The Directors have responsibility for the system of internal control that covers all aspects of the business. In recognition of that responsibility, the Directors set policies and seek regular assurance that the system of internal control is operating effectively. Strategic, commercial, operational and financial areas are all within the scope of these activities which also include management of the related risks.
The Directors acknowledge their responsibility for the system of internal control. However, the Directors are aware that such a system cannot totally eliminate risks and thus there can never be an absolute assurance against the Group failing to achieve its objectives or a material loss arising.
The key elements of the system may be described as the control environment, and this is represented by the following:
- the key business objectives are clearly specified at all levels within the Group;
- "Purpose and Values", a framework for our strategic intent, and "Our Business Principles", a set of guidelines on legal compliance and ethical behaviour, are distributed throughout the Group;
- the organisation structure is set out with full details of reporting lines and appropriate limits of authority for different processes;
- a wide range of corporate policies deal, amongst other things, with control issues for corporate governance, management accounting, financial reporting, project appraisal, environment, health and safety, information technology, and risk management generally;
- individual business units operate on the basis of multi-year contracts with four-weekly reports on performance and regular dialogues with Group senior management on progress. From 1 January 2006, these reports will be prepared on a monthly basis;
- various internal assurance departments, including the internal audit department, overseen by the Director of Business Risk Management, carry out regular reviews of the control activities and report their findings to both the business unit involved and Group management; and
- the Audit Committee approves plans for control reviews and deals with significant issues raised by internal assurance departments or the external auditor.
The management of all forms of business risk continues to be an important part of ensuring that we continue to create and protect value for our shareowners. The processes involved call for the identification of specific risks that could affect the business, the assessment of those risks in terms of their potential impact and the likelihood of those risks materialising. Decisions are then taken as to the most appropriate method of managing them. These may include regular monitoring, investment of additional resources, transfer to third parties via insurance or hedging agreements and contingency planning. For insurance, there is a comprehensive global programme which utilises an internal captive structure for lower level risks and the external market only for cover on major losses. Hedging activities relate to financial and commodity risks and these are managed by the Group Treasury and Procurement departments with external cover for the net Group exposures (see
Cash Flows in the Operating and Financial Review).
All business units are required to regularly review their principal business risks and related strategies (i.e. the chosen management methods). The internal assurance departments and other Group functions report on any further business risks evident at a regional, global or corporate level. Each year, a consolidated summary of our most significant risks is reviewed by the Audit Committee and subsequently by the Board of Directors.
The Group's associates, with the exception of Dr Pepper/Seven Up Bottling Group and Camelot which are managed in line with their respective shareholder agreements, are treated as part of the Group for the purposes of the Turnbull guidance on internal control.
Accordingly the Directors confirm that the system of internal control for the year ended 1 January 2006 and the period up to 13 March 2006 has been reviewed in line with the criteria set out in the Turnbull guidance currently applicable.
John Sunderland
Chairman
13 March 2006
