PROCESS MANAGEMENT
ProSiebenSat.1 Group has an effective risk management system, which covers all activities, products, processes, departments, investments, and subsidiaries that could have an adverse impact on our Company’s business performance. The traditional risk management process is structured into four phases:
1. Identification: The basis is to identify material risks by means of a target/actual comparison. The decentralized risk managers are responsible for this. They use early warning indicators defined for relevant circumstances and key figures. For example, the development of audience shares is an important early warning indicator.
2. Assessment: The relevant risks are assessed on the basis of a matrix (Fig. 099). Firstly, the circumstances are categorized on a five-level percentage scale in terms of the probability of their occurrence. Secondly, their level of potential financial impact is estimated; the financial equivalents are likewise broken down into five levels. Using the matrix presentation, potential risks are classified as “high”, “medium”, or “low” depending on their relative significance. As well as classification, risk assessment also includes analyzing causes and interactions. Measures to counteract or minimize risks are included in the assessment (net assessment). In order to obtain the most precise view of the risk situation possible, however, opportunities are not taken into account.
3. Management: Using appropriate measures, ProSiebenSat.1 Group can reduce the probability of occurrence of potential losses and limit or reduce possible damage. In order to handle risks safely, it is therefore very important to take adequate countermeasures as soon as an indicator exceeds a certain tolerance limit.
4. Monitoring: Risk monitoring and risk reporting round off the risk management process. The aim is to monitor changes and review the effectiveness of the management measures taken. Monitoring also includes documentation, which ensures that all hierarchy levels relevant to decision-making have adequate information on risks.
Risk is defined in this report as a potential future development or event that could significantly influence our business situation and result in a negative deviation from targets or forecasts. The risk indicators that we have already taken into account in our financial planning or in the Consolidated Financial Statements as of December 31, 2018, therefore do not come under this definition and are consequently not explained in this Risk Report.
096 / Risk Management Process
In addition to a structured process, the fundamental requirements for handling risks safely throughout the Group include clear decision-making structures, standardized guidelines, and a methodical approach by the responsible bodies. At the same time, processes and organizational structures must be flexible enough to allow ProSiebenSat.1 Group to respond appropriately to new situations at all times. For this reason the regular classification of risks takes place on a decentralized basis and thus directly in the different corporate units (Fig. 097):
097 / Risk management system
1 For further information, please refer to the chapter “Sustainability”.
- Decentralized risk managers: The risk managers identify the risks from their respective area of responsibility according to the standard Group system described. They document their results in an IT database every quarter.
- Group Risk Officer: The Group Risk Officer reports the risks identified in the database to the Executive Board and Supervisory Board on a quarterly basis. In addition, relevant risks arising at short notice are reported immediately. In this way, the Executive Board and Supervisory Board receive all analyses and data relevant for decision making regularly and at an early stage so that they can respond appropriately.
- The Risk Office supports the various corporate units in identifying risk at an early stage. It ensures the efficacy and timeliness of the system by training the decentralized risk managers and continuously monitoring the scope of risk consolidation. Moreover, the Internal Audit unit regularly reviews the quality and compliance of the risk management system. It reports the results directly to the Group CFO.
In 2018, the audit of the risk management system generated a positive result again. The system itself did not change in the past financial year. The basis for the audit is the risk management handbook. It summarizes company-specific principles and is based on the internationally recognized frameworks for enterprise risk management and internal control systems of COSO (Committee of Sponsoring Organizations of the Treadway Commission).
Development of Risk Clusters
The categorization of risks was updated in 2018 in connection with the Group’s strategic realignment on the basis of the three-pillar strategy; in addition, non-financial risks were considered as a separate category at the end of the year. Since then, the Group has reported the risks at segment and Group level in the “operating risks”, “finance risks”, “compliance risks”, “strategic risks” and “non-financial risks” categories. Due to their thematic diversity, ProSiebenSat.1 Group also subdivides the respective “operating risks” into the following risk clusters: “External risks”, “sales risks”, “content risks”, “technological risks,” “personnel risks”, “investment risks” and “other risks”. The risk clusters in turn comprise various different risks. These are not necessarily the only risks that the Group faces. However, we are not currently aware of any additional risks that could impact our business activities, or we do not consider them relevant in the context of this report.
