighted through the 'Speak Up' process which enables staff to report illegal, dangerous, dishonest or unethical activities anonymously.
In addition, we carry out surveys to understand the effectiveness of these controls in delivering the organisational culture we strive for. The Corporate Responsibility and Risk Committee has responsibility for the review of ethical issues that may arise from our current and future activities.
Safety management systems
Operationsare requiredto workunder defined, documentedsafety management systems (including procedures and work instructions) which are appropriate and proportionate to the nature of the operation's safety risks. Systems and proceduresare reviewed (atleast annually) toensure they reflectmaterial legal responsibilities associated with applicable material laws, regulations, approvals, licences and other material legal requirements, industry codes and best practice, contractual requirements and expectations of regulators and other interested parties. Operations in safety critical areas including rail, aviation, nuclear, marine andcustodial aresubject toregulatory requirements whichinclude specific requirements around safety management systems. These are subject to review and audit by the relevant regulator, typically on an annual basis.
Serco Leadership Model
TheSercoLeadershipModeldefinesthecapabilitiesrequiredat each leadership tier to alignwithourstrategicprioritiesandprovidesasingle,globaldefinition of leadershipthatappliesto allemployees. Itprovidesaclearstructureforour leadershipdevelopment pipelineand helpsustoidentify,selectanddevelop leadershiptalent.Themodelisembedded inourkeypeopleprocesses, including:recruitmentandselection; induction;performance management; leadershipdevelopment;talentreviewsandsuccess planning; internal promotionandappointments.
For our leadership and all our people, successful execution of our business is enabledby clear definitionof what is expectedand the provisionof guidance to meetthose expectations.Our LeadershipModel defines ourleadership capability requirement, aligned to our strategic priorities and applicable to all employees. For Serco, leadership is less about hierarchy and more about behaviour - building trust, relationships, networks, communities and working together.
Serco Management System (SMS
TheSMS defines thepolicies, standards andprocesses to beapplied wherever weoperate. The operatingprocesses reflect theprinciples of cleardelegation of authority and segregation of duties. We continue to improve the SMS standards and processes to ensure they provide clarity on the mandatory controls that the businessis required toimplement to manage ourrisks, but are fitfor purpose for the business.
Through our integrated approach to Corporate Renewal, we have introduced a greaterlevel of transparencywith respect toour SMS internalcontrols. Significant volumes of training have been delivered both in the UK and globally to raise staff awareness of the SMS controls and to understand their roles and responsibilities. We have also continued to roll-out and train key staff in the adoption of a revised Risk Management operating model.
Standardised Divisional Performance Reviews (DPRs)
Divisional and contract performance is reported against a balanced scorecard of metrics contained in the Divisional Performance Review (DPR). DPR meetings are held periodically at different levels across the business and ultimately reviewed bytheGroup ChiefExecutiveOfficer, ChiefOperatingOfficer andChiefFinancial Officeron a monthlybasis. These reviewsenable leadership toassess the operational health of the business on a regular basis.
Standardised finance systems, processes, and controls and reporting
We have implemented a standardised reporting process (including the production of a core set of Management Accounts) to enable line of sight throughout the organisation and a standardised planning and forecasting process to ensure aconsistent approach tobusiness and financialplanning across theGroup. To support the implementation of these standardised processes we have refreshed andupdated the financecontrol procedures andare currently deliveringa Finance TransformationProgrammewhichwill enhanceSAPtoprovide aunifiedfinancial platformwith the aimof providing the abilityto gain instant insightinto our financial position and to carry out real-time planning.
Related Party Transactions (note 39 to the consolidated financial statements on page 232)
Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint venture undertakings are disclosed below. 
