Annual Report 2005 (6 MB) - Lundin Petroleum

INTERNAL CONTROL REPORT
THE BOARD OF DIRECTORS’ REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING FOR THE FINANCIAL YEAR 2005
According to the Swedish Company’s Act and the Swedish Code
of Conduct the board is responsible for the internal control of the
company. This report has been prepared in accordance with the
requirements of the Swedish Code of Corporate Governance and
is accordingly limited to internal control over fi nancial reporting.
This report describes the fi nancial internal control function but
does not comment on its eff ectiveness. This will be included in the
report issued for the 2006 accounting year. This report is not part
of the formal fi nancial statements and has not been subject to an
audit.
The internal control system for fi nancial reporting has been created
to ensure that objectives such as eff ectiveness and effi ciency of
the accounting processes and the reliability of fi nancial reporting
as well as compliance with applicable laws and regulations are
met. Such a system can only provide reasonable and not absolute
assurance against material misstatement or loss, and is designed
to manage rather than eliminate the risk of failure to achieve the
fi nancial reporting objectives.
Lundin Petroleum’s Financial Reporting Internal Control System
consists of fi ve key components and is based upon “COSO”, which
is the generally accepted framework for internal controls systems
instigated by the Committee of Sponsoring Organisations of the
Treadway Commission.
Control environment
The control environment establishes the overall tone for the
organization and is the foundation for all of the other components
of internal control. Sub-components of the control environment
are:
■ Integrity and ethical values
■ Commitment to competence and development of people
■ Management’s philosophy and operating style
■ Organisational structure
■ Assignment of authority and responsibility
■ Human resources policies and procedures
■ Participation by those charged with governance (i.e., board of
directors, audit committee)
The Board adopted the Lundin Code of Conduct in 2001 when
the Lundin Petroleum Group was formed. Through this Code the
Board has stated the Group’s vision and values and the standards
of integrity, ethical value and competence at which the Group’s
employees must operate.
The inclusion of independent directors within the Board of
Directors provides an objective view and monitoring of the
Companies processes and application thereof.
The responsibility for maintaining an eff ective control
environment and for operating the system of internal control and
risk management is delegated to the President and CEO and the
management at varying levels. The managers are responsible for
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internal control and risk management within their respective
areas of responsibility.
The Board has approved an anti-fraud policy outlining the
employees’ responsibilities with regard to fraud prevention,
what to do if fraud is suspected and what action will be taken by
management in the case of suspected or actual fraud.
Together with laws and external regulations, these internal
guidelines form the control environment which is the foundation
of the internal control and risk-management process.
All employees are accountable for compliance with these
guidelines, principles and values within their areas of control and
risk management.
Risk assessment
Lundin Petroleum has reviewed and analysed the risks that exist
within the fi nancial reporting process and has structured its
internal control systems around the risks identifi ed.
Some of the risks in the fi nancial reporting process that have been
identifi ed, assessed and addressed are:
■ control and valuation of inventory
■ existence and valuation of assets and liabilities
■ incurrence of expenditure
■ completeness of accounting
■ cash processing and cash balances
■ changes to the accounting framework (i.e. from Swedish GAAP
to IFRS)
■ valuation and reporting of fi nancial instruments used to reduce
the risk of currency, interest rate and oil price fl uctuations
A principal consideration in the review of risks in the fi nancial
reporting process is the possibility of fraud.
Following the identifi cation and evaluation of a risk a control
activity must be implemented to minimize the eff ect on the
fi nancial reporting process.
Control activities
Control activities are the methods and activities for securing
assets, controlling the accuracy and reliability of reports, fostering
effi ciency and ensuring compliance with defi ned accounting
principles and other directives given by the management.
The control activities involve:
■ approvals
■ authorisations
■ verifi cations
■ reconciliations
■ reviews of operating performance
■ security of assets
■ segregation of duties and reporting systems and processes.
The degree of compliance with these control activities indicates
the level of risk that exists within the fi nancial reporting process.