Audit Report / Information • Mar 31, 2020
Audit Report / Information
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(Article 153, Legislative Decree No. 58 of 24 February 1998, "TUF")
Dear Shareholders,
This report covers the activities performed by the Board of Statutory Auditors of Geox S.p.A. ("Geox" or the "Company") during the financial year ended on 31 December 2019, pursuant to the applicable law provisions.
The Board of Statutory Auditors was appointed by the Shareholders' Meeting on 16 April 2019, which confirmed the previous composition, and the Board of Statutory Auditors will therefore end its mandate with the Shareholders' Meeting to approve the financial statements as at 31 December 2021.
In accordance with Legislative Decree No. 58/1998 ("TUF" - Consolidated Law on Finance) and No. 39/2010, the independent audit was entrusted to Deloitte & Touche S.p.A. by the Shareholders' Meeting of 6 May 2013 for the 2013-2021 term.
During the financial year 2019, the Board of Statutory Auditors carried out the supervisory activity provided by law (and, specifically, by Article 149 of the TUF), by the Rules of Conduct for Boards of Statutory Auditors of Listed Companies issued by the National Board of Chartered Accountants and Auditors, by CONSOB recommendations on corporate supervision and board of statutory auditors activities (specifically, Notice No. DAC/RM 97001574 of 20 February 1997 and Notice No. DEM 1025564 of 6 April 2001, as subsequently supplemented with Notice No. DEM/3021582 of 4 April 2003 and Notice No. DEM/6031329 of 7 April 2006) and by the provisions contained in the Corporate Governance Code (July 2018 edition) issued by the Corporate Governance Committee for listed companies of Borsa Italiana S.p.A., to which the Company adhered.
2.1. During the financial year ending on 31 December 2019, the Board of Statutory Auditors monitored compliance with the law and Articles of Association in force as well as compliance with principles of sound management.
To this end, the Board of Statutory Auditors used the information flows generated by the Company, which are considered suitable to ensure that the Statutory Auditors can check compliance of the organisational structure, internal procedures, corporate documents and management bodies' resolutions with legal provisions, Articles of Association and applicable regulations.
To carry out its audit, the Board of Statutory Auditors held 10 meetings in total, in some cases with the participation of the Audit and Risk & Sustainability Committee.
The Board of Statutory Auditors carried out checks and received information from the managers of various corporate departments. With regard to the administrative and accounting system and its suitability to correctly represent the management facts, in addition to obtaining necessary information from the corporate departments, the Board of Statutory Auditors, gathered information through regular meetings with the legal auditing firm.
In addition, the Board of Statutory Auditors:
Regularly met the company in charge of the legal audit of the financial statements and consolidated financial statements, Deloitte & Touche S.p.A.;
Met the company in charge of the certification of the non-financial statement, BDO Italia S.p.A.
With regard to the decision-making process of the Board of Directors, the Board of Statutory Auditors monitored the compliance with law and Articles of Association of the management transactions carried out by the directors and checked that the resolutions adopted were not contrary to the interests of the Company.
With regard to this, the Board of Statutory Auditors acquired information and monitored, to the extent of their remit, the compliance with the principles of sound management and the adequacy of the administrative structure of the Company to ensure observance of the principles.
The Board of Statutory Auditors believes that the principles of sound management have been complied with and, in accordance with the information acquired, that the management decisions were inspired to the principle of correct information and reasonableness.
2.2. The Board of Statutory Auditors acquired from the Directors, including by taking part in the meetings of the Board of Directors and the Executive Committee, periodical information on general performance and its likely development as well as on the most significant transactions carried out by the Company, in light of their value or characteristics, including through subsidiaries.
Among the most significant events that occurred after the end of the financial year ending on 31 December 2019, we may first record that the Board of Directors took note of the resignation on 16 January 2020 of Matteo Mascazzini, Chief Executive Officer of the Company, with effect from the same date. On the same date, the Board of Directors, having noted the resignation of Matteo Mascazzini, appointed Livio Libralesso as Chief Executive Officer. He was already a director of the Company. The Board of Directors did not co-opt other directors.