Trading transactions
During the year, Group companies entered into the following material transactions with joint ventures:
2015
m
2014
m
Royalties and management fees receivable
-
1.7
Dividends receivable
32.5
34.8
32.5
36.5
The following receivable balances were held relating to joint ventures:
2015
m
2014
m
Current:
Loans and other receivables
1.4
0.1
2015
2014
m
m
Non-current:
Loans and other receivables
7.2
9.0
Joint venture receivable and loan amounts outstanding have arisen from transactions undertaken during the general course of trading, are unsecured, and will be settled in cash. Interest arising on loans is based on LIBOR, or its equivalent, with an appropriate margin. No guarantee has been given or received. No provisions are required for doubtful debts in respect of the amounts owed by the joint ventures.
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and Directors' liability insurance. 
The remuneration of the key management personnel of the Group is set out below in aggregate for each of the categories specified in IAS 24Related Party Disclosures:
2015
m
2014
m
Short-term employee benefits
8.4
8.4
Post-employment benefits
-
0.1
Share-based payment expense
1.1
0.9
9.5
9.4
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee (2015: 19 individuals, 2014: 19 individuals).
Independent Auditor's Report to the members of Serco Group plc
Opinion on financial statements of Serco Group plc
In our opinion:
 thefinancial statements give a trueand fair view ofthe state of the Group'sand of the Parent company's affairs as at 31 December 2015 and of the Group's and the Parent company's loss for the year then ended;
 theGroup financial statementshave been properlyprepared in accordancewith International Financial Reporting Standards (IFRS) as adopted by the European Union;
 the Parent company financialstatements have beenproperly prepared inaccordance with United Kingdom Generally Accepted Accounting Practice, including FRS 101 'Reduced Disclosure Framework'; and
 thefinancialstatements havebeenprepared inaccordancewiththerequirements of theCompaniesAct2006and,as regardsthe Groupfinancialstatements,Article4 of theIASRegulation.
Thefinancial statements comprisethe Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Balance Sheets, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and the related notes 1 to 57.The financialreporting frameworkthat hasbeen appliedin thepreparation ofthe Groupfinancial statementsis applicable lawand IFRS, as adoptedby the European Union.The financial reporting frameworkthat has beenapplied in the preparationof the Parent companyfinancial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101 'Reduced Disclosure Framework'.
Going concern and the Directors' assessment of the principal risks that would threaten the solvency or liquidity of the Group
As required by the Listing Rules, we have reviewed the Directors' statement regarding the appropriatenessof the goingconcern basis of accounting,contained within note 2to the financial statements and the Directors' statement on the longer-term viability of the Group contained within the strategic report, on page 30.
We have nothing material to add or draw attention to in relation to:
 theDirectors' confirmation on page16 that they havecarried out a robustassessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity;
 the disclosures on pages 16 to 29 that describe those risks and explain how they are being managed or mitigated;
 theDirectors' statement innote 2 to thefinancial statements, aboutwhether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identificationof any material uncertaintiesto the Group's abilityto continue to doso over a periodof at least twelvemonths from the dateof approval of thefinancial statements; and
 theDirectors'explanationonpage30astohowtheyhaveassessedtheprospectsoftheGroup, overwhatperiodtheyhavedonesoandwhytheyconsiderthatperiodtobeappropriate,and theirstatementastowhethertheyhaveareasonableexpectationthatthe Groupwillbeableto continueinoperationandmeetitsliabilitiesastheyfalldueovertheperiodoftheirassessment, includinganyrelateddisclosuresdrawingattentiontoanynecessaryqualificationsorassumptions.
We agreed with the Directors' adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's ability to continue as a going concern.
Independence
We are required to comply with the Financial Reporting Council's Ethical Standards for Auditors andwe confirmthat weare independentof theGroup and wehave fulfilledour otherethical responsibilitiesin accordance withthose standards. We alsoconfirm we havenot provided any of the prohibited non-audit services referred to in those standards.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
Risk
How the scope to our audit responded to the risk
Revenue and profit recognition including onerous contract provisions
Revenueandprofit recognitiononcontracts requires significantmanagementjudgement intheassessment of currentandfuture financialperformance.Complex areas in determining the Group's right to recognise revenue and profitinthecurrent periodinclude:
 interpretation of contract terms and conditions, including thebillingandcash flowarrangements
 consideration of onerous contract terms
 recognition and recoverability of pre contract costs
 assessment of stage of completion and forecast costs to complete
TheGroupisrequiredtomakeanassessmentofthestageof completionandcoststocompleteoverperiodsthatcanextend upto15yearsintothefutureinordertoestimatetheonerous contractprovisions.Thepredictionoffutureeventscontains inherentriskandahighdegreeofmanagementjudgement.
