Annual report 2010 - Dexia.com

Declaration of corporate governanceManagement reportConsolidatedfinancial statementsAdditional information Annual financial statementsInternal control and riskmanagement systemPrincipal characteristics of theinternal control and risk managementsystemFramework and tasks of internal controlIn March 2001, Dexia SA, a financial company under Belgianlaw, concluded a protocol on the prudential structure withthe Banking, Finance and Insurance Commission.Within that context, Dexia SA voluntarily complies withoperating standards equivalent to those applicable to Belgiancredit institutions which are parent companies. That conditionincludes on the one hand the introduction within Dexia SAof an appropriate collegial management structure and on theother hand, in addition to the legal provisions arising fromthe status of financial company, Dexia SA is subject to certainprudential framework provisions inspired by those legallyapplicable to credit institutions under Belgian law, includingin particular the Law of 22 March 1993 relating to the statusand control of credit institutions and the Banking, Financeand Insurance Commission Circular of 30 June 1997 oninternal control and internal audit.Internal control is a process providing a reasonable assurancethat the objectives of the organisation, the effectiveness andefficiency of operations, the reliability of financial informationand compliance with the laws and regulations will be achievedat the desired level. Like any control system, it is designed toreduce residual risk to a level accepted by the requirementsof Dexia.More specifically, the tasks assigned to internal control inforce within the Dexia Group can be grouped in five principallines:1. Checking the effectiveness of the risk managementmechanismRisk management is at the core of banking activity. TheDexia Group has introduced an internal control mechanismwith the objective, in relation to the main activities of theGroup, to guarantee that the risks taken are appropriate forthe accepted level.2. Ensuring the reliability and pertinence of accounting andfinancial informationThe principal objective of financial information is to give atrue picture of the situation of the Dexia Group on a regular,complete and transparent basis. The internal control system isfocussed on achieving that objective.3. Ensuring observance of the regulations as well as the rulesof professional ethics and compliance, both internally andexternallyThe good operation of the Dexia Group involves strictfulfilment of legislative and regulatory obligations in eachof the countries where it has establishments, as well as thestandards it has fixed for itself, beyond those obligations, inparticular regarding corporate governance, compliance andsustainable development. The internal control system aims toensure observance of those principles.4. Improving the Group’s operation whilst ensuring theefficient management of available meansIt must be possible to put the decisions taken to that endby the Management Board into practice rapidly throughoutthe Group. The internal control procedures aim to ensure theintegrity of information flows, the compliance of the actionsintroduced and the monitoring of results.5. Ensuring the operational effectiveness and efficiency of allthe business linesThe proper functioning of operational circuits is a constantconcern at all decision-making levels. Many initiatives aretaken in this regard in constant collaboration between theBusiness and Support functions which also measure them viaindicators and regular reporting. The internal control systemassesses the effectiveness of the operational processes andmonitoring mechanisms.General architecture of the mechanismThe general architecture of the mechanism relies on thebasic principles declined in all activity lines and all supportprocesses.The Dexia Group internal control system relies on activitiesintegrated in all operational, support and accountingprocesses, the surveillance of which is a constant responsibilityof management with successive levels of control.Within the context of a project common to the so-calledcontrol support lines (risk, compliance, audit), Dexia hasprogressively completed risk and control guidelines.The latter revolves around five points: control environment,risk analysis, control activities, information and communicationand finally monitoring.In terms of control environment, a clear separation offunctions has been conceived to maintain and to ensure aclear distinction between operators undertaking an actionor a transaction and those responsible for their validation,their monitoring and their completion. In addition, a seriesof consistent and clear instructions, consisting of charters,codes, lines of conduct and procedures has been put in placein order, inter alia, to ensure that all the internal controloperators can be coordinated.In that logic, the general architecture of the Dexia Groupinternal control system is based on an organisation split intothree levels:1. The first control level is performed by each member of staffand their superior, in relation to the responsibilities expresslydelegated to them, procedures applicable to their activity andinstructions given.2. The second control level is for specialist functions,irrespective of their activities and reporting directly to theManagement Board. This second level may also be theresponsibility of specialist committees, composed of members50 Dexia Annual report 2010