On 5 March 2020, the Board of Directors appointed, with the favourable opinion of the Board of Statutory Auditors, Massimo Nai as the manager in charge of preparing corporate accounting documents, replacing Livio Libralesso.
The Board of Statutory Auditors notes that on 5 March 2020 the Board of Directors approved the draft separate financial statements and the draft consolidated financial statements of the Company and of the Group; subsequently, on 27 March 2020, the Board of Directors met again to update the paragraph relating to the "Outlook" section of the Management Report, and that relating to "Significant events occurring after 31 December 2019" contained in the Notes, to which reference is made.
The Board of Statutory Auditors therefore waives the deadlines as set out in article 154-ter, paragraph 1-ter, of the TUF.
The update of the above-mentioned paragraphs was necessary owing to the worsening of the healthcare emergency related to the spread of COVID-19 (Corona Virus Disease-19), which is having significant economic and social repercussions.
The Company and the whole Group are scrupulously following every order issued by the competent authorities and are adopting all the other precautions that are considered opportune to safeguard the health of employees, partners, suppliers and consumers, also in order to contain the spread of the virus in the regions affected by the contagion. The spread of the virus is now of significant size and affecting around 175 countries worldwide. The global spread of the epidemic led the World Health Organization to declare a pandemic on 11 March 2020.
The containment measures adopted by the authorities of the various countries envisage, with varying degrees of intensity, the closure of schools, government offices, manufacturing sites, the cancellation of sports events and public and private entertainment and the closure of all commercial activities that are not considered essential since they are necessities, strategic sectors, or regard health and safety. In all the key markets for Geox this has led to the issue of general temporary closure orders of distribution networks in both cities and shopping centres.
Today around 90 mono-brand stores (directly operated and franchised stores) are open out of a total of 820 (excluding distribution licences). The operational stores are mainly located in China, Hong Kong, Macao and Japan. These countries are still experiencing a drastic reduction in the mobility of their populations as well as in domestic and international tourism and, inevitably, a sharp fall in footfall in stores. Instead the e-commerce websites managed by the Group in Italy, Europe, North America and Asia remain fully operational. The Group is in any case fully operational in all its aspects also thanks to the investments it has made in technologies which enable the ready use of smart-working and online activities, and it can guarantee constant oversight of managerial activities, customer relations and care of consumers.
Currently, however, it is not possible to envisage the duration of this situation and the temporary closures which, although their time horizon is currently limited to a few weeks, could be renewed by countries in different ways. Equally, it is not therefore possible to assess its impact on the overall results for 2020.
However, it is important to note that the Group, over the previous year, focussed on actions which enabled its financial solidity to be enhanced by reducing its debt to zero and presenting a positive net financial position (before IFRS 16) of around EUR 6 million as at 31 December 2019, thanks to optimising working capital which recorded its best result in recent years as a percentage of revenues at 22.7%.
As at 31 December 2019, the Group has equity of EUR 305 million and currently has significant lines of credit that are considered adequate to manage both the normal seasonal fluctuation of the business and to satisfy the additional needs required by this exceptional situation. In addition, it is also evaluating a further increase and extension of equity.
The management of the Group is also preparing measures to contain the impact of the scenario described on the business, such as for example the renegotiation of lease fees, the postponement of non-essential investment, and evaluation of the distribution strategy.
2.3. The Board of Statutory Auditors did not find any atypical and/or unusual transaction with the Group companies, with third parties or related parties, and this was confirmed by the indications of the Board of Directors, the auditing firm and the head of the Internal Audit Department.
The Management Report prepared by the Directors contains adequate information on the intercompany transactions and on related-party transactions, which are all fair, in the interest of the Company and entered into at arm's length. The financial impact of the related-party transactions is shown in Note 36 to the Company's financial statements and Note 34 to the consolidated financial statements. Their impact on financial flows is reported directly in the cash flow statement.
With reference to these transactions, the Board of Statutory Auditors considers that the information that the Directors provided in their Management Report and the explanatory notes to the financial statements is adequate.
2.4. With reference to these transactions, the Board of Statutory Auditors considers that the information that the Directors provided in their Management Report and the explanatory notes to the financial statements is adequate.
2.5. During the financial year ending on 31 December 2019, the Board of Statutory Auditors issued the opinions required by law.