At 31 December 2014, the Group recognised provisions for a number of contracts that became onerous of 447.1m to cover the excess of unavoidable costs of meeting the obligations underthe contractsover theeconomic benefitsexpected to be received over the remaining term of such contracts. Such provisions arose predominantly where contractual volume and / or price risk rest with the Group and forecast revenues are largelyfixed.
During 2015, the Group has continued to assess both those contracts for which onerous contract provisions were made at 31 December 2014, and other contracts which may display similar characteristics and potential onerous outcomes. The total onerous contract provision at 31 December 2015 was 302.1m following utilisation of 116.8m, new provisions of 89.1m, release of 93.0m of provisions no longer required and net movement of 7.6m relating to foreign exchange, unwindingofdiscount,andreclassifications.
Refer to notes 2 and 3 for the Group's accounting policy andcriticalaccounting judgementsover revenueand profit recognition and refer to note 30 for detailed disclosures of onerous contract provisions recognised by the Group as at 31 December 2015.
The key procedures we have performed are:
 Where we have taken a controls approach, we tested the operating effectiveness of controls over the contract lifecycle including tendering controls and estimating, contract monitoring, billings and approvals, contract ledger reconciliations and contract forecasting.
 We havechallengedtherighttorecogniserevenue throughreviewofcontractualtermsandassessed management's judgementregardingtheappropriate timingofrevenuerecognition, includingwherea percentageofcompletion basiswasapplied.Weobtained contractforecastsandcomparedtheassumptions tocontracttermsandwhererelevant inspected correspondencewith partiestothecontract.
 We developed an expectation of revenue from contracts wherethe contractsstipulate fixedrevenue ona regular basis or by using external volume data and applying the rates per unit as per the contract to test the revenue recognised by the Group.
 Wheretherevenue isnotbased onafixed amountorfixed rates per unit, we have performed test of details by testing the underlying work order / change orders for the contracts and the actual expenses incurred to provide those services.
 Wechallengedmanagement'sjudgements ofspecific contract forecasts and historic operational costs comparing contract forecasts to past performance versus contractual targets to assess whether contracts are deemed to be onerous and reviewed provisions for anticipated losses. This has included a review and challenge of evidence produced by third party experts, where used by management in determining certain future contract costs and the models for these onerous contracts.
 Forcontractswhereonerouscontractprovisions have beenrecognisedorreleasedduringtheyear, we have assessedwhethertheprovisionsorreleases werea changeofestimatearisingfrom newcircumstances inthe yearorwhethertheyrepresentedthecorrectionofaprior perioderror.
 Wehaveverified capitalisedcontract coststo underlying documentation and assessed the accounting treatment adopted by management
Impairment of goodwill
The Group haspreviouslyrecognisedgoodwillof541.5m allocatedtoitsvariouscashgenerating units(CGUs). In thecurrentyear,the Group hasrecognisedan impairment of87.5mofgoodwillasa resultof worseningcashflows experiencedbytheAmericasdivisioncomparedtothe 2014forecasts.
TheGroup isrequiredto assess goodwillforimpairment onanannual basis. In makingthatassessment, management estimate therecoverableamountsfor theCGUtowhich the goodwillattaches.Thisrequiresmanagement judgementtomake assumptionsinrespectofforecast operatingcashflows and discountrates.Inso doing consideration will be giventoanticipatedrevenuegrowth, cashconversionand wider economicinputstogether with anychangesin theGroup'sstrategy.
Further details on the impairment can be found at notes 11 and 20 and notes 2 and 3 for the Group's accounting policy and critical judgements over impairment of goodwill.
