Philips 2006 Annual Report Download - page 86

Philips Annual Report 200686
The following sections present an overview of Philips’
approach to risk management and business control and
a description of the nature and the extent of its exposure
to risks. Philips recognizes different risk categories, namely
Strategic business risks, Market/Business environment risks,
Operational risks, Financial risks, and Compliance and
fi nancial reporting risks. These are further described in
the section Risk categories of this Annual Report. 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 the forward-looking statements.
Our approach to 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 objectives
are met by integrating management control into the daily
operations, by ensuring compliance with legal requirements
and by safeguarding the integrity of the Company’s fi nancial
reporting and its related disclosures. It makes management
responsible for identifying the critical business risks and
for the implementation of fi t-for-purpose risk responses.
Philips’ risk management approach is embedded in the
areas of corporate governance, Philips General Business
Principles and Philips Business Control Framework and
in the actual periodic business planning and review cycles.
Corporate governance
Corporate governance is the system by which a company
is directed and controlled. Philips believes that good
corporate governance is a critical factor in achieving
business success. Good corporate governance derives
from, amongst other things, solid internal controls
and high ethical standards. Risk management is a well-
established part of Philips’ corporate governance model.
The quality of Philips’ systems of business controls and
the fi ndings of internal and external audits are reported
to and discussed in the Audit Committee of the Supervisory
Board. Internal auditors monitor the quality of the
business controls through risk-based operational audits,
inspections of fi nancial reporting controls and compliance
audits. Audit committees at corporate, division, business
and regional levels meet on a regular basis to address
weaknesses in the business control infrastructure as
reported by the auditors or from self-assessments, and
to take corrective action where necessary. These audit
committees are also involved in determining the desired
company-wide internal audit coverage as approved by the
Audit Committee of the Supervisory Board. An in-depth
description of Philips’ corporate governance model can
be found in the chapter Corporate governance of this
Annual Report.
Philips Business Control Framework
The Philips Business Control Framework (BCF), derived
from the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) framework on internal
control, sets the standard for risk management and
business control in Philips. 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.
Philips reviewed and further strengthened the
fundamentals of its BCF over the last years. The fi rst
of these developments was 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. Thereafter, Phillips introduced a program to
systematically certify the critical IT systems against an
Risk management
6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group