Provision 29 dry runs: a way to engage the board?

Why are boards doing dry runs?

Over half of the FTSE 350 chairs we spoke to said their boards were planning or had conducted a dry run, with several more suggesting they probably would.  

One audit committee chair at a multinational said that, along with conducting extensive training, they had completed a dry run for one entity in each region, along with central functions, “so that everyone gets to see it”.

Much of the value is in building “muscle memory” in the business for testing and certifying controls, and surfacing potential issues early. 

Simon Henry, Non-Executive Director at BP and former audit committee chair at Rio Tinto, says that while a dry run is certainly useful, it doesn’t necessarily capture everything. “A proper board discussion would suggest that certain controls have to work during the year to be able to say they're still working appropriately at year end,” he explains, therefore requiring ongoing evaluation too. 

Others point to the value of dry runs for the board itself. For example, Mary Reilly, former audit committee chair at Mitie Group, says that writing down the declaration helps crystallise the board’s thinking. 

“The proof is only when you put it on paper, read it cold and ask, ‘have we done enough to make that declaration’? Unless you write it down, it’s very hard to answer,” Reilly explains.

John Ramsay, Audit Committee Chair at Babcock, adds that dry runs can help bring members of the full board more closely into the Provision 29 preparation process, especially when responsibility has been delegated to the audit committee: “Boards haven’t really engaged deeply yet, but there will come a point where you put the declaration in front of them and they will become more focused and ask more searching questions to ensure they discharge their responsibility and are comfortable with the disclosure.”

The dry run would typically involve a two- to three-page summary of the control framework, accounting manual, risk assessments, various relevant policies, and a notice of the work management has done throughout the year, identifying the results of any specific testing, Ramsay says.

“There will still be a certain reliance on the audit committee going into more detail, but the board will have more comprehension of what’s been done. It will be a useful exercise to get them engaged early,” he adds.

The role of the audit committee

Audit committees have naturally played a key role so far, particularly as many are in fact audit and risk committees. 

“The ability to define a control, and get assurance over a control, sits quite neatly with the skills set of audit committees,” says Andrew Kemp, Audit Committee Chair at The Berkeley Group. 

This is certainly the case for financial controls, he adds, and will increasingly need to be for non-financial or operational controls, which may be new territory for committee members.

Challenges could also emerge around the respective roles of the audit committee and, for example, the sustainability committee, which may have oversight over specific controls. 

“It is not for the audit committee to decide the right operational controls. You would expect a different committee to make that assessment. But it is for the audit committee to decide if the structure around them is appropriate,” says Byron Grote, Audit Committee Chair at IHG. 

Overall, he says, the audit committee’s role is to ensure that the whole process is properly structured, and it will probably also be the first line of review for Provision 29. But it is still the board that makes the final assessment.

“There will need to be discussion at board level. It could be that the whole board joins the audit committee discussion, or that there’s a parallel discussion, but the board does need to look at this on a periodic basis to feel comfortable making a statement at the end of the year that the material controls are operating properly, or if there are concerns, hopefully to be able to state that there are compensating controls,” Grote says.

Kemp agrees, arguing that non-execs without a financial background should still be prepared to participate fully. “Every main board director in a listed company should be interested enough in the control system to be able to stand behind this statement. You don’t have to be an expert in everything, and many of the controls have nothing to do with financial matters, but you do need to be conversant enough to participate.”

Engaging the board

In some cases, the board needs a little push. “There were a few groans to start with,” says one audit committee chair. “I’ve been able to get them to focus, but if I had not led this, they would not have engaged with it, because no one else was championing it. You have to be on top of this.”

Aside from dry runs, then, how are audit committee chairs engaging boards?

“It’s part of my job to educate them on what we’re declaring, and make sure they really understand the principal risks,” says Reilly. “Are they really cognisant of what they’re signing off on, and why?” 

Jock Lennox, Board Chair at Johnson Service Group and former audit committee chair at Barratt Redrow, says that management can help in this education process too: “I asked the head of audit [at Barratt] to spend time with each non-executive, to talk through the logic of what we’re doing, making sure they understood and agreed, and giving them the chance to feed back.” 

Executive engagement has another value, in helping both the main board and the wider business take the Provision 29 process more seriously.

“I always encourage the chief executive to sit in on audit committee meetings,” says Ramsay. “It’s important they are seen to attend because of the message it sends to the organisation.” 

The more that executive and non-executive directors appreciate that a well-defined control and assurance framework is really about running the business better, rather than regulatory compliance, the more engaged they are likely to be.