The key procedures we performed are:
 We have challenged the results of management's strategy reviewanditsimplicationsonthecarryingvalueofgoodwill for certain CGUs through our review of the forecasts.
 We challenged management's assumptions within the cash flowforecasts usedin the valuein use calculationsfor CGUs including revenue, growth, discount rates and economic assumptions such as long-term growth rates (by reference to independent data where possible) and by performing tests on historical forecasting accuracy.
 We have challenged the discount rate applied to the separate CGUs by utilising valuation experts, the prevailing Group cost of capital at the year end and our understanding of the future prospects of the Group.
 We have tested the consistency of forecasts used by management for assessment of contracts for onerous contract provisions, recoverability of deferred tax assets and going concern.
 We have challenged the sensitivity of changes to the various inputs into the impairment model by reperformance of the calculations using different levels of discount rates and other inputs.
 We have recalculated the goodwill balance to determine whether changes to the business in 2015 have been appropriatelyreflected.
 We also considered the adequacy of the Group's disclosures in respect of its goodwill impairment testing and whether disclosures about the sensitivity of the outcome of the impairment assessment to reasonably possiblechangesin keyassumptionsproperly reflected the risks inherent in such assumptions
Pension commitments
The Group has a net pension related asset of 115.6m as at 31 December 2015, comprising 1.308.9m assets and 1,196.4m liabilities adjusted by 1.9m for franchise arrangements and 1.2mfor themembers' shareof scheme deficits.The net asset value is based on actuarial assumptions used in the measurement of the Group's pension commitments which involvesjudgementsin relationto mortality,price inflation, discount rates, and rate of pension and salary increases, around which there are inherent uncertainties. Judgement is also exercised in determining whether a pension surplus should be recognised as an asset, and the extent of the Group's pension liability in respect of franchise and other contractual agreements.
Please refer to note 34 which details the valuation of the pension assets and the actuarial assumptions used in measuring the Group's pension commitments. The Group's accounting policy and critical judgement disclosures in relation to recognition of pension assets and liabilities are set out in note 2 and 3.
The key procedures we performed are:
 We evaluated the appropriateness of the principal actuarial assumptions used in the calculation of the Group's pension commitments, using our own actuarial experts, and by benchmarking certain assumptions to independent data.
 As part of our work we reviewed advice received by the Group from its external actuaries and used our actuaries to challenge the advice in relation to the Group's unconditional right of refund and the recoverability of pension surplus amounts.
 Wechallengedcontractspecificpension commitmentsrecorded includingthosearising fromfranchisearrangements.
 We performed substantive audit procedures on the data provided by management to their actuaries, to determine whether it is accurate and complete.
 We have substantively tested pension contributions to and from the pension scheme to determine whether they reflectpayrolldeductionsand pensionpayments.
Changes in risk
In the current year, we no longer present going concern and covenant compliance (for which there was an emphasis of matter) and presentation of exceptional items as risks.
The risk related to going concern and covenant compliance was removed following the successful completion of the Group's rights issue and reduction in the Group's net debt together with the conclusion of the Group's strategy review. The risk with respect to exceptional items was removed as exceptionalitems are significantly lowerand involve a lowerlevel of judgement inthe current year. As a result the impact on our audit strategy and allocation of audit resource has also changed.
Thedescription of risksabove should be readin conjunction with thesignificant issues considered by the Audit Committee discussed on page 105.
Thesematters were addressed inthe context of our auditof the financial statements asa whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Our application of materiality
Wedefinemateriality asthe magnitudeof misstatementin thefinancial statementsthat makesit probable that the economic decisions of a reasonably knowledgeable person would be changed orinfluenced. We use materialityboth in planning the scopeof our audit work andin evaluating the results of our work.
We determined materiality for the Group to be 9m (2014: 20m).
In the prior year, the materiality of 20m was around 3% of adjusted pre-tax loss. Pre-tax loss was basedon adding back netexceptional costs of 661.5m;this base was used toreflect the particular circumstances of 2014, where the exceptional costs were one-off and did not represent the underlying performance of the business.
