Audit Committee report

Introduction and mandate

The Audit Committee has formal terms of reference which are updated on an annual basis, or as and when required. The Board is satisfied that the Audit Committee has complied with these terms, and with its legal and regulatory responsibilities as set out in the Companies Act of South Africa, 2008 ("Companies Act"), King IV Report on Corporate Governance for South Africa, 2016 ("King IV") and the JSE Listings Requirements ("JSE LR").

The primary role of the Audit Committee is to ensure the integrity of Telkom SA SOC Ltd ("Telkom" or "Company") and the Telkom Group's financial reporting and audit processes and that a sound risk management and internal control system is maintained. In pursuing these objectives, the Audit Committee oversees relations with the external auditors and reviews the effectiveness of the Internal Audit function.

The Audit Committee consisted of 6 independent Non-executive Directors from 1 April 2022 to 31 March 2023. Keith Rayner is the Chairman of the Audit Committee.

The Board believes that the Audit Committee collectively possesses the knowledge and experience to supervise Telkom's financial management, internal and external auditors, the quality of Telkom's financial controls, the preparation and evaluation of Telkom's audited company and consolidated financial statements, and Telkom's periodic financial reporting.

Attendance and membership

The attendance of Audit Committee members at its meetings during the financial year was as follows:

Member	Attendance
KA Rayner (Chairman)	6/6
N Ford-Hoon****	2/2
KP Lebina***	2/2
PCS Luthuli	6/6
KW Mzondeki**	4/4
H Singh	6/6
LL von Zeuner*	5/6*

*	Apology
**	Resigned 24 August 2022
***	Appointed 25 August 2022
****	Appointed 1 December 2022

The Telkom Group has established and maintains internal controls and procedures, which are reviewed on a regular basis by Internal Audit which then reports to the Risk and Audit Committees. These reporting responsibilities include management of the risk of business failures and to provide reasonable assurance against such failures. However, this is not a guarantee that such risks are eliminated.

Responsibility

It is the duty of the Audit Committee, inter alia, to monitor and review and where applicable, approve:

• The effectiveness of the Internal Audit function;
• The appointment and/or termination of both, or one, of the joint independent external auditors ("External Auditors" or "Joint Auditors" as the context requires), including their audit fee, expertise, independence, and objectivity;
• The nature and extent of any non-audit services performed by the External Auditors;
• The External Auditors suitability and recommendation to the Shareholders for appointment and reappointment;
• The reports of both Internal and External Auditors;
• The expertise and experience of the Group Chief Financial Officer (GCFO);
• The effectiveness of the finance function;
• Financial reporting systems to ensure that Company and Group reporting procedures are functioning properly;
• The governance of information technology ("IT") and associated risks;
• The internal financial control compliance, combined assurance and enterprise risk management effectiveness;
• Interim results and report, audited Company and Consolidated annual financial statements for the financial year ended 31 March 2023 ("audited Company/Consolidated AFS"), Integrated Report and all other widely distributed financial documents and announcements;
• The quality and acceptability of the Telkom Group's accounting policies and practices;
• The compliance with applicable legislation, requirements of appropriate regulatory authorities, and Telkom's;
• Group Ethics Handbook;
• The integrity of the Integrated Report and associated reports (by ensuring that its content is reliable and recommending it to the board for approval); and
• Policies and procedures for preventing and detecting fraud.

Annual financial statements

The Committee has reviewed and is satisfied that the audited Company /Consolidated AFS, including accounting policies, are appropriate and comply with the International Financial Reporting Standards ("IFRS") of the International Accounting Standards Board ("IASB") and in compliance with the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, the Financial Pronouncements as issued by the Financial Reporting Standards Council, the JSE LR and the requirements of the Companies Act.

