Ubisoft 2005 Annual Report Download - page 150

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Internal control procedures
7.2
Ubisoft has adopted the definition of internal control laid
out in the AFEP/MEDEF report on corporate governance
in France.
According to this definition. the objective of internal
control is:
to ensure that the actions taken and operations carried out
by the company’s management, as well as the conduct of
personnel, comply with the existing laws and regulations.
the policies established by the corporate bodies and the
company's own values. standards and rules;
to ensure the accuracy and reliability of the accounting,
financial and management data conveyed to the corporate
bodies;
to prevent and manage risk resulting from the company’s
activity and the risk of error or fraud.
The procedures put in place form an operational framework
within the company.
The objectives of risk management and internal control
procedures are as follows:
to identify potential risks and evaluate them in terms of
their impact on the company’s activity;
to define and implement measures for monitoring and
measuring these risks.
The primary risks identified by general management (cf.
Section 7.2.2 below) have been mapped out and the following
steps have been taken:
- identification of all the company’s activities;
- identification of approximately 30 risks that could impact
the group’s activities;
- identification of the main preventative measures.
This descriptive analysis is part of a far-sighted effort
that will enable Ubisoft to evaluate, in the long run, the
relevance and effectiveness of its internal control.
Principal risks
The principal risks identified are as follows:
7.2.2.1 Risk related to computer
security
In spite of the numerous integrated security systems
deployed, Ubisoft is not totally protected from malicious
intent, intrusion, problems with network user identification,
and so on. Changes in legislation, the deployment of new
mobility technology, the spread of virus attacks and
increased use of the Internet have all been factors in the
adoption of comprehensive security solutions.
Information is a strategic resource of considerable value,
and must therefore be protected in an appropriate
manner.
Security measures for information systems protect infor-
mation from a wide array of threats to ensure business
continuity.
These measures are aimed at guaranteeing the confidentiality,
integrity and availability of information.
7.2.2.2 Risk related to customer
dependence
The company has no significant dependence on customers
that could affect its development plan.
Ubisoft’s distribution network is increasingly centralized.
In fact, in most European countries as well as in the United
States and Japan, distribution is centralized, and Ubisoft
delivers its products directly to local retail chains. which in
turn redistribute products to their stores. Only the smallest
independent retailers are supplied through distributors or
wholesalers, mainly in France and United Kingdom.
Most sales are made to so-called “major accounts”. The
risk of non-payment by these clients is relatively low.
Moreover, the main subsidiaries, which represent more
than 92% of Group sales, are covered by credit insurance.
7.2.2.3 Market risk
The group limits its market involvement to the manage-
ment of positions resulting from its commercial activities
and does not engage in any speculative transactions. Risk
management is centralized and handled exclusively by the
staff of the group’s Finance department on the basis of
guidelines approved by the CEO.
To limit interest rate and foreign exchange risk resulting
from business financing needs and international activities,
the group uses certain financial instruments, as described
below.
Interest rate risk:
The management of interest rate risk is aimed mainly at
minimizing the cost of the group’s borrowings and at redu-
cing exposure to this risk. In this regard. the group gives
priority to fixed-rate loans for long-term financing needs
and variable-rate loans to finance specific needs related to
an increase in working capital during particularly active
periods.
As of March 31, 2006. the group's net debt consisted
mainly of bond debts and fixed-rate loans. The group is
therefore not greatly affected by a rise in interest rates but
is exposed to opportunity cost risk if rates decrease.
Foreign exchange risk:
The group is exposed to foreign exchange risk on its
operating cash flow and its investments in its foreign sub-
sidiaries. The group protects only its positions related to
Definition and objectives
of internal control
7.2.1
7.2.2