Aspart of the RightsIssue in April 2015,the Company provided Trading Profitguidance to the marketfor the year-ended 31December 2015 of 90m.Trading Profit is a keymeasure of the business. The requirements of the London Stock Exchange are that any deviation of 10% from their estimate (9m) would necessitate an announcement to the market. As such we considered 9m to be the most important measure for the shareholders and the best measure on which to base our materiality. Our selected materiality is less than 1% of total assets of the Group.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of 0.18m (2014: 0.4m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure mattersthatwe identifiedwhenassessing theoverall presentationofthe financialstatements
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope primarily on the audit work at seven (2014: seven) components, all of which were subject to a full scope audit. The seven components, and the levels of materiality applicable to each component, are described below:
Component
Component auditor used
2015 Materiality 
( million)
2014 
Materiality
( million)
UK Central Government (CG)
No
4.20
4.60
UK & Europe Local & Regional Government (LRG)
No
4.20
3.90
Asia Pacific (AsPac)
Yes
3.85
3.90
Middle East (ME)
Yes
3.50
3.50
Serco Global Services (SGS)
Yes
3.85
3.90
Americas
Yes
3.85
3.90
Corporate
No
3.50
3.50
The scope of work over the components above provided us with 100% coverage over the Group's revenue and net assets.
The CG and LRG divisions were audited by the Group audit team.
The ME division has been audited using a component audit team under instructions from the Group team; in the prior year this was audited directly by the Group team.
The Group audit team continued to follow a programme of planned visits to the component audit teams, visiting America (Americas component), Australia (AsPac component) and the United Arab Emirates (ME component) during the current year audit. During the year we did not visit India (SGS component)however we includedthe component audit teamin our teambriefing, discussed their riskassessment, andreviewed documentation ofthe findings fromtheir work.
In addition to the components described above, we have directed the performance of the audit procedures at the Group's shared service centre in India, including visiting the audit team during the current year audit.
At the Parent entity level we also tested the consolidation process and carried out analytical procedurestoconfirm ourconclusion thatthere wereno significantrisks ofmaterial misstatementof theaggregated financial informationof the remaining componentsnot subject to auditor audit of specifiedaccountbalances
Included within the components above are some joint ventures; the joint venture auditors report to the relevant component teams and we review the work of the component teams in respect of their supervision of the joint venture auditors.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
 the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
 theinformation given inthe Strategic Report andthe Directors' Report forthe financial year forwhichthe financialstatementsare preparedis consistentwiththe financialstatements.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
 we have not received all the information and explanations we require for our audit; or
 adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or
 the Parent company financialstatements are notin agreement withthe accounting records and returns.
We have nothing to report in respect of these matters.
Directors' remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.
Corporate Governance Statement
Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to the company's compliance with certain provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Our duty to read other information in the Annual Report
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:
 materiallyinconsistent withthe information inthe audited financialstatements; or
 apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
 otherwise misleading.
Inparticular, we arerequired to consider whetherwe have identifiedany inconsistencies between our knowledge acquired during the audit and the Directors' statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed.Weconfirm thatwe havenot identifiedanysuch inconsistenciesor misleadingstatements.
Respectiveresponsibilities of Directors and auditor
AsexplainedmorefullyintheDirectors'ResponsibilitiesStatement,theDirectorsareresponsiblefor thepreparationofthefinancialstatementsandforbeingsatisfiedthattheygiveatrueandfairview. Ourresponsibilityistoauditandexpressanopiniononthefinancialstatementsinaccordance withapplicablelawandInternationalStandardsonAuditing(UKandIreland). Wealsocomplywith InternationalStandardonQualityControl1(UKandIreland).Ourauditmethodologyandtoolsaimto ensurethatourqualitycontrolproceduresareeffective,understoodandapplied.Ourqualitycontrols andsystemsincludeourdedicatedprofessionalstandardsreviewteamandindependentpartnerreviews.
