Philips 2005 Annual Report Download - page 102

Philips Annual Report 2005102
management of each organizational unit. The GBP
incorporates a whistleblower policy, standardized complaint
reporting and a formal escalation procedure. In 2005 a
framework was developed for the registration and reporting
of GBP violations in the area of supply management.
To standardize the use of guaranteed-anonymity hotlines,
Philips decided to implement a One Philips Ethics Line
throughout the world in 2005. Phase one of the
implementation (a pilot at Philips Medical Systems
worldwide) was completed in August 2005; the global
roll-out is scheduled for completion in 2006.
To drive the practical deployment of the GBP, a set of
directives has been published, including a Supply Management
Code of Ethics and a Financial Code of Ethics. To ensure
compliance with the highest standards of transparency
and accountability by all employees performing important
fi nancial functions, the Financial Code of Ethics contains,
amongst other things, standards to promote honest and
ethical conduct, and full, accurate and timely disclosure
procedures to avoid confl icts of interest. The Company
did not grant any waivers of the Financial Code of Ethics
in 2005.
Philips Business Control Framework
The Philips Business Control Framework (BCF), derived
from the leading Committee of Sponsoring Organizations
of the Treadway Commission (COSO) framework on
internal control, sets the standard for risk management
and business control in the Company. The objectives of
the BCF are to maintain integrated management control
of the Company’s operations, to ensure integrity of the
fi nancial reporting and business processes, as well as
compliance with laws and regulations. With respect to
fi nancial reporting, a structured quarterly self-assessment
and monitoring process is in place company-wide to
assess, document, review and monitor compliance with
the Company’s standard on internal control over fi nancial
reporting. These controls are the cornerstone of the internal
process that allows the management of the Company to
attest to the reliability of the fi nancial information of the
Company, the safeguarding of its assets and the timeliness
and completeness of its disclosures.
The Company reviewed and further strengthened the
fundamentals of its BCF over the last years. The fi rst of
these developments is the drive to harmonize enterprise
resource planning systems, with SAP as the leading standard,
enabling Philips to replace time-consuming manual
controls with embedded, automated controls. As a result,
the Company introduced a program to systematically
certify the critical IT systems against the Internal Control
Standard (ICS). Furthermore, the BCF was extended to
cover the requirements of section 302 of the Sarbanes-
Oxley Act. This act requires, amongst other things, that
companies should assess and review their internal controls
of fi nancial reporting more frequently, systematically
document their fi ndings and personally involve management
in the monitoring process.
As part of BCF the Company rolled out a global ICS on
fi nancial reporting to support management in a quarterly
cycle of assessment and monitoring, enhancing transparency
of its control environment. ICS has been deployed in all
main reporting units, where business process owners
perform an extensive number of controls each quarter.
An extensive training program supported this roll-out.
In 2005 focused training programs and workshops were
organized to deploy relevant new developments in ICS
throughout the Company.
Systematic monitoring is in place to enable the Company’s
Chief Executive Offi cer (CEO) and Chief Financial Offi cer
(CFO) to review and report on the effectiveness of risk
management and business controls. Each quarter, division
management and functional management at Group level
involved in the external reporting process issue a formal
certifi cation statement to confi rm the adequacy of the
design and effectiveness of disclosure controls and internal
controls over fi nancial 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 division. The
Statements on Business Controls and Letters of
Representation are subject to review by the Board
of Management.
As a foreign registrant, Philips has to comply with
section 404 of the Sarbanes-Oxley Act by the end of 2006.
For this purpose Philips has adopted a top-down, risk-based
approach, for which signifi cant additional resources are
being deployed.
Management discussion and analysis