IFRS 16 valuation	The review and consideration of the IFRS 16 valuation because of the high number of leases. The major lease categories that gave rise to an ROU asset and related liability primarily relate to the Mast and Tower infrastructure lease agreements, co-location agreements, property leases, and vehicle fleet leases. As of 31 March 2023, the ROU asset and liability were reflected at R5 360 million (31 March 2022: R4 945 million) and R5 888 million (31 March 2022: R5 374 million), respectively, with related depreciation and interest of R1 274 million (31 March 2022: R1 184 million) and R488 million (31 March 2022: R450 million) for the 12-month period under review.
Dividend consideration	The review and recommendation to the Board to continue with the suspension of the declaration and payment of dividends as approved by the Board in the 2020 financial year ended.
Actuarial assumptions	The review and approval of the Actuarial Assumptions for recommendation to the Board for both the interim period end and financial year end for financial computation and compilation purposes.
Impairment testing	The review of the impairment testing of Telkom Group Cash Generating Units (“CGUs”), resulted in no impairment for BCX and Swiftnet, an impairment of R6 billion on the Telkom Consumer CGU, and R7 billion in the Openserve CGU. The impairment at Telkom Consumer CGU and Openserve CGU was mainly due to the adverse impact of significant changes in the market and economic environment plus evolving technological advancements.
Provisions	The review of the impairment of trade and other receivables, finance lease receivables and contract assets, and inter-company receivables in accordance with IFRS 9.
Key audit matters	The review and consideration of the Key Audit Matters detailed in the External Auditors report on the audited Company/Consolidated AFS.
Group Chief Executive Officer (CEO) and Group Chief Financial Officer (CFO) Responsibility Statement	The review and consideration of the GCEO and GCFO Responsibility Statement as required in terms of paragraph 3.84(k) of the JSE LR.
Remediation of Internal Control Deficiencies	The review and consideration of timeously implemented remedial actions by management regarding internal control deficiencies identified by Internal Audit.
Compliance with King IV and JSE Regulatory Disclosures	The review and consideration of the King IV disclosures, practices, and principles and the JSE corporate governance disclosures in accordance with the JSE LR and the JSE Disclosure Policy.

Execution of Audit Committee mandate

The Audit Committee discharged all responsibilities and functions delegated to it in terms of the Audit Committee terms of reference, the Companies Act, King IV, and the JSE LR.

During the year, the Audit Committee:

In respect of the Joint Auditors:

• Considered and satisfied itself that the joint independent external audit firms and their two engagement partners are independent;
• Considered and satisfied itself with respect to the Auditor Suitability Review required by the JSE LR (refer below);
• Reviewed the nature of non-audit services that were provided by the Joint Auditors during the year;
• Approved the fees paid to the Joint Auditors for the 2023 financial year;
• Approved and confirmed non-audit services and fees which the Joint Auditors performed during the year under review; and
• The Audit Committee Chairman held separate meetings with the Joint Auditors prior to Audit Committee meetings.

In respect of financial reporting:

• Considered the appropriateness and experience of the GCFO as required by the JSE LR;
• Reviewed the audited Company/Consolidated AFS and ensured that there are adequate controls in place to ensure the correct compilation of both audited Company/Consolidated AFS;
• Reviewed the appropriateness of any amendments to accounting policies and internal financial controls; and
• Reviewed the Integrated Reporting process.

In respect of Internal Audit:

• Approved the Internal Audit plan for the year;
• Monitored and provided oversight of the Internal Audit function;
• Evaluated the effectiveness of the Internal Audit function; and
• The Audit Committee Chairman held separate meetings with the Chief Internal Audit Executive (“CAE”) of Internal Audit prior to Audit Committee meetings.

In respect of the Audit Committee:

• Ensured the Audit Committee complied with the membership criteria as set out in the Companies Act, King IV, and the JSE LR; and
• Reviewed and approved the Audit Committee Terms of Reference.

In respect of information technology governance:

• Monitored Telkom’s technology governance framework and processes including that of information security.

External auditors

The Audit Committee has the primary responsibility for overseeing the relationship with, and performance of, the External Auditors. This includes making the recommendation on the appointment, re-appointment, and removal of the Joint External Auditors, assessing their independence on an ongoing basis, and for reviewing and approving the audit fee.

