audit committee network audit committee network accounting developments iain selfridge january 2018...
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PwCPwC
Audit Committee Network
PwC
Accounting developments
Iain Selfridge
January 2018
Slide 2
PwCPwC
Agenda
Audit Committee Network
Year end reminders IFRS updates
Future changes to FRS 102
Other resources/communications
1 2
3 45
January 2018
Slide 3
PwCPwC
Year end reminders
New accounting standards
Accounting policies
Business combinations
Alternative Performance
Measures
Judgements and
estimates
Strategic report
Cash flow statements
Pensions
www.pwc.co.uk/aruJanuary 2018Audit Committee Network
Slide 5
PwCPwC
Impact of new standards:What does the standard (IAS 8) actually say?
30. When an entity has not applied a new IFRS that has been issued but is not yet effective, the entity shall disclose:
a) this fact; and
b) known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity's financial statements in the period of initial application.
31. In complying with paragraph 30, an entity considers disclosing:
[…]
b) the nature of the impending change or changes in accounting policy;
[…]
e) either:
i. a discussion of the impact that initial application of the IFRS is expected to have on the entity's financial statements; or
ii. if that impact is not known or reasonably estimable, a statement to that effect.
January 2018Audit Committee Network
Slide 6
PwCPwC
What has the FRC said?
[…] Given their significance it is important for companies to disclose the likely impact of the new accounting standards on their financial statements as soon as they can be reliably measured. The FRC encourages companies to provide clear disclosures with reference to their existing accounting policies. In the last set of financial statements before the implementation date we expect to see detailed quantitative disclosure regarding the effects of the new standards. We expect companies to have made a step change in the quality of their disclosures this year, particularly in respect of IFRS 15 and IFRS 9.
These quantitative disclosures should be accompanied by informative and sufficiently detailed explanations of the company’s analysis. Disclosures should be tailored to the company’s specific circumstances and transactions, and describe any key judgements that management will need to make in complying with the new standards.
Open letter to audit committee chairs and finance directors, 10 October 2017
January 2018Audit Committee Network
Slide 7
PwCPwC
Thematic reviews –Alternative Performance Measures
FRC will continue to question companies where:
• Definitions and good explanations are not given of APMs used
• A reconciliation to amounts appearing in the financial statements is not disclosed
• APMs are displayed with greater prominence, or earlier in narrative, than IFRS measures
• A term such as non-recurring is used and that description does not appear to apply in the circumstances
• No explanation is given for changes made in the APMs used
Alternative Performance
Measures
January 2018Audit Committee Network
Slide 8
PwCPwC
Thematic reviews –Pensions
FRC will continue to question companies where:
• Sufficient information has not been provided about risks, how future cash flows may be affected and valuation of unquoted plan assets
• Net pension asset is recognised, or there may be a future surplus, and there is no disclosure of judgements
• There is an asset-liability matching strategy without description
• Strategic report does not refer to pension scheme
• Plan assets of different nature/risk have been aggregated
Pensions
January 2018Audit Committee Network
Slide 9
PwCPwC
Thematic reviews –Judgements & estimates
FRC will continue to question companies when they do not see:
• Clear differentiation of estimates from judgements
• Detailed disclosures of the judgements that have the most significant impact
• Company-specific disclosures that pin-point areas of uncertainty – not boilerplate
• Quantification of the specific amounts of estimates at risk of material adjustment within the next year and assumptions underlying estimates
• Sensitivity analysis or disclosure of the range of reasonably possible outcomes
Judgements and
estimates
Audit Committee Network January 2018
Slide 11
PwCPwC
January 2018Audit Committee Network
2018/19 Thematic reviews
Corporate reporting
• Financial Services
• Oil and Gas
• General Retailers
• Business Support Services
Priority sectors
• Target: smaller listed and AIM quoted company
• The effect of new IFRSs on IFRS 15 and IFRS 9 on companies’ 2018 interim accounts
• Expected effect of IFRS 16
• Effects of Brexit on companies’ disclosure of potential risks and uncertainties.
PwC Slide 11
PwCPwC
Dividends under the microscope
How has practice
developed (2016/17)?
