Volvo 2007 Annual Report Download - page 80
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Please find page 80 of the 2007 Volvo annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.The Board’s report regarding internal
control over the fi nancial reporting
The purpose of this report is to provide share-
holders and other interested parties an under-
standing of how internal control is organized
at Volvo with regard to fi nancial reporting.
The report has been prepared in accord-
ance with the Swedish Code of Corporate
Governance (the Code), and the guidance
issued by the Confederation of Swedish
Enterprise and FAR. The report is therewith
limited to internal control over fi nancial report-
ing. In accordance with application directions
for the Code from the Swedish Corporate
Governance Board, this report does not con-
tain any statement regarding how well the
internal controls have functioned. This report
is included as a section in the Corporate Gov-
ernance Report, but does not comprise a por-
tion of the formal annual report. This report
has not been reviewed by the company’s
external auditors.
Introduction
Since AB Volvo’s Series B shares are regis-
tered with the Securities and Exchange Com-
mission (SEC) in the US, Volvo is subject to
the Sarbanes-Oxley Act (SOX) that includes,
among other aspects, comprehensive regula-
tions regarding evaluation of internal control
over the fi nancial reporting. During 2007
Volvo applied for delisting of the Volvo share
from the NASDAQ stock exchange in the US
and for deregistration of the class B share
from the SEC.
Volvo primarily applies internal control prin-
ciples introduced by the Committee of Spon-
soring Organizations of the Treadway Com-
mission (COSO). The COSO principles consist
of fi ve interrelated components. The com-
ponents are: control environment, risk assess-
ment, control activities, information and com-
munication and follow-up/supervision.
Volvo has had a specifi c department for
internal control since 2005. The aim of the
Internal Control function is to provide support
for management groups within business
areas, so that they are able to continuously
provide good and improved internal controls
relating to fi nancial reporting. Work that is
conducted through this function is based pri-
marily on an evaluation methodology that has
been developed for the purpose of complying
with SOX requirements. The methodology
is aimed at ensuring both compliance with
directives and policies, as well as to create
good conditions for specifi c control activities
in key processes related to fi nancial reporting.
The Audit Committee is informed of the result
of the work performed by the Internal Control
function within Volvo with regard to risk, con-
trol activities and follow-up on the fi nancial
reporting.
Volvo also has an Internal Audit function
with the primary task of independently verify-
ing that companies in the Group follow the
principles and rules that are stated in the
Group’s directives, policies and instructions
for fi nancial reporting. The head of the
Internal Audit function reports directly to the
CEO, the Group’s CFO and the Audit Committee.
Control environment
The foundation of the internal control process
relating to the fi nancial reporting is built up
around the Group’s directives, policies and
instructions, and the responsibility and author-
ity structure that has been adapted to the
Group’s organization to create and maintain a
satisfactory control environment. The prin-
ciples for internal controls and directives and
policies for the financial reporting are
contained in Volvo Financial Policies &
Procedures (FPP).
Fundamental to Volvo’s control environ-
ment is the business culture that is estab-
lished within the Group and in which man-
agers and employees operate. Volvo works
actively on communications and training
regarding the company’s basic values as
described in The Volvo Way, an internal docu-
ment concerning Volvo’s business culture,
and the Group’s Code of Conduct, to ensure
that good morals, ethics and integrity perme-
ate the organization.
Risk assessment
Risks relating to the fi nancial reporting are
evaluated and monitored by the Board through
the Audit Committee. The annual evaluation
of internal control activities conducted by the
Internal Control and Internal Audit functions,
are based on a risk-based model. The evalu-
ation of the risk that errors will appear in the
fi nancial reporting is based on a number of
criteria. Complex accounting principles can,
for example, mean that the fi nancial reporting
risks being inaccurate for those posts that are
covered by such principles. Valuation of a par-
ticular asset or liability according to various
evaluation criteria can also constitute a risk.
The same is true for complex and/or changing
business circumstances.
Control activities
In addition to the Board of AB Volvo and its
Audit Committee, the Boards and manage-
ment groups of Group companies constitute
the overall supervisory body.
Several control activities are applied in the
ongoing business processes to ensure that
potential errors or deviations in the fi nancial
reporting are prevented, discovered and cor-
rected. Control activities range from review of
outcome results in management group meet-
ings to specifi c reconciliation of accounts and
analyses of the ongoing processes for fi nan-
cial reporting. CFOs in Group companies are
ultimately responsible for ensuring that con-
trol activities in the fi nancial processes are
appropriate and in accordance with the Group’s
policies and instructions. They are also respon-
sible for ensuring that authority structures are
designed so that one person can’t perform an
activity and then perform the control of the
same activity. Control activities within IT security
and maintenance are a key part of Volvo’s
internal control over fi nancial reporting.
Information and communication
Policies and instructions relating to the fi nan-
cial reporting are updated and communicated
on a regular basis from management to all
affected employees. In addition, there are a
76 Corporate Governance