The Audit Committee, after taking account of the audit approach, materiality, and audit risks, reviewed and agreed both the interim period review plan and financial year-end audit plan, and agreed on both the interim and financial year-end audit fees. The Audit Committee received updates during the year on the audit process, including how the External Auditors had challenged the Telkom Group’s assumptions on the significant matters noted in this report.

The Board delegated the responsibility to review the Company’s current appointed Joint Auditors for re-appointment to the Audit Committee. The Audit Committee makes a recommendation to the Board and the Board then makes a recommendation to the shareholders in the notice of Annual General Meeting (“AGM”).

With the current appointed joint independent external audit firms PricewaterhouseCoopers (“PwC”) and SizweNtsalubaGobodo (“SNG”) Grant Thornton’s five-year term of office coming to an end, the Group has decided to transition to a single Auditor.

To adhere to Section 92(3) of the South African Companies Act of 2008 which recommends that a company with joint auditors should manage the rotation such that both auditors are not rotated in the same financial year, the Group decided not to go to market for External Audit services. Instead, both PwC and SNG Grant Thornton were requested to submit proposals according to a procurement process for the appointment of a single auditor, with the successful firm expected to continue with the full audit scope for a further 5 years. The successful firm will also be required to appoint, contract, and manage a Black Owned (BO) audit firm.

Following the conclusion of this process, the Telkom Board will be considering the recommendation of the Audit Committee to put to shareholders at the AGM scheduled for 24 August 2023 regarding the appointment of the successful single auditor for the Telkom Group for the financial year ending 31 March 2024. The term of engagement for the unsuccessful joint auditor, will terminate following the conclusion of the audit for the financial year ended 31 March 2023.

Auditor independence

The Audit Committee is also responsible for determining that the Joint External Auditors have the necessary independence. A key factor that may impair any such independence is a lack of control over non-audit services provided by the Joint External Auditors.

Telkom addresses this issue by ensuring prior approval by the GCFO and Chairman of the Audit Committee of all non-audit services. Fees paid for non-audit services to the Joint External Auditors amounted to R1.5 million (R1,525,640) for the financial year ending 31 March 2023 (31 March 2022: R1.6 million). Non-audit fees as a percentage of audit fees for the year ending 31 March 2023 is approximately 1.35%. Fees accrued for audit work performed for the financial year ended 31 March 2023 by the Joint External Auditors amounted to R113.3 million (31 March 2022: R99.8 million).

The Audit Committee Chairman met with the External Auditors prior to each Audit committee meeting to discuss and review the content of the External Auditors report to the Audit Committee.

The Audit Committee has reviewed and assessed the independence of the External Auditors, and has confirmed that the criteria for independence, as set out in the rules of the IRBA and other relevant legislation, have been followed. The Audit Committee is satisfied that the External Auditors are independent of the Telkom Group.

Internal auditors

The Internal Audit function adopts a co-source operating model to supplement its Internal Audit activities and execute its mandate. During the financial year, the co-source agreement with SekelaXabiso CA Incorporated (“SkX Protiviti”) and KPMG Services Proprietary Limited (“KPMG”) continued. The co-sourced service providers form part of Telkom’s Internal Audit function and report directly to the CAE.

The internal control systems of the Company and Group are monitored by Internal Audit, which reports findings and recommendations to the Audit Committee and to senior management. The Audit Committee determines the purpose, authority, and responsibility of the Internal Audit function in the Internal Audit Charter.

The Internal Audit function is headed by the CAE, who may be appointed or dismissed by the Audit Committee. The Audit Committee is satisfied that the incumbent CAE has the requisite skills and experience and that he is supported by a sufficient staff complement with appropriate skills and training.

Telkom’s Internal Audit operates in accordance with the International Standards for the Professional Practice of Internal Auditing as prescribed by the Institute of Internal Auditors. Internal Audit activities carried out during the year were identified and planned through a combination of the Telkom risk management framework and the risk-based methodologies adopted by Internal Audit. The Audit Committee approves the annual Internal Audit assurance plan presented by Internal Audit and monitors progress against the plan.