132 FTSE 350
companies enhanced
disclosures
48% of FTSE 100 disclose
distributable profits
Only 30% of FTSE 250
now disclose distributable
profits
Improved risk and policy
disclosures
Improved disclosure of
policy application
Source: FRC Lab implementation study: Disclosure of dividends –policy and practice (October 2017)
January 2018Audit Committee Network
Slide 12
PwCPwC
Dividends under the microscope
How could disclosures be improved further?
Identifying the explicit links between dividend, business model, principal risks and viability
Enhancing disclosure on constraints
Explaining more fully what policy means in practice
Enhancing understanding of structure and process
Source: FRC Lab implementation study: Disclosure of dividends –policy and practice (October 2017)
January 2018Audit Committee Network
Slide 13
PwCPwC
January 2018Audit Committee Network
What’s new: IFRS amendments effective this year
Standard Nature of amendment
Amendments to IAS 12 Income tax on recognition of DTA for unrealised losses
Amendments to IAS 7 Statement of cash flows
Annual improvements 2014-2016 cycle
Disclosure of interests in other entities
Slide 16
Subject to EU endorsement
PwCPwC
January 2018Audit Committee Network
What’s new: amendment to IAS 7Might be different to current net debt reconciliation
Effective 1 January 2017
20x1 Cash flows Non-cash changes 20x2
Acquisitions Foreign
exchange
Fair value
changes
Long-term borrowings 22,000 (1,000) – – – 21,000
Short-term borrowings 10,000 (500) – 200 – 9,700
Lease liabilities 4,000 (800) 300 – – 3,500
Hedges of long-term
borrowings
(675) 150 – – (25) (550)
Total liabilities from
financing activities
35,325 (2,150) 300 200 (25) 33,650
Slide 17
PwCPwC
January 2018Audit Committee Network
What’s new: amendment to IAS 7But you could do this…
Effective 1 January 2017
20x1 Cash flows Non-cash changes 20x2
Acquisitions Foreign
exchange
Fair value
changes
Long-term borrowings 22,000 (1,000) – – – 21,000
Short-term borrowings 10,000 (500) – 200 – 9,700
Lease liabilities 4,000 (800) 300 – – 3,500
Hedges of long-term
borrowings
(675) 150 – – (25) (550)
Total liabilities from
financing activities
35,325 (2,150) 300 200 (25) 33,650
Cash and cash
equivalents
(1,250) (225) 75 (25) (1,425)
Net debt 34,075 (2,375) 375 175 (25) 32,225
Slide 18
PwCPwC
January 2018Audit Committee Network
What’s in the pipeline?
Standard 2018 2019 2020 2021
IFRS 9Financial instruments
Effective
IFRS 15Revenue from contracts with customers
Effective
IFRS 16Leases
Effective
IFRS 17Insurance contracts
EU endorsement
Effective
IFRIC 23Uncertainty over income tax treatments
EUendorsement
Effective
REMEMBER: Disclosure of new accounting standards (IAS 8)!
Slide 19
PwCPwC
January 2018Audit Committee Network
Future changes to FRS 102
FRED 68
Gift aid
Impact ofnew
standards
Simplifications
on Director loans
Fewerintangibles
in a BC
Investmentproperty
choices
Morebasic FI
FinancialInstitution definition
Changes in FRS 102
FRED 67 effective date
1 Jan 2019 with early adoption
Slide 21
PwCPwC
Other resources / communicationssee www.pwc.co.uk/aru
Corporate Reporting InsightsPwC Inform IFRS News
In depth / In briefLive webcasts IFRS Talks
Corporate Reporting BlogIFRS series on PwC Inform Youtube channel
PwC Blog
PwC IFRS Manual of Accounting
MoA
January 2018Audit Committee Network
Slide 23
PwCPwC
Corporate Governance and Reporting update
Mark O’Sullivan/John Patterson
Audit Committee Network December 2017
Corporate Reporting/Governance
Arran Jones
Slide 24
PwC
Agenda
Priorities for this year’s reporting
Principal and other developments
Audit Committee Network January 2018
Slide 25
PwC
Navigating the stakeholder agendaPrincipal developments
Stakeholders and the impact of business on society
Government Green Paper on corporate governance reform and response
FRC consultation on Guidance on the strategic report
Non-financial reporting regulations
Law FRC Guidance
FRC consultation on the UK Corporate Governance Code and Guidance on board effectiveness
Combination
Secondary legislation – s172 reporting requirement
GC100 Guidance on section 172
Guidance
Final
Key
Still subject to consultation/or not yet issued
January 2018Audit Committee Network
Law
Investment Association/ICSA Guidance on stakeholder engagement
Guidance
Slide 27
PwC
Navigating the stakeholder agendaOther developments and initiatives
Stakeholders and the impact of business on society
Board diversity Website disclosures based on social impact of companies
Task-force on Climate-related Financial Disclosure (‘TCFD’)
Guidance
Davies and Hampton-Alexander on gender diversity
Parker on ethnic diversity
Guidance
DTR 7.2.8AR on disclosure of diversity policy for the main and executive boards
Regulation
Modern Slavery Act
Law
UK tax strategy
Law
Gender pay gap
Law
Prompt payment policy
Law
January 2018Audit Committee Network
Slide 28
PwC
Corporate governance reformDirectors’ duties debate
What does it mean to ‘promote the success of the company’?