We monitor all relevant risks as part of the risk management process; however, this Risk Report focuses only on risks classified as having medium or high significance overall and describes the respective change compared to the previous year. Contingent liabilities from possible compliance risks are described in Note 30 “Contingent liabilities”, page 204.
ProSiebenSat.1 Media SE has implemented a comprehensive risk management system to systematically identify, assess, manage and monitor risks. Risks reported as part of this system are summarized into categories and clusters as below. While detailed descriptions and action plans to manage these risks exist, in this report focus is laid on all risks which are rated overall as medium or high. Consequently, detailed descriptions of only such risks are included in this Risk Report. If any risks which are currently rated as low change to either medium or high in the future, such risks will then be described in detail as necessary. Conversely, if risks which are currently rated as medium or high diminish to a “low risk”, such risks will not be described in detail in this report except for the change compared to the risk situation published in the Annual Report 2017 itself. The evaluation of probability of occurrence and risk impact and the general Group thresholds are unchanged compared to the previous period.
The Annual Report 2017 is published at www.prosiebensat1.com/en/, which contains the Risk Report.
We estimate that there are currently no risks that, individually or in combination with other risks, could have a material or lasting adverse effect on the earnings, financial position and performance. The identified risks pose no threat to the Company as a going concern, even looking into the future. Nevertheless, our overall risk situation has increased compared to the previous year. This development is attributable to the fact that the general sector risks in the Entertainment segment but also the sales risks in the Entertainment and Content Production and Global Sales segments have increased since December 31, 2017. Furthermore, macroeconomic and compliance risks are slightly increased at the Group level. All other risks and risk clusters — if not explicitly mentioned — are either unchanged or have decreased. Our overall risk situation therefore remains limited.
Overall risk situation: To assess the overall risk situation, ProSiebenSat.1 Group initially classifies all individual risks as part of the quarterly assessment process, aggregates them, and assigns them to clusters. When assessing the overall risk situation, ProSiebenSat.1 Group weights the clusters according to their significance for the Group. The assessment of the overall risk situation is thus the result of an aggregate analysis of the main risk categories of the Group and its three segments Entertainment, Content Production & Global Sales and Commerce, whereas no medium or high risks were detected in the Commerce segment.
098 / Overview of the Relevant Risks
1 For further information please refer to the Notes, Note 30 “Contingent liabilities”, page 204.
ENTERTAINMENT SEGMENT
Operating Risks: External Risks
General sector risks (incl. media usage behavior): We believe that the risks from a change in video usage have increased and now see their occurrence as possible (2017: unlikely). In the event of a fundamental change, we cannot completely rule out a very high impact. We therefore rate this as a high risk overall.
099 / Risk Matrix
1 For further information please refer to the Notes, Note 30 “Contingent liabilities”, page 204.
2 6 is not represented in the matrix because it cannot be evaluated. Further information can be found in the Annual Report 2018 from page 204.
The digital transformation, and particularly the growing use of the Internet, have changed media usage behavior. For a long time now, TV content has been used not only linearly and on conventional TV sets but also via mobile devices such as laptops and smartphones. These forms of use are becoming increasingly popular, especially among younger viewers. Today, around 23% of all TV use by 14- to 29-year-olds is not via a TV set but on devices such as smartphones, tablets and PCs/laptops.
Together with radio, free TV has been the medium with the furthest reach in Germany for over 50 years. In Germany, the viewing time calculated by AGF Videoforschung has been around 3.5 hours per day (target group 14 – 69) for years. Traditional television will continue to dominate video usage in Germany in the future. Although TV usage on non-mobile devices is likely to continue to decline slightly, it will still remain in first place. At the same time, the popularity of web-based offers will increase. Streaming platforms with own content are therefore gaining in importance. We have made this the focus of our strategy and expectations. We extend our portfolio with digital offers in a purposeful manner. We do this through our own products as well as through partnerships with other platform providers. An example of this is our Joint Venture with 7TV, in which ProSiebenSat.1 Group owns 50%.
