annual report - Kendrion

options. In addition, loans to Group
companies in foreign currencies are hedged
at a central level using currency swaps.
At balance sheet date Kendrion had not
hedged any net investments in its
subsidiaries outside the eurozone.
In principle significant acquisitions and
local debts are financed in the local
currency and as a result this financing
constitutes a natural hedge against
exchange rate risks.
Interest rate risks – The majority of the
financing raised by the company is in the
form of variable interest rate loans. These
variable interest rates can fluctuate and
reduce the results. At the end of 2011,
Kendrion concluded interest rate swaps for
EUR 20 million for a period of one and two
years to hedge a substantial part of the
interest-bearing debt.
Fluctuations in the level of interest rates
can also affect the assets and liabilities of
pension funds and result in higher pension
costs and contributions. The majority of
Kendrion’s pension schemes are defined
contribution pension schemes.
Although Kendrion hedges significant
sensitivities to interest rate and currency
fluctuations, some sensitivities will always
remain.
Tax risks
The outcome of tax disputes, litigation,
indemnification and guarantees, and
regulatory action could be detrimental to
the business and the results
Kendrion operates in 13 countries with
companies that possess a high degree of
autonomy. In most countries the
responsibility for accurate tax returns has
been assigned to the local management.
Kendrion carries out an annual inventory
at corporate level and in close collaboration
with renowned international tax consultants
to assess whether fiscal developments
could have an effect on the company’s
subsidiaries. Kendrion plans to initiate a tax
compliance programme in 2012, which will
review our operating companies’
compliance with the regulations for various
taxes during a three-year timeframe.
Management of financial reporting risks
in the year under review
Kendrion has adopted a structured
approach to the management of financial
reporting risks. The company perceives the
structured management of financial
reporting risks as one of the regular duties
of the Controllers. In principle, the control
measures are integrated in the various
company processes. The local Controllers
supervise compliance. Kendrion has
implemented guidelines for the Controllers
that specify the monthly close procedures
and the minimum controls to be performed.
Kendrion has developed a special internal
audit programme (KiC: Kendrion-in-Control)
for an independent assessment of the
effectiveness of the companies’ control
framework. Kendrion has to date opted for
an audit programme with a scope of the
companies that jointly account for
approximately 80% of the value of the
relevant reporting cycles. The reporting
cycles Kendrion has implemented for its
operating companies are revenue and
accounts receivable, purchase and accounts
payable, inventories, fixed assets, and
human resources. The current audit
programme set-up safeguards the
independence of the internal auditors, since
Controllers do not audit their own operating
companies. The KiC testing also serves as a
platform for management development and
provides for the sharing of best practices
between the various operating companies.
Audits are conducted by Kendrion N.V. and/
or external audit firm staff, depending on
the available capacity.
Results from and shortcomings revealed
by the audit programme
In 2011, Kendrion audited companies
to assess the quality of their financial
reporting risk management systems.
These internal audits covered over 80% of
the value of the relevant reporting cycles.
The overall results from the audits carried
out in 2011 were satisfactory, in view of the
outcome of the internal audits conducted
by Kendrion and the limited number of audit
findings of the external local auditors
communicated in the management letters
and identified during the final audits.
In 2010, shortcomings in the segregation
of duties were identified in the ICT system
at Kendrion Magneta, a company that
was acquired earlier in 2010. These
shortcomings have since been rectified
or the risks have been mitigated by the
implementation of compensating controls,
as was established during an internal audit.
In view of the above, the Executive Board
is of the opinion that the design of the
internal risk management and control
systems provide a reasonable assurance
that the financial reporting does not contain
any errors of material importance and that,
with due regard for the aforementioned
shortcomings, the risk management and
control systems performed adequately in
the year under review.
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annual report 2011