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The Board of Statutory Auditors acknowledges that, before the draft financial statements were approved, the Directors approved the results of the impairment test and verified that they complied with the requirements of the IAS 36.
In compliance with the provisions of the Corporate Governance Code, the Board of Statutory Auditors also verified the correct implementation of the criteria and procedures adopted by the Board of Directors to assess the independence of their members based on the criteria provided by law and by the Corporate Governance Code.
The Board of Statutory Auditors has also provided for the self-assessment of the independence of its members, the results of which confirmed the existence of the conditions required by law and by the Corporate Governance Code; it also attested to the fact that no statutory auditor had interests, on their own account or for third parties, in any operation of the Company during the 2019 financial year.
With reference to the 2019 financial year, the Board of Statutory Auditors also proceeded to carry out the self-assessment process on the composition and report on the functioning of the collective body, the outcome of which will be reported to the Board of Directors.
The members of the Board of Statutory Auditors have complied with the collection of assignments provided for in Article 144-terdecies of the Issuers' Regulations.
2.6. During financial year 2019, no complaints under Article 2408 of the Italian Civil Code have been received nor any other complaint filed by third parties.
2.7. The Board of Statutory Auditors verified that the Company has adopted an internal audit and risk management system, also with reference to the Group, which aims to allow identifying, measuring, managing and monitoring the Company's main risks.
To oversee the adequacy of the Company's internal control system, the Board coordinated its work with the Audit and Risks & Sustainability Committee, the Director in charge of the supervision of the Internal Audit and risk Management system correct functioning, with the head of the Internal Audit Department and with the Supervisory Body.
Furthermore, in exercising its functions of Internal Control and Audit Committee, in addition to implementing a continuous information flow with the Audit and Risks & Sustainability Committee, the Board of Statutory Auditors held regular meetings with the auditing firm, and acknowledged the certification made by the auditing firm with regard to the absence of significant shortfalls in the internal control system.
With reference to the provisions under article 36 of CONSOB Resolution no. 16191 of 29 October 2007, on the basis of the information collected and the work undertaken by the Internal Audit Department, the accounting/information system of the significant subsidiaries established and governed by the laws of non-European Union member states was considered adequate, as well as satisfying the other conditions required by the aforementioned article 36 of CONSOB Resolution no. 16191 of 29 October 2007.
The Board of Statutory Auditors confirmed that the last version of the Company's code of ethics was approved by the Board of Directors on 23 February 2018.
The Board of Statutory Auditors also pointed out that the Company has a diversity policy that was approved in 2017.
The Board of Statutory Auditors examined the 2019 annual report of the Supervisory Board and has no observations with regard to it.
The Board of Statutory Auditors participated at the meetings of the Nomination and Remuneration Committee, acquiring information that is useful to perform the supervisory activities for which it is responsible.
The Board of Statutory Auditors also declared that the Audit and Risks & Sustainability Committee operated in compliance with the provisions of the Corporate Governance Code. The collaboration with the Audit and Risks & Sustainability Committee was satisfactory and effective and, among other things, made it possible to co-ordinate their respective activities and carry out a joint evaluation and an effective co-ordination of the overall internal audit and risk management system.
The Board of Statutory Auditors examined the annual report of the Internal Audit Department on the activities carried out in 2019 as well as the audit reports, carried out the verifications for which it is responsible with regard to the process of preparing the half-year financial report and the annual financial statements and evaluated, including through regular meetings with the auditing firm, the adequacy of the accounting principles and their consistency for the purposes of the half-year financial report and the annual financial statements.
In light of the supervisory activity carried out, and having regard to the evaluations on the adequacy, effectiveness and actual functioning of the internal control system made by the Audit and Risks & Sustainability Committee and by the Board of Directors, the Board of Statutory Auditors holds that, to the extent of its remit, this system is overall adequate.
2.8. The Board of Statutory Auditors oversaw the adequacy of the directives from the Company to its subsidiaries in accordance with Article 114, paragraph 2 of the TUF, and the correct flow of information between the Company and the subsidiaries and holds that the Company is able to comply with the communication obligations under the law. The information flow towards the central external auditor, comprising the various levels of the corporate control chain, which has been operating over the entire financial year and which is necessary for the control of the annual and periodic accounts, has been considered effective.