[Companies Act s172]
A director must “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”
• and in doing so have regard (amongst other matters) to:
- the likely consequences of any decision in the long term
- the interest of the company’s employees
- fostering business relationships with suppliers, customers and others
- the impact of operations on the community and the environment
- maintaining a reputation for high standards of business conduct
- the need to act fairly as between members of the company
January 2018Audit Committee Network
Slide 29
PwC
Corporate governance reformPrincipal developments – outcome of Government Green Paper
Code consultation – November 2017 and effective for periods beginning January 2019Secondary legislation – laid by March 2018 and effective for periods beginning June 2018 onwards
• Code or Guidance for large private businesses
• Governance reporting for private companies (> 2,000 employees?)
• Reporting: secondary legislation to have all companies (>1,000 employees?) report on implementation of s172
• Stakeholder engagement mechanisms -employees: UK Corporate Governance Code provision for premium listed companies to have one from: o Stakeholder panelso Designated non-executive directoro Representative on board or board
committee
• Guidance: from Investment Association/ICSA on engagement & GC100 on s172
Stakeholder voice
• Public register of cases of ‘significant dissent’, maintained by Investment Association
• Disclosure of ratio of CEO pay to average UK employee
Executive pay
Private company governance
January 2018Audit Committee Network
Slide 30
PwC
Navigating the stakeholder agendaPrincipal developments – non-financial reporting regulations
Now applicable – for periods beginning on or after 1 January 2017
Scope
Requirements
EU Public Interest Entities with > 500 employees, with exemptions for certain subsidiaries
‘Non-financial information statement’ within the strategic report covering (‘to the extent necessary for an understanding of the company’s development, performance and position, and the impact of its activity’):
• Environmental matters
• Employees
• Social matters
• Respect for human rights
• Anti-corruption and anti-bribery matters
Italics = new requirement compared to strategic report regulations
January 2018
Slide 31
In relation to these areas:
Policies, including due diligence on them and outcomes
Principal risks, including likely adverse impacts of business relationships, products or services
Audit Committee Network
PwC
Navigating the stakeholder agendaPrincipal developments – FRC consultation on Guidance on the strategic report
Three main themes
Latest indications on timing – middle of 2018; could see initial recommendations around non-financial reporting regulations first
• Reflecting s172 debate, with new focus on:
Value generation and preservation
Long-term reporting
• Annual report content to be judged on materiality to shareholders
Updating for the non-financial reporting regulations
• ESMA Guidance on Alternative Performance Measures
• Consistency of commentary in the business review with the segmental analysis
• Consistency of KPIs with remuneration and how the business is run
• Discouragement of the use of the ‘commercially sensitive’ exemption from disclosure
Other areas of focusNew regulationSection 172
January 2018Audit Committee Network
Slide 32
PwC
Navigating the stakeholder agendaPriorities for this year – Section 172 and engagement
ICSA/Investment Association guidance
Areas to cover Related comments
Who are the key stakeholders?
• Company-specific, and may change over time – reflect in reporting
• Outline process used to make decisions, based on impact and materiality
How does the board hear from them?
