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Auditor Independence Policy Summary

MICRO FOCUS INTERNATIONAL PLC
POLICY ON AUDITOR INDEPENDENCE
(approved by the Audit Committee at its meeting)

On 6th February 2006

External auditors' independence and use of the audit firm in a non-audit capacity

Introduction

In order to fulfil the Audit Committee's obligations under point 8.52 of its Terms of Reference approved on 27th April 2005, the Smith report published in January 2003 and the requirements of the Combined Code on Corporate Governance published in July 2003, it is recommended that the Audit Committee adopt a formal policy which addresses the independence of the external auditors ("the auditors") in the provision of both audit and non-audit services.

Policy objectives

The primary objective of this policy is to ensure that the auditors are, and are seen to be, independent as identified by the Institute of Chartered Accountants in England and Wales.

Provision of services

Services available from the auditors are classified into

  • audit services
  • audit-related services
  • non-audit services and
  • prohibited services.

Audit services

This comprises work undertaken to provide an audit or review opinion on Micro Focus' financial statements.

In order to ensure an appropriate scope of work, the auditors will present an audit plan annually to the Audit Committee, setting out the proposed audit activity considered necessary to deliver these opinions.

The fees relating to this work will also be presented and agreed by the Audit Committee at the same time. Fees will be assessed on the basis of providing fair value for the services undertaken.

The auditors will be expected to undertake their work effectively and efficiently, using an appropriate balance of junior and senior staff.

Audit-related services

This represents work, generally of an assurance nature, provided by the auditors as a result of their expert knowledge and experience of the Group. It includes reviews required by regulatory bodies, corporate governance reviews, assurance reviews of public documents and the audit of pension and share schemes.

In respect of these services, executive management has discretion to use the auditors without prior consultation with the Audit Committee. However, the nature of and fees associated with that work must be regularly reported to the Committee and, if there is any concern on the part of executive management as to a potential threat to the auditors' independence, the Chairman of the Audit Committee must be consulted at an early stage.

Non-audit services

The auditors must conscientiously consider, before taking on non-audit work, whether the work involves any threats to auditor independence and the appropriate safeguards to eliminate them or reduce them to clearly insignificant levels.

The fees levels payable for non-audit services, individually and in the aggregate, relative to the audit fee will be a material consideration in assessing any threat to the auditors' actual and perceived independence.

Non-audit services include tax advice, valuations, internal audit and consultancy services, corporate finance services, over and above those provided in conjunction with audit and audit-related services.

Executive management are required to select the most appropriate supplier of such services, having regard to the expertise and experience offered and fees charged by alternative suppliers.

All assignments involving a fee exceeding USD 30,000 must be tendered and the best supplier chosen as appropriate on each occasion. In addition, any contract for the provision of non-audit services involving a fee exceeding USD 100,000 shall be referred to the Audit Committee for prior approval.

The auditors and the Company will monitor the total fees charged and chargeable by the auditors in any financial year for non-audit services and collate this information for review by the Audit Committee at each of its meetings.

Prohibited services

The Company will not engage the auditors for services where there is an evident threat to independence or where the work is deemed to or should be carried out by other providers. In particular, the auditors should not:

  • prepare accounting records and financial statements except where this falls within the normal statutory audit mandate or where the work is carried out for Micro Focus subsidiaries and is deemed immaterial;
  • advise on any business decision or
  • be responsible for the design or implementation of changes to the company's infrastructure.

Rotation of audit partners

The auditors are required to adhere to a partner rotation policy in accordance with the requirements of the Institute of Chartered Accountants in England and Wales and which provides an appropriate balance between consistency and independence.

Appointment of the auditors

The Audit Committee will assess the performance of the auditors annually based on service level criteria determined in conjunction with the auditors in advance. Subject to satisfactory performance and the recommendation of the Audit Committee, the Board will recommend the re-appointment of the auditors to shareholders at the Annual General Meeting. If the Audit Committee does not recommend the incumbent audit firm, a tender process will be carried out by the Audit Committee and executive management to select a new firm.

Hiring policy

Micro Focus and the auditors agree that full consultation between the audit partner and Chief Financial Officer should take place before recruiting each other's staff, either on a permanent or temporary basis, and that such consultation should specifically consider the effect of such recruitment, both individually and cumulatively, on the actual or perceived independence of the auditors and relevant ethical guidance published by professional accountancy bodies.

Responsibilities of the auditors

The auditors will maintain a monitoring system that provides reasonable assurance that their independence will not be impaired. The auditors will report annually to the Audit Committee on all aspects concerning independence, including possible conflicts with this policy.

Responsibilities of the Audit Committee

The Audit Committee will determine annually, and report accordingly to the Board, whether it is satisfied that the independence of the auditors has been maintained, taking into account the auditors' statements on independence and the Committee's own enquiries.

Auditor Independence Policy Summary (PDF)

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