REG - Serco Group PLC - Annual Financial Report <Origin Href="QuoteRef">SRP.L</Origin> - Part 2
21/03/2017 10:35
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Material legal and regulatory compliance failureThe complexity and constantly changing legal and regulatory environment we operate in across our sectors and geographies creates challenges to ensuring that we are compliant at all times to all laws and
regulations. Failure to comply materially with these laws and regulations may cause significant loss and damage to the Group including reputational damage, potential loss of licences and authorisations, as well as prejudicing future bids. Legal proceedings
may be costly and if they are not determined in the Group's favour may divert management attention away from the running of the business for a prolonged period. Uninsured losses or financial penalties resulting from any current or threatened legal actions
may have a material adverse effect on the Group. Strategic objectives impacted: Winning good business, Executing brilliantly, A place people are proud to work, Profitable and sustainable
Key risk drivers:Lack of policy and guidance - may result in a failure to manage Group-wide material legal and regulatory requirements. Staff non-compliance with policies and standards - may result in compliance failures for Group-wide material legal and Mitigation:Material controls:• Serco Management System (SMS)• Serco Essentials training• Third party ethical due diligence procedure• External monitoring - automatic alerts on material enterprise-wide legal and regulatory requirements• Legal case tracker• Compliance Assurance Programme (CAP) reviews• Business Lifecycle Review Team (BLRT) process Current mitigation actions:• Updates to SMS including: Human Rights Policy, Modern Slavery Act 2015, Use of Force and Firearms, Market Abuse Regulations (MAR), and third party ethical due diligence, and BLRT process• Development of Global Data Protection Regulations Programme• Identification of SMS policy owners and subject matter experts • Due diligence checks on our existing customers and suppliers• Development of new Anti-Bribery and Corruption (ABC) Frameworks • Development of Dawn Raid procedure Future actions:• Development of master list of material legal and regulatory requirements by SMS policy owners• Gap analysis of subject matter expert capability within the Divisions for contract-specific legal and regulatory requirements • Process to ensure dissemination of automated alerts to the business
regulatory requirements. Failure to identify and keep up to date with all material legal and regulatory requirements - may result in key subject matter experts within the business not remaining up to date and we then fail to comply with material legal and
regulatory obligations. Inadequate assurance processes - may result in an inability to confirm compliance with legal and regulatory requirements. Lack of legal and regulatory expertise within the business - may result in lack of identification and support
of legal and regulatory risks. Inadequate provision for material legal and regulatory risks in contracts - may result in the failure to provide adequate legal support for material legal and regulatory risks. Contract exit legal/regulatory requirements not
being met - may result in possible legal action and diversion of management attention. SFO investigation - we remain under investigation by the UK Serious Fraud Office (SFO). In November 2013, the SFO opened an investigation into our Group's Electronic
Monitoring Contract. We are cooperating fully with the SFO's investigation but it is not possible to predict the outcome. However, in the event that the SFO decides to prosecute, the range of possible adverse outcomes is any one or a combination of the
following: (i) that the SFO prosecutes the individuals and / or the Serco Group companies involved, who may defend the action successfully or be convicted. This may result in significant financial penalties, an impact on existing contracts and Serco being
subject to a period of discretionary debarment from future contracts with UK Government entities; or(ii) that the SFO and the relevant Serco entities enter into a deferred prosecution agreement (DPA) - which may result in significant financial penalties
and a period of discretionary debarment from future contracts with UK Government entities. Such debarment would be discretionary in the sense that a contracting authority may consider it not to be relevant to a given bid or re-bid, or that Serco has
provided sufficient evidence that it has addressed any issues identified in a DPA, or be limited intime under the terms of the Public Contract Regulations 2015. Upon any such conviction or DPA, the amount of additional work given to the Group may be
reduced, and the Group may be subject to enhanced scrutiny with respect to its other contracts and further actions beyond those being implemented under the Corporate Renewal Programme may need to be taken. If the Group faces any criminal convictions,
debarment consequences or enters into a DPA, any such outcome could result in significant fines and have a material adverse impact on the Group's ability to contract with the UK Government and on its reputation, which would, in turn, materially adversely
affect its business, financial condition, operations 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 and paid in 2013 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
SFO's investigation.
Related Party Transactions (note 38 to the consolidated financial statements)
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 and associates are disclosed below.
Transactions
During the year, Group companies entered into the following transactions with
joint ventures and associates:
Transactions 2016 £m Current outstanding at 31 December 2016 £m Non current outstanding at 31 December 2016 £m
Sale of goods and services
Joint ventures 0.5 0.1 -
Associates 6.2 0.5 -
Other
Dividends received - joint ventures 20.4 - -
Dividends received - associates 19.6 - -
Receivable from consortium for tax - joint ventures 3.2 7.7 -
Total 49.9 8.3 -
AWE Management Limited (AWEML) was formerly a joint venture but in August 2016
there was a change in the AWE Management Limited shareholding structure, with
the Group's shareholding reducing from 33.3% to 24.5% by way of a return of
shares and Lockheed Martin taking a majority holding. Subsequent to the change
in share ownership AWEML has been accounted for as an associate as we continue
to have significant influence. In the prior year, the AWE transactions and
outstanding balances were disclosed within joint ventures below.
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. The only loan amounts owed by joint ventures or associates related
to a single entity which have been provided for in full (see note 11).
Transactions 2015 £m Current outstanding at 31 December 2015 £m Non current outstanding at 31 December 2015 £m
Sale of goods and services
Joint ventures 6.1 0.6 -
Other
Dividends received - joint ventures 32.5 - -
Loans and other receivables - joint ventures - 0.8 7.2
Receivable from consortium for tax - joint ventures 4.2 9.3 -
Total 42.8 10.7 7.2
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 24 Related Party
Disclosures:
2016 £m 2015 £m
Short-term employee benefits 11.9 8.4
Share based payment expense 4.7 1.1
16.6 9.5
The key management personnel comprise the Executive Directors, Non-Executive
Directors and members of the Executive Committee (2016: 20 individuals, 2015:
19 individuals).
Aggregatedirectors'remuneration
The total amounts for directors' remuneration in accordance with Schedule 5 to
the Accounting Regulations were as follows:
2016£m 2015£m
Salaries,fees,bonusesandbenefitsinkindAmountsreceivableunderlong-termincentiveschemes 5.65.6 3.74.7
11.2 8.4
None of the Directors are members of the company's defined benefit pension
scheme.
One director is a member of the money purchase scheme.
Further information about the remuneration of individual directors is provided
in the audited part of the Directors' Remuneration Report on pages 96 to 125.
Directors' Responsibility Statement (page 132)
The Directors are responsible for preparing the Annual Report and financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors are required to prepare the Group
financial statements in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union and Article 4 of the IAS
Regulation and have elected to prepare the Parent Company financial statements
in accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework. Under company law the Directors must not approve the accounts
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for that
period.
In preparing the Parent Company financial statements, the Directors are
required 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 departures disclosed and explained
in the financial statements; and
• prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
In preparing the Group financial statements, International Accounting Standard
1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with the specific
requirements in IFRS are insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the entity's
financial position and financial performance; and
• make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
1. The financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the EU, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company and 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. The Annual Report and financial statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the Company's performance, business model and
strategy.
By order of the Board
Rupert Soames, Group Chief Executive
Angus Cockburn, Group Chief Financial Officer
This information is provided by RNS
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