In line with our strategy, we bracket these various forms of use, i.e. the use of TV, catch-up and other online video content, together as video usage. This is reflected in particular by the planned reporting of comprehensive, overall reach for all these forms of use under the name “total reach”.
As a Joint Venture, 7TV and its activities are not considered in the revenues and costs of the Group. However, the results of the joint venture are consolidated in the Group Profit and Loss statement at equity.
Operating Risks: Sales Risks
ProSiebenSat.1 Group itself is actively advancing the digital development in the media industry and diversifying and linking up its portfolio. This includes strengthening its own digital platforms in order to generate additional reach for channel homepages and 7TV, as well as for online video providers. Despite important market share successes, the Group’s sales risks have increased year-on-year.
The development of sales risks is influenced by a number of factors. In addition to measurements of reach, macroeconomic data and sector-specific trends such as the general development of the advertising market and the distribution of advertising budgets among the media mix are relevant. In this context, there is considerable risk potential in reallocating budgets to online media, possibly going hand-in-hand with a declining TV share in the media mix or a negative trend in the revenue volume of the net TV advertising market.
Risks from reach development (TV and digital): The risks from reach development have not changed: We continue to classify this risk category as possible; the potential effects would be high. On the whole, we consider it a medium risk.
ProSiebenSat.1 Group has implemented an early warning system in order to keep a close eye on short, medium and long-term developments in reach. Audience market shares, which ProSiebenSat.1 Group analyzes daily on the basis of data from Arbeitsgemeinschaft Fernsehforschung (AGF, Working Group of Television Research), are an important indicator here. In 2018, we successfully increased the audience market shares in the important revenue market of Germany while extending our reach on digital platforms. Thereby, a shift of the total reach from TV to digital offers was observed.
Our objective is to offer entertainment — whenever, wherever and on any device. In this context, the Group consolidated its entertainment activities in the TV and digital sectors into one segment in 2018. This will allow us to make use of synergies, to compensate for fluctuations in reach within the portfolios and simultaneously to react to the change in media usage habits resulting from the growing attractiveness of web-based offerings. This objective is also reflected in the enhancement of our early warning system: In 2018, ProSiebenSat.1 Group expanded its risk definition for reach development to the digital sector. In the medium term, the total reach of TV and digital (including 7TV) is to be expressed in standardized KPIs (“Total reach”) and advertising is to be more precisely addressable (“Smart reach”). “Total reach” allows overlaps between the various forms of use to be presented, e.g. joint viewers of the TV broadcast of a show and the accompanying catch-up offering. “Smart reach” will also give us the opportunity to show more relevant and individual advertising for users, enabling an improved offer for advertising customers to address their target groups. These new indicators will adequately reflect the change in usage of the traditional TV and the digital entertainment offering.
In addition to these quantitative analyses, qualitative studies are also an important control instrument, as they give stations direct feedback from their audience. Nevertheless, individual mistakes cannot be ruled out. The production and acquisition of appropriate programs is a process whose success depends to a significant degree on the subjective opinion of our viewers. Moreover, competition will remain fierce, both within the German market and with regard to international digital corporations.
Ad sales risk (TV and digital): ProSiebenSat.1 Group considers the convergence of media not only in terms of the reach development, but also in enhancing its risk management system in the sales area. Therefore, a number of risks, that were identified in this context, were aggregated into an overall risk for TV and Digital Ad sales in 2018 (risk categorization in 2017: Ad sales, Convergence and Online Ads (incl. adblocker)).
TV has benefited from digitalization in recent years and gained in relevance over print media in particular. However, competition with global digital providers has since become more intensive. The transition from traditional linear television to streaming and catch-up video offerings is constantly accelerating. This entails the risk for ProSiebenSat.1 Group that advertising customers could be less willing to invest or prices for TV advertising could fall. We cannot therefore rule out very high effects on our revenue development in the TV advertising market, although we are pursuing a digital entertainment strategy.