The Board of Statutory Auditors evaluated and oversaw the adequacy of the directives issued to the subsidiaries. These directives have allowed the subsidiaries to timely provide the Company with the information necessary to comply with the communication obligations under the applicable law.
The Board of Statutory Auditors also confirms having met the Sole Statutory Auditor of the Italian subsidiaries. As a result of these meetings, no issues have emerged that need be reported.
Furthermore, the Board of Directors of the Company has a Global Compliance Program. It is a governance tool aimed at reinforcing the ethics and professionalism of the Company and to prevent commissions of crimes abroad (such as, for example, offences against the public administration, fraudulent accounting, money laundering, offences contrary to occupational safety laws, environmental offences) that could lead to criminal corporate liability and the ensuing reputational damage risks.
The Global Compliance Program was drawn up in light of applicable law and taking into account the Group's corporate structure and the specific applicable legislation in the various legal systems in which the Geox Group companies operate.
In accordance with Law No. 179/2017 named "Law on Whisteblowing", the Board of Statutory Auditors also confirmed that the Company has implemented a suitable global Whistleblowing system that is integrated at group level. This system is aimed at finding and promptly managing any offences and/or violations pertaining to questionable conduct and breaches of the Company's Code of Ethics.
2.9. The Board of Statutory Auditors oversaw the Company's administrative and accounting system and its reliability in correctly representing the facts reported therein, by obtaining information from the Manager in charge of the Accounting and the heads of the relevant departments, examining the documents prepared by the Company and analysing the work made by the statutory auditing firm.
Specifically, the Board of Statutory Auditors has ascertained that the Manager in charge of the Accounting has issued the certification that the documents in the financial statements provide a truthful and correct representation of the asset, economic and financial situation of the Company and of the investee companies included in the scope of the consolidation. Based on the information acquired, the statements made by the Manager in charge of the Accounting are complete.
The position of Manager in charge of preparing corporate Accounting documents was held by Livio Libralesso (appointed at the previous Shareholders' Meeting on 16 April 2019); subsequently, on 5 March 2020, the position was assigned to Massimo Nai, the Group's Financial Accounting Manager.
In light of the supervisory activity carried out, and having regard to the evaluations on the adequacy, effectiveness and effective functioning of the organisational, administrative and accounting structure made by the Board of Directors, the Board of Statutory Auditors holds that, to the extent of its remit, the system is overall adequate and reliable as to the representation of the events occurred during the management.
2.10. During the financial year ending on 31 December 2019, the Board of Statutory Auditors regularly met the auditing firm, Deloitte & Touche S.p.A., to exchange data and information that are relevant under Article 150, paragraph 3 of the TUF.
During these meetings, the auditing firm did not communicate any fact or anomaly that is sufficiently relevant to be reported in this report.
2.11. The oversight activities on the audit in accordance with Article 19 of Legislative Decree No. 39 of 27 January 2010 was made by the Board of Statutory Auditors within the above meetings with the auditing firm, which presented the quarterly controls made and the relevant results as well as the auditing strategy and any relevant issue encountered in performing its activity. No critical matters have emerged from these meetings such as to affect the individual financial statements of the Company or the consolidated financial statements.
The Board of Statutory Auditors also evaluated the work plan prepared by Deloitte & Touche S.p.A. and has found it adequate having regard to the characteristics and size of the Group and has overseen the effectiveness of the process of statutory audit and found that the same has been carried out in compliance with the statutory auditing plan and with the International Standard Audit.
The reports of the company Deloitte & Touche S.p.A. on the financial statements and the consolidated financial statements were issued on 30 March 2020 in accordance with Articles 14 and 16 of Legislative Decree No. 39 of 27 January 2010.
As regards the statements and certifications, the auditing firm:
The report also includes the key aspects of the audit, in relation to which, however, no separate opinion is provided, since the same are dealt with in the audit and in the overall assessment conducted in relation to the financial statements. The key aspects of the audit with respect to the Company's financial statements are the measurement of inventories from previous collections, the measurement of the provision for returns and other credit memos to be issued, and the initial application of the international accounting standard IFRS 16.
