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Case study: Johnson Matthey

Angela O'Hara, group assurance and risk director

Johnson Matthey is a leading multinational specialty chemicals and sustainable technologies company with 14,000 employees globally, operating in more than 30 locations.

Immediately after the referendum, Johnson Matthey set up a Brexit working group to give careful consideration as to how best to navigate through the situation. The working group, headed up by a Sector Chief Executive, has 9 functional work streams, each of which is led by a nominated leader who can co-opt people on the streams if functional expertise is required. The 9 streams are: indirect tax, supply chain, regulatory, people and talent, commercial, legal, trade and controls, research development and innovation, and communications.

A dedicated project manager was appointed to assist the Sector Chief Executive to project manage the work streams and who reports their individual progress, as well as the overall progress of the working group, to senior management. Several of the streams work together on issues of common interest. One such collaboration is that between the indirect tax and supply chain streams working together on Johnson Matthey’s response to issues around border controls, tariffs and non-tariffs issues.

Internal audit

Due to a lack of certainty on future trading arrangements with the EU, the internal audit department has not been directly involved in the individual work streams as all streams report their activities in a transparent manner up and through the Brexit project team, Group Management Committee and the board. The audit function placed reliance on the work of the company’s Head of Risk, as well as the Group Assurance and Risk Director’s desk top review, while allocating the function’s narrow resources on other high risk areas.

Although the Group Assurance and Risk Director’s role covers both risk and audit, the focus has been on understanding how the risks were assessed, the governance associated with this risk assessment and the mitigating controls being put in place.

The audit team is developing a readiness assessment to evaluate the organisation’s overall preparedness and that of the individual work streams. In addition, the assessment will determine the level of resources required so the business is fully prepared in the event of a no-deal Brexit.

Scenario planning

The impact of Brexit has been limited but one area that has been of particular concern is that over the rights of their EU workers. The chemicals and sustainable technologies industry needs a large number of skilled and diverse workforce. Johnson Matthey employees several hundred EU nationals and their HR department have increased their communications to these employees on issues such as employment law and immigration policy in case of a transitional Brexit - when employees can apply for Settled Status. Johnson Matthey is awaiting further guidance from the UK government on the rights of EU nationals in the eventuality of a hard Brexit before further assessment is undertaken. The company is considering a range of possible exit scenarios, each coming with possible implications for the business, and as a publicly listed company, Johnson Matthey is required under company law to report material risks to its shareholders. The financial costs of scenario planning are small compared to the consequences of a hard Brexit.

The Brexit working group’s remit is to look at both a transitional arrangement deal and a hard Brexit but the team decided early on that it would focus on the latter scenario and look to mitigate those risks as having the biggest impact to the organisation. The team also considered a possible transitional arrangement but does not expect this to have any impact until its implementation on 1 January 2021. Identification of the risks that Brexit brings for the company will involve an assessment of the impact of custom duties and non-tariff barriers, as well as supply chain disruption; three areas the company is focussing on strongly in case of a hard Brexit. It sought to mitigate these risks by looking at World Trade Organization (WTO) rules around tariffs and by engaging with suppliers early on to look at appropriate stock holding. Other work streams, for example, are considering the possible effects on the organisation’s contractual obligations, and access to EU research and innovation funding through the EU’s Horizon 2020 research and innovation programme and its successor, Horizon Europe.

While recognising smaller organisations simply do not have the resources to assess what the worst-case scenario would mean to their enterprises, Johnson Matthey sought expert advice from professional services firms on employment issues and model tariff duties.

Government support

While several business and trade organisations expressed concern over the level of engagement from government in assisting businesses in preparing for Brexit, Johnson Matthey is actively engaged with the UK government in understanding the potential impact of the various options being considered. It has sought to create a dialogue with government and has specifically targeted certain departments within the civil service to seek clarity on areas of mutual interest. Johnson Matthey has expertise knowledge of rules of origin of material and movement of goods across borders and the UK government has sought their advice on these issues to get a clearer understanding of their current practicalities and the effects a hard Brexit would have.

Advice

The internal audit function’s strategy on Brexit and its associated risk are communicated to the audit committee as part of their detailed coverage of the audit plan. It also provides assurance to the audit committee on the organisation’s preparations for Brexit. To achieve this, the right level of buy-in is required from senior management and the board, as well as acquiring expert advice from key stakeholders and a high level of engagement from government to get a better understanding what the organisation needs to do in case of a hard Brexit.

The internal audit function placed reliance on the information received through the company’s risk management process, while not placing too much reliance on audits. The function makes sure their risk assessment and audit planning process are dynamic and agile enough to react to the latest developments and advises other organisations to prepare for all scenarios, so any problems associated with Brexit are timely addressed.

 

Content reviewed: 2 November 2018