Success depends, also in the digital sector, on several factors like attractiveness of products through which the content is reproduced, but also on the content as well as their reach and monetization. In addition, adblockers represent a further sales risk in the sale of online advertising. These plug-ins, which are offered for browsers or apps for mobile devices, prevent advertising from being displayed. In order to limit this risk, ProSiebenSat.1 Group has introduced technical means that can effectively prevent the adblockers from functioning. We are also taking legal action and have filed an application for an injunction against the most widespread adblocker in Germany (AdBlock Plus).
For the reasons given, the probability of occurrence and thus the ad sales risk increased overall year-on-year (2018: likely; previous year: possible). The potential impact on revenue performance would be very high, so we categorize the risk overall as high.
Operating Risks: Content Risks
ProSiebenSat.1 Group focuses on an individual and generally balanced mix of licensed programs as well as commissioned and in-house productions. The Group uses exclusive agreements in the form of contractual blocking periods (hold-back clauses) to protect its rights against other licensees and program licensing forms. In order to stay informed about trends and new productions at an early stage, our purchasing department is also in constant dialog with national and international licensors. Nonetheless, the competition for attractive content has increased as a result of growing competition from international market participants and new digital offers. In addition, individual purchases are becoming a more frequent necessity, especially for small TV stations, as their programming is very specifically targeted. For this reason, ProSiebenSat.1 Group wants to make greater use of in-house and local content in the future.
Licensed programming/negotiating position with major and independent studios (incl. program quality): In the light of the growing market presence of global streaming services, competitive pressure on European media companies has increased. This is also true with regard to exploiting rights. Here, ProSiebenSat.1 Group cannot maintain its past successes in licensed US TV programming. In addition, viewer interests can develop differently from country to country. Formats that are a hit on the other side of the Atlantic are no longer necessarily met with the same response in Germany. Programs that viewers can connect with at a local level are increasingly becoming a competitive advantage. Therefore, the Group has developed its content strategy and focusses more heavily on broadcasting local programming apart from strengthening its exploitation of digital sales opportunities. At the same time, the Group has reviewed its existing contracts with US studios. This process was completed in the fourth quarter of 2018, so that the risk is now classified overall as low. At the end of 2017, this matter was still reported as a medium risk with a possible probability of occurrence. Further information about this as well as its financial implications are described in chapter Group Earnings.
CONTENT PRODUCTION & GLOBAL SALES SEGMENT
Operating Risks: Sales Risks
Program productions: In the US, cable television providers in particular are increasingly competing with subscription video-on-demand (SVOD) services. For Red Arrow Studios, the market consolidation still anticipated means not just opportunities — such as new customer groups — but risks as well. Classic cable TV especially is one of our key commissioners in the US. We consider the probability of occurrence of risks in connection with productions for the US market to be possible, and the financial impact on revenue development in the Content Production & Global Sales segment to be high. The overall risk has therefore increased compared to the end of 2017 and is rated by ProSiebenSat.1 Group as a medium risk category.
RISKS AT GROUP LEVEL
Operating Risks: External Risks
External risks slightly increased in 2018; visibility in the advertising market is limited. ProSiebenSat.1 Group therefore aims to increase its independence from the highly profitable but economically sensitive free TV business and thus further diversify the risk profile.
Macroeconomic risks: After a solid first half of the year, the German economy’s growth lost momentum significantly in the third quarter of 2018, due among other things to the slowdown in the global economy and reconciling items in the automotive industry. Although at least a slight recovery can be expected in the final quarter of 2018, the growth momentum seen in 2017 will not be achieved again. The future prospects are also characterized by growing uncertainty, particularly in relation to foreign trade. We therefore consider economic risks to be slightly increased compared to the end of 2017. We classify this external risk as a medium risk (previous: medium) with high negative effects and we see the occurrence of it now as possible (previous year: unlikely).