• Explain engagement processes concisely, for ongoing and ad hoc instances
• Consider disclosing outcome of any engagement effectiveness assessment
What were the outcomes of the engagement with stakeholders – what impact did they have on the board’s decisions?
• Report a fair, balanced and understandable appraisal
• Aim for a mix of qualitative and quantitative information
ICSA/IA The stakeholder voice in board decision making, pages 28 – 29
January 2018Audit Committee Network
Slide 34
PwC
Navigating the stakeholder agendaPriorities for this year – Section 172 and engagement
FRC encouraged content elements
An entity could set out who it considers its major stakeholders to be, how an entity engages with those stakeholders and how the interests of major stakeholder groups and the matters set out in section 172 were taken into account when making significant strategic decisions in the period.
FRC draft Guidance on the strategic report, paras 7.10 and 7.18
An entity could describe how it develops and maintains its relationships with its key stakeholders. This could include the regular interactions it has with them, how it communicates with them and how regard is had to their interests in key decisions. For instance, there may be a non-executive director who has specific responsibility for considering the interests of employees and other stakeholders.
January 2018Audit Committee Network
Slide 35
PwC
Navigating the stakeholder agendaPriorities for this year – Section 172 and engagement
Early examples – Stakeholder engagement (Marks & Spencer annual report 2017)
January 2018Audit Committee Network
Slide 36
PwC
Navigating the stakeholder agendaPriorities for this year – Section 172 and engagement
Early examples - Board activity (SSE annual report 2017)
January 2018Audit Committee Network
Slide 37
PwC
Navigating the stakeholder agendaPriorities for this year – non-financial reporting regulations
Points of focus
Areas to cover Related comments
Structure of reporting • Fully integrated, as per the draft FRC Guidance on the strategic report?
Non-financial risks • Relationship with other principal risks?
Revisit disclosures on all fiveareas of content, including the new one on anti-corruption and anti-bribery matters
• Are all material matters disclosed, including material impactsof the business
Consider what due diligence on how policies are operating needs to be disclosed
• ‘Due diligence’ on policies has been promoted from the FRC Guidance and generates debate as to how much is enough
January 2018Audit Committee Network
Slide 38
PwC
Navigating the stakeholder agendaPriorities for this year – value generation and preservation
Points of focus from draft FRC Guidance on the strategic report
A critical part of understanding an entity’s business model is understanding its sources of value, being [its] key resources and relationships… In identifying [these it] should consider both its tangible and intangible assets and consider those resources and relationships that have not been reflected in the financial statements.
FRC draft Guidance on the strategic report, paras 7.17 and 7.21
(Encouraged content element)
An entity could describe how its allocation of resources will support the achievement of its strategy, generate and preserve value and will impact on its stakeholders where material to an understanding of the entity’s future prospects. This could include a, quantitative and qualitative analysis of allocation decisions made (such as investments) and their impact during the year.
January 2018Audit Committee Network
Slide 39
PwC
Navigating the stakeholder agendaPriorities for this year – value generation and preservation
Investment Association Long-term Reporting Guidance on capital management strategy
IA Guidance, para 23
• The objectives and investment priorities of the company’s capital management strategy, including
an explanation of the key criteria and underlying assumptions used to assess capital allocation
opportunities
• The policies governing what the company regards as capital, including an explanation of the
company’s approach to distinguishing between maintenance capital, and capital that is used for
growth
• The process by which capital allocation decisions are made by the company, how often policies
regarding capital management are reviewed, and how performance of these decisions are assessed
over the long term
• The role of the Board in setting the Capital Management Strategy, with discussion regarding its
responsibility in providing oversight over final capital allocation decisions and reviewing past
performance
January 2018Audit Committee Network
Slide 40
PwC
Navigating the stakeholder agendaPriorities for this year – long-term reporting
Viability statements
FRC Annual Review of Corporate Reporting, page 29
“…improvements have not been widely identified in the quality of companies’ viability statements, and investors are therefore getting limited value from this disclosure. Investors would welcome further explanation of the factors taken into account when making an assessment of viability including explaining why a company has selected its period of assessment and how this aligns to the business cycle, the potential exposure of different parts of the business to one or more risks materialising, and an explanation of the extent of resilience of the company as a result.”
