Philips 2004 Annual Report Download - page 77

Risk Management
As a global company, Philips is affected by economic developments
in all regions of the world. In addition to the risks inherent to its
operations, Philips is exposed to specific business risks. In the
following paragraphs, a summary of Philips’ approach towards risk
management and business control is given, followed by a brief
description of the nature and the extent of its exposure to risks.
The risk overview provided is not exhaustive. Some risks not yet
known to Philips or currently believed not to be material could
later turn out to have a major impact on Philips’ businesses,
revenues, income, assets, liquidity or capital resources.
The risk factors should be considered in connection with any
forward-looking statements.
Philips’ approach towards risk
management and business control
Risk management forms an integral part of business management.
The Company’s risk and control policy is designed to provide
reasonable assurance that strategic objectives are met by creating
focus, by integrating management control over the Company’s
operations, by ensuring compliance with legal requirements and by
safeguarding the reliability of the financial reporting and its
disclosures. It makes management responsible for identifying the
critical business risks and the implementation of fit-for-purpose
risk responses. The Company’s risk-management approach is
embedded in the periodic business planning and review cycle. The
Philips Business Control Framework (BCF), derived from the
leading COSO framework on internal control, sets the standard
for risk management and business control in the Company. The
objectives of the BCF address financial reporting, business
processes and compliance. With respect to financial reporting, a
structured quarterly self-assessment and monitoring process is
used company-wide to assess, document, review and monitor
compliance with the Company’s standard on internal control over
financial reporting. These controls are the cornerstone of the
internal process that allows the management of the Company to
attest the reliability of the financial information of the Company,
the safeguarding of its assets and the timeliness and completeness
of its disclosures. On the basis of risk assessments, product
division and business management determine the risks related to
the achievement of business objectives and appropriate risk
responses in relation to business processes and objectives. The
most important business risks of the Company are identified on
the basis of this process and disclosed in the Annual Report. To
ensure compliance with laws and regulations, as well as with the
Company’s norms and values for ‘doing business’, rules are laid
down in the Philips General Business Principles and enforced by a
global system of compliance officers. The Philips General Business
Principles include a Financial Code of Ethics. A structured annual
self-assessment process is in place to assist organizations in
reviewing compliance with the Philips General Business Principles.
The totality of controls over financial reporting, business
processes and compliance are called business controls.
Each quarter, product division management and functional
management at Group level involved in the external reporting
process issue a formal certification statement to confirm the
adequacy of the design and effectiveness of disclosure controls and
internal controls over financial reporting, which is subject to
review by the Board of Management.
Annually, as part of the Annual Report process, management
accountability for business controls is enforced through the formal
issuance of a Statement on Business Controls and a Letter of
Representation by each business unit, resulting, via a cascade
process, in a statement by each product division. The Statements
on Business Controls and Letters of Representation are subject to
review by the Board of Management. Internal auditors monitor the
quality of the business controls through risk-based operational
audits, inspections of the financial reporting controls and
compliance audits. This structured evaluation process enables the
Company’s Chief Executive Officer and Chief Financial Officer to
certify that the Group financial statements fairly represent the
financial condition and results of operations of the Company. For a
report on disclosure controls and procedures for the 2004
financial statements, please refer to page 197 of this Annual
Report.
Internal audit committees at product division, business and
regional levels meet on a regular basis to address weaknesses in
the business control infrastructure as reported by the auditors,
and to take corrective action where necessary. These audit
committees are also involved in determining the desired internal
audit coverage.
The quality of the Company’s systems of business controls and the
findings of internal and external audits are reported to and
discussed in the Audit Committee of the Supervisory Board.
Business risks
As Philips’ business is global, its operations are exposed to
economic, political and military developments in countries
across the world, which could adversely impact the
revenues and income of Philips.
The business environment is influenced by numerous political
uncertainties, which continue to affect the global economy and the
76 Philips Annual Report 2004
Operating and financial review and prospects