Security risks: Targeted attacks show that politically, economically or ideologically motivated groups represent a growing challenge for our society. The growing number and quality of risk factors require fast and effective emergency plans and clear responsibilities. To this end, ProSiebenSat.1 Group has defined instructions and established a crisis organization. At the same time, data protection and securing corporate assets in the form of information are becoming increasingly relevant. ProSiebenSat.1 Group has also reacted to this by implementing an information security management system. At the same time, employees’ awareness is raised and they are given training on security issues. In addition to these risk factors, unforeseeable events such as natural disasters or attacks could have an adverse impact on ProSiebenSat.1 Group’s work processes and thus also on its earnings. We take account of these risks by means of construction-related and technical safeguards, among other measures; we secure productions and events with specialist staff. Security risks have not changed: We consider their occurrence to be possible and rate their potential impact on the Group’s revenue and earnings performance as medium. In view of the preventive measures taken, we classify the security risks as medium overall.
Finance Risks
The Group is exposed to various finance risks in its operating and financing activities. These include financing risk, counterparty risk, interest risk, currency risk and liquidity risk; with the exception of counterparty risk, we classify finance risks as having low significance. We counter these risks with extensive measures and use derivatives for hedging purposes.
The assessment and management of finance risks is coordinated centrally. To this end, the Group Finance & Treasury department analyzes the development in the markets, derives potential opportunities and losses for ProSiebenSat.1 Group on this basis, and regularly assesses the risk situation. The measures required are defined in close cooperation with the Group’s Executive Board. Principles, tasks, and responsibilities are defined on a Group-wide basis and regulated via binding guidelines for all subsidiaries of ProSiebenSat.1 Group.
Counterparty risk: The Group concludes finance and treasury transactions exclusively with business partners which meet high credit rating requirements. The counterparties’ profiles are monitored systematically and continuously in this context. As well as using credit checks, ProSiebenSat.1 Group limits the probability of occurrence of counterparty risks through a broad diversification of its counterparties. The conditions for concluding finance and treasury transactions are regulated in standardized Group guidelines. We continue to rate the occurrence of counterparty risk unchanged as unlikely. However, as lenders’ defaults could have a very high impact on our earnings performance and financial position, we classify the risk as medium overall.
Derivative financial instruments are usually recognized as cash flow hedges as part of hedge accounting. More information can be found in the Notes, Note 32 “Further notes on financial risk management and financial instruments in accordance with IFRS 7”, page 206. ProSiebenSat.1 Group does not deploy derivative financial instruments for trading purposes, but only to hedge existing risk positions (Financing Analysis). For more information on the hedging instruments, measurements and sensitivity analyses together with a detailed description of the risk management system for financial instruments, please refer to the Notes to the Consolidated Financial Statements: Risks from ineffectiveness, in connection with falling interest rates, are described in Note 32 “Further notes on financial risk management and financial instruments in accordance with IFRS 7”, page 206.
Compliance Risks
Digitalization has fundamentally changed consumer behavior. This poses new challenges not only for the media industry but also for legislators in particular. They have the task of adapting legal regulations from the analog era to meet the requirements of a fully digitalized world. One important step in this context was the General Data Protection Regulation. As a result of this change in the law, potential compliance risks for ProSiebenSat.1 Group have increased slightly.
General compliance (incl. statutory reporting obligations, antitrust, litigation): The General Data Protection Regulation came into force in May 2018. ProSiebenSat.1 Group has taken measures at an early stage to implement this throughout the Group. This also includes adequate data protection in targeted online advertising, which can be tailored more precisely the better we know users’ interests.
Modern data protection on the Internet is essential, both for users and for publishers and the advertising industry. However, the impact of the General Data Protection Regulation on the advertising industry cannot yet be fully predicted. This is especially true in the context of the controversially debated positioning of the German data protection authorities in April 2018. It is unclear whether the implicit or even explicit consent of the user will need to be obtained from a certain point in the future when developing profiles.
In March 2018, we established our Log-in Alliance netID in order to create the infrastructure for potentially expanded permissions management in accordance with the General Data Protection Regulation. We are thus also anticipating potential requirements of a future ePrivacy Regulation for targeted advertising on the Internet. Irrespective of this, ProSiebenSat.1 Group is also continuing to monitor the current developments closely, in particular with regard to the General Data Protection Regulation, and is preparing to be able to react appropriately to expected and unexpected conditions and thereby minimize the financial risk. To the extent that there have been isolated incidents so far, no fines have been imposed. Nonetheless, we classify general compliance risks as slightly increased and in this context we cannot completely rule out high negative effects on the Group’s earnings performance and consider their occurrence to be possible (previously: unlikely). We still classify the overall risk as a medium risk.