Finally, the audit report expresses an opinion on whether Management's use of the going concern assumption is appropriate, based on audit evidence gathered up to the date of the report.
On 30 March 2020, the independent auditors also presented the additional report envisaged to the Board of Statutory Auditors, in its capacity as Internal Control and Audit Committee, the additional report required by Article 11 of Regulation (EU) No. 537/2014, which shows that no significant shortfalls in the internal control system concerning the financial reporting process deserve to be brought to the attention of those responsible for the corporate governance. The Board of Statutory Auditors will inform the Board of Directors of the Company with regard to the outcome of the statutory audit, transmitting the additional report for this purpose, together with any observations, under Article 19 of Legislative Decree No. 39/2010. As regards the previous financial year, the Board of Statutory Auditors informed the Board of Directors on the outcome of the statutory audit, as required by law.
As an attachment to the additional report referred to in the previous paragraph, the auditing firm presented to the Board of Statutory Auditors its declaration of independence, as required by Article 6 of (EU) Regulation no. 537/2014, which shows that no critical issue exists which might affect their independence. Finally, the Board of Statutory Auditors took note of the transparency report prepared by the auditing firm and published on its website pursuant to Article 18 of Legislative Decree No. 39/2010.
2.12. During the financial year ending on 31 December 2019, the Company did not confer any non-audit work on Deloitte & Touche S.p.A.; the fees set out in Annex 2 to the consolidated financial statements (EUR 6 thousand) relate to a mandate assigned during 2018, for a preliminary assessment project for the potential impact from application of the new IFRS 16 – relating to the accounting treatment of leases – at the transition date (1 January 2019).
Having regard to the declaration of independence issued by Deloitte & Touche S.p.A., owing to the fact that no non-audit work engagements were assigned and the fact that no engagements were assigned to companies belonging to its network by the Company and the Group companies, we do not believe that there are any critical issues with regard to the independence of Deloitte & Touche S.p.A.
2.13. As mentioned, the Company has agreed to abide by the Corporate Governance Code issued by the corporate governance committee for listed companies of Borsa Italiana S.p.A., as resulting from the Corporate Governance and Ownership Structure Report for financial year 2019, approved by the Board of Directors on 05 March 2020 and made available on the Company website. This Report was drafted in accordance with the instructions of the Market Regulations organised and managed by Borsa Italiana S.p.A.
The Report in question describes in detail the governance system adopted by the Company. This system complies with the rules of the governance model required by the above-mentioned Corporate Governance Code and the principles indicated therein are effectively and correctly applied.
The Corporate Governance and Ownership Structure Report for financial year 2019 reports the conclusions reached by the Directors with regard to the confirmation of the adequacy and effectiveness of the organisational, administrative and accounting structure of the Company and of the main subsidiaries.
2.14. The Directors also prepared the Report on the Remuneration Policy, approved by the Board of Directors on 05 March 2020. In the Report, the Directors also described the principles adopted to determine the remuneration of the members of the management bodies and the managers with strategic responsibilities. Furthermore, the report contains a table showing the remuneration paid to the members of the management and control bodies and the other managers with strategic responsibilities, as well as the schedule concerning the information on the interests in the Company that they hold.
The Report on Remuneration Policy in question includes some changes compared to the previous report. In particular, in order to transpose the changes introduced to article 123-ter of the TUF by Leg. Decree no. 49 of 10 May 2019 in implementation of (EU) Directive 2017/828 (Shareholder Rights Directive II), the following has been included:
During the oversight activity, no omissions, inappropriate conduct or irregularities have emerged such as to require reporting to the relevant external control and surveillance bodies or to deserve being reported herein.
2.15. Legislative Decree No. 254/2016, which implemented the EU Directive on non-financial and diversity information, requires large public interest entities (PIEs) to report specific nonfinancial information and applies to financial statements relating to financial years starting on 1 January 2017. This information concerns environmental and social issues, employee-related issues, respect for human rights, anti-corruption, diversity on the Board of Directors and other aspects concerning sustainability. The Board of Statutory Auditors stated that the Company, in accordance with the recommendations of the Corporate Governance Code and in consideration of the value attributed to corporate social responsibility, expanded the operations of the Audit and Risks Committee, entrusting it with the supervision of processes, initiatives and activities to keep the Company' commitment for sustainable development, renaming the same "Audit and Risks & Sustainability Committee".