Internal Audit reports deficiencies to the Audit Committee every quarter together with recommended remedial actions, which are then followed up. Internal Audit provided the Audit Committee with a written report, which assessed as adequate the internal controls over financial reporting, IT governance, and the risk management process during the financial year.

The Chairman of the Audit Committee met with the CAE prior to each Audit Committee meeting to discuss and review the content of the Internal Audit report to the Audit Committee.

Internal Audit and the External Auditors have unrestricted access to the Audit Committee, the Audit Committee Chairman, the Risk Committee Chairman, and the Chairman of the Board, thereby ensuring the maintenance of independence.

Risk management

Reviews of the Telkom Group’s risk management, enterprise risk management programmes, business continuity, and forensic services are performed by the Telkom Group’s Risk Committee. The Audit Committee Chairman is a member of the Risk Committee and ensures any identified financial risks are referred to the Audit Committee for consideration. The top principal risks, being those that will prevent the Telkom Group from achieving its strategic objectives in the short and medium term are reported to and considered by the Risk Committee and the Board. All principal risks are currently managed within the risk appetite statements. The key focus areas, risk appetite, and further details of the Telkom Group’s principal risks are reported in the risk management report included in the Telkom Group’s Integrated Report.

The Internal Audit department has conducted a review on the effectiveness of the risk management function in accordance with the approved risk management framework. The results of the review indicated that the risk management process was satisfactory as at 31 March 2023.

Combined assurance

The Telkom Group assessed risks based on principal risks as indicated above. The current combined assurance model in place is representative of how the risks are currently being managed between the five lines of assurance. Management and Internal Audit have implemented a coordinated structure for planning, executing, and reporting on Internal Audit, compliance, and risk activities. The Audit Committee is satisfied that the Group has optimised the assurance obtained from the five lines of assurance in accordance with the approved combined assurance model and that the model is effective in achieving the objectives of coordinating assurance and reporting to provide management and the Board with a clear view on what the Telkom Group risks are; what the effective risk mitigations are; and the resultant acceptable level of residual risks.

Audit Committee statement

Based on information from, and discussions with, management and the External Auditors, the Audit Committee is of the opinion that the financial records may be relied upon as the basis for the preparation of the audited Company/Consolidated AFS.

The Audit Committee has considered and discussed the audited Company/Consolidated AFS with both management and External Auditors. During this process, the Audit Committee:

• Evaluated significant judgements and reporting decisions;
• Determined that the going-concern basis of reporting is appropriate;
• Evaluated the material factors and risks that could impact the audited Company/Consolidated AFS and associated reports;
• Evaluated the Telkom Group’s solvency and liquidity and ensured the financial sustainability and disclosures of the Telkom Group;
• Discussed the treatment of significant and unusual transactions with management and the External Auditors;
• Noted the tenure of the Joint Auditors firms;
• Noted the tenure of the designated joint independent external audit partners; and
• Discussed the Audit Committee's views on the effectiveness of the CAE.

A key requirement of our audited Company / Consolidated AFS is for the audited Company / Consolidated AFS to be fairly presented, balanced, understandable and provide the information necessary for stakeholders to assess the Telkom Group’s position, performance, business model, and strategy. The Audit Committee and the Board are satisfied that the audited Company / Consolidated AFS meets this requirement.

The Audit Committee considers that the audited Company / Consolidated AFS comply in all material respects with the statutory requirements of the various laws and regulations governing disclosure and reporting of the audited Company / Consolidated AFS and that the audited Company / Consolidated AFS comply in all material respects with IFRS, as issued by the IASB, the SAICA Financial Reporting Guides issued by the Accounting Practices Committee and Financial Reporting Pronouncements issued by the Financial Reporting Standards Council, as well as the requirements of the Companies Act and the JSE LR. The Audit Committee has recommended to the Board that the audited Company / Consolidated AFS be adopted and approved by the Board.