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to thecompany'smembersthosematterswearerequiredtostatetotheminanauditor'sreportandfor no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Scope of the audit of the financial statements
Anaudit involves obtainingevidence about the amountsand disclosures inthe financial statements sufficienttogive reasonableassurancethat thefinancial statementsarefree frommaterial misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the Parent company's circumstances andhave been consistentlyapplied and adequatelydisclosed; the reasonablenessof significant accountingestimatesmadebytheDirectors;andtheoverallpresentationofthefinancialstatements. Inaddition, weread allthe financialand non-financialinformation inthe annualreport toidentify materialinconsistencies with theaudited financial statements andto identify anyinformation that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by usinthecourseofperformingtheaudit.Ifwebecomeawareofanyapparentmaterialmisstatements or inconsistencies we consider the implications for our report
Andrew J. Kelly FCA (Senior statutory auditor) for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor London, UK
25 February 2016
Directors' responsibilities statement (page 151)
TheDirectorsareresponsibleforpreparingtheannualreportandfinancialstatements in accordancewithapplicablelaw andregulations.
Companylaw requiresthe Directorsto prepare financialstatements foreach financial year.Under thatlaw the Directorsare requiredto prepare the Groupfinancial statements in accordancewith International Financial Reporting Standards (IFRS) as adoptedby the European Union andArticle 4 of the IAS Regulationand have elected to preparethe Parent Company financial statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework. Under company law the Directors mustnot approve the accounts unless theyare satisfied that they give a trueand fair view of the state ofaffairs of the Company and ofthe profitor loss ofthe Company forthat period.
Inpreparing the ParentCompany financial statements,the Directors arerequired to:
 select suitable accounting policies and then apply them consistently;
 make judgements and accounting estimates that are reasonable and prudent;
 state whether Financial Reporting Standard 101 Reduced Disclosure Framework has been followed, subject to any material departuresdisclosed andexplained inthe financialstatements; and
 preparethe financial statements on thegoing concern basis unlessit is inappropriate to presumethat the Company will continue in business.
Inpreparing the Groupfinancial statements, InternationalAccounting Standard 1requires that Directors:
 properly select and apply accounting policies;
 present information, including accountingpolicies, ina mannerthatprovidesrelevant,reliable,comparableand understandable information;
 provideadditionaldisclosureswhencompliancewiththespecificrequirementsinIFRSareinsufficienttoenableuserstounderstand theimpactofparticulartransactions,othereventsandconditionsontheentity'sfinancialpositionandfinancialperformance;and
 make an assessment of the Company's ability to continue as a going concern.
TheDirectors are responsible for keeping adequate accounting records thatare sufficient to show andexplain the Company's transactionsand disclose with reasonable accuracyat any time the financialposition of the Company andenable them to ensure thatthe financial statements comply withthe Companies Act 2006. Theyare also responsible for safeguardingthe assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
TheDirectors are responsible forthe maintenance and integrity ofthe corporate and financial informationincluded on the Company'swebsite. Legislation inthe United Kingdom governingthe preparation and disseminationof financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
1. Thefinancial statements, prepared inaccordance with International Financial Reporting Standards as adopted bythe EU, givea true andfair view ofthe assets, liabilities,financial position andprofit or lossof the Companyand the undertakings included in the consolidation taken as a whole.
2. The Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
3. Theannual report and financialstatements, taken as a whole,are fair, balanced and understandableand provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
Sir Roy Gardner - Chairman
Rupert Soames OBE - Chief Executive Officer
Edward J Casey, Jr - Chief Operating Officer
Angus Cockburn - Chief Financial Officer
Mike Clasper - Senior Independent Director and Non-Executive Director
Ralph D Crosby, Jr - Non-Executive Director
Tamara Ingram - Non-Executive Director
Rachel Lomax - Non-Executive Director
Angie Risley - Non-Executive Director
Malcolm Wyman - Non- Executive Director

This information is provided by RNS
The company news service from the London Stock Exchange
  END
ACSPGURPWUPQGGC