Report of the Audit Committee
The Audit Committee is chaired by Jackson Tai, and its other members are Neelam Dhawan, Kees van Lede and Heino von Prondzynski. The Committee assists the Supervisory Board in fulﬁlling its supervisory responsibilities for (inter alia) the integrity of the company’s ﬁnancial statements.
The Audit Committee met for four quarterly meetings and two education and training sessions during 2013 and reported its ﬁndings to the plenary Supervisory Board. The CEO, the CFO, the Head of Internal Audit, the Group Controller and the external auditor (KPMG Accountants N.V.) attended all regular meetings. Furthermore, the Committee met each quarter separately with each of the CEO, the CFO, the Head of Internal Audit and the external auditor as well as on an ad hoc basis with other company employees, such as the Group Treasurer, the Group Controller and Head of Financial Risk and Pensions Management.
The overview below indicates certain of the matters that were discussed during meetings throughout 2013:
- The company’s 2013 annual and interim ﬁnancial statements, including non-ﬁnancial information, prior to publication thereof. It also assessed in its quarterly meetings the adequacy and appropriateness of internal control policies and internal audit programs and their ﬁndings.
- Matters relating to accounting policies, ﬁnancial risks and compliance with accounting standards. Compliance with statutory and legal requirements and regulations, particularly in the ﬁnancial domain, was also reviewed. Important ﬁndings, Philips’ major areas of risk (including the internal auditor’s reporting thereon, and the General Counsel’s review of litigation and other claims) and follow-up action and appropriate measures were examined thoroughly.
Specifically, the Committee reviewed the company’s pension liabilities and its program to de-risk future pension liabilities and related economic, accounting and legal implications. The Committee reviewed the company’s cash flow generation, liquidity and headroom throughout the year to undertake its financial commitments, including the company’s share repurchase program and payment of dividends, The Committee also reviewed the goodwill impairment test performed in the second quarter, risk management, tax issues, IT strategy and transformation (including information security) and remediation of IT related internal control findings, the company’s ﬁnance transformation, developments in regulatory investigations as well as legal proceedings including antitrust investigations and related provisions, environmental exposures and ﬁnancing and performance of ﬁnancial holdings and recent acquisitions and new Dutch legislation on mandatory auditor rotation and prohibition on non-audit services.
- With regard to the internal audit, the Committee reviewed, and if required approved, the internal audit charter, audit plan, audit scope and its coverage in relation to the scope of the external audit, as well as the stafﬁng, independence and organizational structure of the internal audit function. The Committee also reviewed and approved the appointment of a new Head of Internal Audit following the rotational reassignment of the previous incumbent.
- With regard to the external audit, the Committee reviewed the proposed audit scope, approach and fees, the independence of the external auditor, non-audit services provided by the external auditor in conformity with the Philips Auditor Policy, as well as any changes to this policy. The Committee also reviewed the External Auditor’s independence as well as its professional fitness and good standing. For information on the fees of KPMG Accountants N.V., please refer to the table ‘Fees KPMG’ in note (3) Income from operations.
- The company’s policy on business controls, the General Business Principles including the deployment thereof and amendments thereto. The Committee was informed on, discussed and monitored closely the company’s internal control certiﬁcation processes, in particular compliance with section 404 of the US Sarbanes-Oxley Act and its requirements regarding assessment, review and monitoring of internal controls.
On January 1, 2016, the new legislation on mandatory auditor rotation will become effective, which has also been reflected in the Auditor Policy amended as per January 1, 2013 (please refer to Corporate governance for more information). Under the new rotation rules, Philips must engage a new audit ﬁrm for its statutory audit for the financial year starting January 1, 2016. The Committee has been involved in the process of selecting a new auditor and will continue to be involved in the final selection in 2014 of such future auditor, subject to appointment by the 2015 Annual General Meeting of Shareholders.
During each Audit Committee meeting, the Committee reviewed the report from the external auditor in which the auditor set forth its ﬁndings and attention points during the relevant period. The Committee also assesses the overall performance of the external auditor, as required by the Auditor Policy. Please refer to the agenda and explanatory notes thereto for the upcoming 2014 Annual General Meeting of Shareholders for more information on the proposed re-appointment, for one additional year, of the external auditor.
Finally, the Audit Committee also participated in a number of education sessions during 2013, including education on pensions and proposed changes to the IFRS accounting standards.