January 2018Audit Committee Network
Slide 41
PwC
Navigating the stakeholder agendaPriorities for this year – long-term reporting
1 2 3
4 5
7 8 9
Show relevance & priority of principal risks6
Investment Association Guidance on viability statements
Consider time horizon beyond 3 – 5 years
Distinguish prospects (long term plan) from viability
Explain period chosen through more than strategic (medium term) plan
Consider current state of affairs & assumptions in plan
Be clear on impact on sustainability of dividend policy
Discuss specific mitigating or remedial actions
Be clear on scenarios tested and outcomes
Consider carrying out reverse stress testing
January 2018Audit Committee Network
Slide 42
PwC
Navigating the stakeholder agendaPriorities for this year – long-term reporting
FRC draft Guidance on the strategic report
Three encouragements to provide a longer-term view on risks
‘Entities should communicate relevant information that enables shareholders to assess the factors that may have an impact on the long-term success of the business. This may involve looking beyond the strategic planning horizon of an entity.’1
Linkage example ‘Principal risks may result in threats to solvency and liquidity. An entity should consider the period over which principal risks may crystallise and how these have been taken into account when, where relevant making the viability statement. Where a viability statement uses a timeframe shorter than that over which risks may crystallise, the entity should explain the potential impact of these long term risks on the entity’s viability.’
2
‘Where the entity is facing long-term systemic risks which may have a material effect on the entity’s ability to generate and preserve value in the long term, for instance risks arising from climate change or risks arising from changing technology, the strategic report should explain how the directors expect the entity’s strategy and business model to change in response to those risks.’
3FRC draft Guidance on the strategic report, paras 6.14, 7.24 & 7.25
January 2018Audit Committee Network
Slide 43
PwC
An overview of the GDPR – why is it important?
January 2018Audit Committee Network
Slide 45
Law that regulates the processing of personal data.
Comes into effect in May 2018, but the legislative journey began in 2009.
All sectors of the economy are regulated and all living individuals protected and empowered.
Scope extended to Data Processors (service providers).
Global reach – legislation is extra-territorial.
Financial, regulatory, operational and reputational consequences for non-compliance.
1
2
3
4
5
6
A new ‘Accountability Principle’:
‘The controller shall be responsible for, and be able to demonstrate compliance…….’
Intention is to put people back in control of their data and to improve how personal data is handled and used.
PwC
An overview of the GDPR – what has changed?
January 2018Audit Committee Network
Slide 46
A new ‘Transparency Framework’
• Entities need to be much clearer about how they use personal data.
• Consent rules are toughened up, with new proof requirement.
• Individual rights are boosted.
• Mandatory breach disclosure, means entities must come clean after failure.
• Enhanced rights of regulatory inspections and audit.
A new ‘Compliance Journey’
• ‘Privacy by Design’ means entities have to get data handling right from the start.
• ‘Privacy Impact Assessments’ will have to be carried out routinely.
• ‘Accountability’ means compliance activities need to be undertaken and evidenced.
• ‘Data Portability’ means that people will be able to take their data away with them.
• ‘Right to be Forgotten’ means that people will have greater power to demand deletion.
A new ‘Punishment Regime’
• Tougher enforcement powers for regulators.
• Financial penalties at 4% Annual Worldwide Turnover.
• Compensation rights for distress.
• Data Processors liable in their own right.
PwC
An overview of the GDPR – what has not changed?
January 2018Audit Committee Network
Slide 47
Is your business compliant with existing regulation? If not, the step up is more onerous.
Principles - Personal data must be:
(a) Processed fairly, lawfully and in transparent manner
(b) Collected for specific and legitimate purposes, and used only for the purpose obtained
(c) Adequate, relevant and not excessive
(d) Kept accurate and up to date
(e) Not kept longer than necessary
(f) Kept secure
PwC
The local regulatory environment
January 2018Audit Committee Network
Slide 48
Guernsey legislation
• The Data Protection (Bailiwick of Guernsey) Law, 2017
Jersey legislation
• Data Protection (Jersey) Law 2018
• Data Protection Authority (Jersey) Law 2018
Both laws are intended to be ‘equivalent’ to the GDPR.
Both islands are seeking to maintain their ‘adequacy’ status which enables free movement of personal data with the EU.