The Board of Statutory Auditors also pointed out that the responsibility for ensuring that the report is drafted and published in compliance with the provisions of the law rests with the Directors. The Board of Directors must monitor compliance with the provisions of Legislative Decree No. 254/2016.
As part of this supervisory activity, the Board of Statutory Auditors pointed out that the Board of Directors tasked the auditing firm BDO Italia S.p.A. with the auditing of non-financial information. The task assigned pursuant to Article 3, paragraph 10 of Legislative Decree No. 254/2016 relates to the limited assurance engagement concerning the consolidated non-financial statements of Geox and the Group companies. The Board of Statutory Auditors met with the representatives of the auditing firm and read the report of the independent auditing firm on the consolidated non-financial statement issued on 30 March 2019 pursuant to Article 3, paragraph 10 of Legislative Decree No. 254/2016 and Article 5 of CONSOB Regulation No. 20267.
Since the activity carried out by BDO Italia S.p.A. involves a limited review, the opinion is provided in negative form of expression. More specifically, in its report, BDO Italia S.p.A. stated that, based on the work carried out, no aspects emerged that indicate that the non-financial statement of the Geox Group for the year ended on 31 December 2019 was not drafted, in all material respects, in compliance with the requirements of Articles 3 and 4 of Legislative Decree No. 254/2016 and with the Global Reporting Initiative Standards.
The Board of Statutory Auditors examined the draft financial statements as at 31 December 2019 and reviewed the consolidated financial statements on the same date. To the best of their knowledge and understanding, the Board of Statutory Auditors holds that, in preparing the financial statements and the consolidated financial statements no provisions of law have been derogated from.
As the Board of Statutory Auditors is not responsible for statutory auditing, the Board of Statutory Auditors oversaw the general approach used to draft the financial statements, its compliance with law in general with regard to its preparation and structure and, in this regard, reports as follows.
Since 1 January 2019 IFRS 16 has been in force and provides a new definition of lease and introduces a criterion based on control of an asset (right of use) to distinguish lease contracts from service contracts, based on: the identification of the asset, the right to replace it, the right to obtain substantially all of the economic benefits from use of the asset and, finally, the right to direct the use of the asset underlying the contract. The standard establishes a single model for the recognition and measurement of lease contracts for the lessee, which requires the recognition of assets subject to operating leases among assets with an offsetting financial liability. The application of this standard entailed, from an economic viewpoint, an increase in the operating result of EUR 0.9 million and financial expenses of EUR 1.7 million, while, from the viewpoint of equity, it entailed the recording of an asset for the right of use for EUR 95.1 million at 31 December 2019 and worsening of the net financial position by EUR 93.5 million.
The final result for 2019 was significantly affected by some extraordinary, one-off measures such as (i) one-off contributions to support franchisees and distributors in the difficult economic period and costs for the departure of the previous CEO for a total of EUR 3.2 million and (ii) write-down of investments in the non-EU area for € 24.9 million..
The Board of Statutory Auditors verified that the provisions of law concerning the preparation of the management report have been complied with and has no specific remarks in relation thereto.
The financial statements as at 31 December 2019, prepared by the Directors pursuant to law, and duly submitted to the Board of Statutory Auditors (together with the Management Report) show losses for the financial year equal to EUR 33,599,866.88. The Board of Directors described in detail, in its Management Report and in the Notes, how the result of the year has been calculated and the events that have generated such result.
Considering also the results of the activity performed by the auditing firm, insofar as falling within its remit, the Board of Statutory Auditors has not found any reason that would prevent the approval of the financial statements as at 31 December 2019, as drafted and approved by the Board of Directors in the meeting of 27 March 2020, or the approval of the proposed coverage of the loss for the year by the Board of Directors.
Biadene di Montebelluna, 30 March 2020
On behalf of the Board of Statutory Auditors
Sonia Ferrero (Chair)
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