Philips 2014 Annual Report Download - page 67

Risk management 7
Annual Report 2014 67
7Risk management
7.1 Our approach to risk management
and business control
The following section presents an overview of Philips’
approach to risk management and business controls
and a description of the nature and the extent of its
exposure to risks. Philips’ risk management focuses on
the following risk categories: Strategic, Operational,
Compliance and Financial risks. These categories are
further described in section 7.2, Risk categories and
factors, of this Annual Report. The risk overview
highlights the main risks known to Philips, which could
hinder it in achieving its strategic and nancial business
objectives. The risk overview may, however, not include
all the risks that may ultimately aect Philips. Some
risks not yet known to Philips, or currently believed not
to be material, could ultimately have a major impact on
Philips’ businesses, objectives, revenues, income,
assets, liquidity or capital resources.
All oral and written forward-looking statements made
on or after the date of this Annual Report and
attributable to Philips are expressly qualied in their
entirety by the factors described in the cautionary
statement included in chapter 19, Forward-looking
statements and other information, of this Annual
Report and the overview of risk factors described in
section 7.2, Risk categories and factors, of this Annual
Report.
Risk management and controls forms an integral part of
the business planning and review cycle. 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 nancial reporting and its related
disclosures. It makes management responsible for
identifying the critical business risks and for the
implementation of t-for-purpose risk responses.
Philips’ risk management approach is embedded in the
areas of corporate governance, Philips Business
Control Framework and Philips General Business
Principles.
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.
The quality of Philips’ systems of business controls and
the ndings of internal and external audits are reported
to and discussed by the Audit Committee of the
Supervisory Board. Internal auditors monitor the quality
of the business controls through risk-based operational
audits, inspections of nancial reporting controls and
compliance audits. Audit committees at group level
(Group, Finance, Innovation and IT), at Global Market
level and at Business level (Healthcare, Lighting,
Consumer Lifestyle) meet quarterly to address
weaknesses in the business controls infrastructure as
reported by internal and external auditors or revealed
by self-assessment of management, and to take
corrective action where necessary. These audit
committees are also involved in determining the
desired company-wide internal audit planning as
approved by the Audit Committee of the Supervisory
Board. An in-depth description of Philips’ corporate
governance structure can be found in chapter 11,
Corporate governance, of this Annual Report.
Philips Business Control Framework
The Philips Business Control Framework (BCF) 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, in order to ensure the integrity of the
nancial reporting, as well as compliance with laws and
regulations. Philips has designed its BCF based on the
“Internal Control-Integrated Framework (2013)”
established by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
As part of the BCF, Philips has implemented a global
standard for internal control over nancial reporting
(ICS). The ICS, together with Philips’ established
accounting procedures, is designed to provide
reasonable assurance that assets are safeguarded, that
the books and records properly reect transactions
necessary to permit preparation of nancial
statements, that policies and procedures are carried out
by qualied personnel and that published nancial
statements are properly prepared and do not contain
any material misstatements. ICS has been deployed in
all material reporting units, where business process
owners perform an extensive number of controls,
document the results each quarter, and take corrective
action where necessary. ICS supports business and
functional management in a quarterly cycle of
assessment and monitoring of its control environment.
The ndings of management’s evaluation are reported
to the Executive Committee and the Supervisory Board
quarterly.
As part of the Annual Report process, management’s
accountability for business controls is enforced through
the formal issuance of a Statement on Business
Controls and a Letter of Representation by business
and functional management to the Executive
Committee. Any deciencies noted in the design and