Report of the Audit Committee
The Audit Committee is chaired by Jackson Tai, and its other members are Neelam Dhawan, Kees van Lede, Heino von Prondzynski and Orit Gadiesh. Jeroen van der Veer also regularly participated in Audit Committee meetings. The Committee assists the Supervisory Board in fulﬁlling its supervisory responsibilities for (inter alia) ensuring the integrity of the Company’s ﬁnancial statements and reviewing the Company’s internal controls.
The Audit Committee met for four quarterly meetings and one education and training session during 2014 and reported its ﬁndings to the plenary Supervisory Board. The CEO, the CFO, the Chief Legal Officer, 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 Chief Legal Officer, 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 some of the matters that were discussed during meetings throughout 2014:
- The Company’s 2014 annual and interim ﬁnancial statements, including non-ﬁnancial information, prior to publication thereof. The Committee 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 Chief Legal Officer’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, the Company’s outsourcing of certain services, specific finance topics including non-manufacturing costs, the Company’s currency hedging practices and the impact of certain potential acquisitions.
- 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.
- 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 independence as well as its professional ﬁtness and good standing of the external auditor and its engagement partners. For information on the fees of KPMG Accountants N.V., please refer to the table ‘Fees KPMG’ in note (6) 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, and it 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. It also discussed on a regular basis the developments in and findings resulting from investigations into alleged violations of the Philips GBP and, if required, any measures taken.
Under Dutch legislation on mandatory auditor rotation, which has also been reﬂected in the Auditor Policy (please refer to Corporate governance for more information), Philips must engage a new audit ﬁrm for its statutory audit for the financial year starting January 1, 2016. The Committee, jointly with management, conducted a comprehensive tender and selection process for a new external auditor (incorporating an interim period of one year with the current external auditor) and resolved to recommend to the Supervisory Board the appointment of a new auditor. This resulted in the Supervisory Board proposing and recommending the appointment of Ernst & Young Accountants LLP as the company’s new auditor at the upcoming 2015 Annual General Meeting of Shareholders. Please refer to the agenda and explanatory notes thereto for such meetings for more information.
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 assessed 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 2015 Annual General Meeting of Shareholders for more information on the proposed appointment of the external auditor.
Finally, the Audit Committee also participated in an education session during 2014 on the quality and regulatory aspects of the industries in which the company is active.