New Guernsey and Jersey regulatory bodies to be established.
PwC
Risks and challenges – which area is of most concern for you?
January 2018Audit Committee Network
Slide 49
Reputational
Non-compliance with the GDPR could result in brand damage, loss of consumer trust, loss of employee trust, and customer attrition.
Operational
Data subjects can impose data processing bans, suspend data transfers, and order the correction of an infringement. This could result in restricted EU operations and invalidated data transfers.
Financial
Fines of up to 4% of the total global annual turnover can be enforced depending on the breach severity. You may also experience loss of revenue, and high litigation and remediation costs.
Regulatory
Regulators may require the provision of information, conduct audits, and obtain access to premises if they determine it is necessary.
PwC
What does GDPR ‘good’ look like?
1. There is an organisational view on what data privacy means.
2. You understand how privacy and data protection fit in to your overall strategy.
3. There is a clear understanding of what data is held, where it is and who has access to it.
4. You know how well you are protecting the data, and where you are not.
5. The risks introduced to the data by third parties are well understood and managed.
6. The data is being used for the purpose that you have committed to, and nothing more.
7. Your privacy model is designed with agility in mind given the ever changing privacy landscape and changes in strategy.
8. You understand your legal obligations here and abroad and you are tracking developments in regulation.
January 2018Audit Committee Network
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PwC
What might a good GDPR programme look like?
January 2018Audit Committee Network
Slide 51
Data discovery and mapping
Tech stack functionality to deliver subject rights
Culture, training and change
Roles and responsibilities
Third parties/ Vendor risk management
Breach management
Risk management and governance systems
Policies and controls design
Project Management Office
Ongoing programme maintenance
Embed new processes and controls
Remediation – Fix identified issues
PwC
Emerging market trends in GDPR programmes
January 2018Audit Committee Network
Slide 52
Internalaudit
Programme assurance
Second opinion requests
Contentious business
• Uplift in IA inquiries for GDPR support.
• Programmes are starting to mature to the point of needing validation and testing.
• GDPR is now residing on corporate risk registers, because generally the IA cycle is closely connected to the content of those registers.
• Programme assurance looks at whether the set-up of the programme is optimised (vision and strategy; governance; requirements and metrics)
• Programme assurance also monitors the delivery of the programme and checks it’s on track measured against the programme requirements and metrics.
• Organisations are seeking second opinion on whether the right programme choices have been made.
• Requests are concerned with the quality of the choices made on the actual programme priorities and content.
• There is a shortage of skilled data privacy professionals in-house.
• An increase in awareness of the litigation risks involved in getting data protection wrong.
• Organisations starting to notice that there is more to GDPR than fines.
• New focus on Personal Data Breach notification, with organisations thinking afresh about how they will handle things going wrong.
PwC
What are Audit Committees asking?
January 2018Audit Committee Network
Slide 53
Is it too early to audit the GDPR programme?
What should be in my internal audit scope?
How do I upskill my team to do this?
• Timing – GDPR will be in effect in four months and now is the perfect time for an audit as it will uncover areas of unmitigated risk and provide early and actionable feedback.
• Value add – A lot more value can be added by doing an audit before rather than after a regulatory breach.
• Programme scope –Obtain confidence on the programme scope, approach and resources. Failure to deliver is often a result of poor scoping, ineffective leadership, insufficient resourcing and expertise.
• Key questions – Is the programme considering all the relevant risks? How are they engaging with the business? Are they hitting their milestones?
• Core skills – The same basic principles apply to the GDPR programme (as they do to others) as it relates to appraising risk, running a compliance programme and embedding change.
• Supplementing the team – Data Protection experts can help ask the right questions and identify risk areas.
PwC
GDPR - closing thoughts
The GDPR is effective from May 2018
• Many businesses will struggle to be compliant by then
• Need to at least ensure you understand the risks and that you are working to a prioritised plan
Compliance will be a journey – regulatory guidance and industry practice will continue to involve.
Consider how you deal with data privacy risks in a business-as-usual context:
• Privacy control framework
• Three lines of defence model
• Third party assurance
• Board reporting and oversight
• Regulatory engagement
January 2018Audit Committee Network
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PwC
Thank you!
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January 2018Audit Committee Network
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