Philips 2010 Annual Report Download - page 111

7 Risk management 7.5 - 7.5
Annual Report 2010 111
7.5 Compliance risks
Legal proceedings covering a range of matters are pending
in various jurisdictions against Philips and its current and
former group companies. Due to the uncertainty inherent
in legal proceedings, it is difficult to predict the final
outcome.
Philips, including a certain number of its current and
former group companies, is involved in legal proceedings
relating to such matters as competition issues,
commercial transactions, product liability, participations
and environmental pollution. Since the ultimate outcome
of asserted claims and proceedings, or the impact of any
claims that may be asserted in the future, cannot be
predicted with certainty, Philips’ financial position and
results of operations could be affected materially by
adverse outcomes.
Please refer to note 24 for additional disclosure relating to
specific legal proceedings.
Philips is exposed to governmental investigations and legal
proceedings with regard to increased scrutiny of possible
anti-competitive market practices.
Philips is facing increased scrutiny by national and
European authorities of possible anti-competitive market
practices, especially in product segments where Philips
has significant market shares. For example, Philips and
certain of its (former) affiliates are involved in
investigations by competition law authorities in several
jurisdictions into possible anti-competitive activities in the
Cathode-Ray Tubes (CRT) industry and are engaged in
litigation in this respect. Philips’ financial position and
results could be materially affected by an adverse final
outcome of these investigations and litigation, as well as
any potential claims relating to this matter. Furthermore,
increased scrutiny may hamper planned growth
opportunities provided by potential acquisitions (see also
note 24).
Philips’ global presence exposes the company to regional
and local regulatory rules which may interfere with the
realization of business opportunities and investments in
the countries in which Philips operates.
Philips has established subsidiaries in over 80 countries.
These subsidiaries are exposed to changes in
governmental regulations and unfavorable political
developments, which may limit the realization of business
opportunities or impair Philips’ local investments. Philips’
increased focus on the healthcare sector increases the
exposure to highly regulated markets, where obtaining
clearances or approvals for new products is of great
importance, and the dependency on the funding available
for healthcare systems. In addition, changes in
reimbursement policies may affect spending on
healthcare.
Philips is exposed to non-compliance with General
Business Principles.
Philips’ attempts to realize its growth targets could
expose it to the risk of non-compliance with the Philips
General Business Principles, in particular anti-bribery
provisions. This risk is heightened in emerging markets as
corporate governance systems, including information
structures and the monitoring of ethical standards, are
less developed in emerging markets compared to mature
markets. Examples include commission payments to third
parties, remuneration payments to agents, distributors,
commissioners and the like (‘Agents’), or the acceptance
of gifts, which may be considered in some markets to be
normal local business practice. (See also note 24.)
Defective internal controls would adversely affect our
financial reporting and management process.
The reliability of reporting is important in ensuring that
management decisions for steering the businesses and
managing both top-line and bottom-line growth are based
on top-quality data. Flaws in internal control systems
could adversely affect the financial position and results and
hamper expected growth.
The correctness of disclosures provides investors and
other market professionals with significant information
for a better understanding of Philips’ businesses.
Imperfections or lack of clarity in the disclosures could
create market uncertainty regarding the reliability of the
data presented and could have a negative impact on the
Philips share price.
The reliability of revenue and expenditure data is key for
steering the business and for managing top-line and
bottom-line growth. The long lifecycle of healthcare sales,
from order acceptance to accepted installation, together
with the complexity of the accounting rules for when
revenue can be recognized in the accounts presents a
challenge to ensure there is consistency of application of
the accounting rules over Philips Healthcare’s global
business.
Compliance procedures have been adopted by
management to ensure that the use of resources is
consistent with laws, regulations and policies, and that
resources are safeguarded against waste, loss and misuse.
Ineffective compliance procedures relating to the use of
resources could have an adverse effect on the financial
condition and operating results.