Regulatory risks (including media law and broadcasting licenses): Changes to the regulatory or legal environment could have an impact on individual business activities. This is especially true for stricter provisions or the interpretation of legal provisions on distribution, advertising or broadcasting licenses. The Group actively monitors all relevant developments and is in constant contact with the regulators concerned, to ensure that its interests are taken into account as far as possible. We therefore consider regulatory risks to be unchanged. We cannot completely rule out a medium negative impact on the Group’s earnings performance. We therefore rate this issue as a medium risk overall and consider the occurrence of this risk as possible.
The legislative process for the State Media Treaty is currently underway, with a draft released for public debate in 2018. ProSiebenSat.1 Group has actively participated in this process and issued a statement. The effects of a possible revision of the treaty, for example in relation to addressable advertising via HbbTV, cannot currently be foreseen for ProSiebenSat.1 Group. We welcome the Broadcasting Commission’s approach of initiating a broad-based dialog about the creation of a State Media Treaty with all involved and interested parties. The aim is to bring about a comprehensive and fundamental overhaul of regulation in Germany and Europe. A first step in this direction has been taken at European level with the Audiovisual Media Services Regulation (2018), which now has to be implemented in national law by fall 2020. In this context, ProSiebenSat.1 Group is arguing for the Directive’s provisions to be implemented in a way that does not use the possibility of discrimination against domestic companies, under which legislators would make domestic media providers subject to stricter regulations than those stipulated by EU law and therefore would not create a level playing field.
A level playing field, and thus a market environment in which the same regulations apply to all media providers, forms the basis for a fair and sustainable competitive situation. This particularly applies in view of the growing significance of global platform providers that are establishing monopolistic market positions by virtue of their financial strength and are not bound by the strict German or European regulations. For this reason, the EU legislative process “Satellite and Cable Online Directive”, should also be viewed in a differentiated way. The directive carries the danger of unequal competitive conditions for market participants and that the balance of power will shift further in favor of US market participants, because we as a broadcasting company would have to pass along parts of our content at fixed conditions. This is justified by the need for the harmonization of Online TV broadcasting to conventional TV broadcasting. After the law is finally enacted, the German Government has two years to implement the rules of the directive into national law. Within the legislative process, ProSiebenSat.1 Group will stand up to protect the interests of the channels.
Customers of PE Digital GmbH are currently bringing several first-instance or appeal actions before various courts to examine withheld compensation from premium memberships. Members of the online dating sites operated by PE Digital GmbH can cancel their contracts without explanation within a period of fourteen days. Within this period, PE Digital GmbH reimburses its members the fee for their premium membership, but reserves the right to claim compensation for the service provided that it deems appropriate. The outcome of these proceedings and the resulting financial impact cannot be reliably forecast. Sufficient provisions have been recognized for proceedings pending as of December 31, 2018.
In the past few weeks, the press reported further regulations of comparison portals. In the context of the possible insolvency of an energy provider, who was approved by the Federal Network Agency, the business practice of comparison portals is under scrutiny. We see ourselves as representatives of consumer interests and are therefore obliged to a high level of transparency. That is why we proceed on the basis that efforts to further regulate this matter is not a material risk for us.
For further information on compliance risks, please refer to the Notes.
100 / Disclosures on the internal control and risk management system in relation to the (consolidated) reporting process (section 289 (4) and section 315 (4) of the German Commercial Code) with explanatory notes
The internal control and risk management system in relation to the (consolidated) reporting process is intended to ensure that transactions are appropriately reflected in the Consolidated Financial Statements of ProSiebenSat.1 Media SE (prepared in line with the from the EU adopted International Financial Reporting Standards, IFRS) and that assets and liabilities are recognized, measured and presented appropriately. This presupposes Group compliance with legal and company regulations. The scope and focus of the implemented systems were defined by the Executive Board to meet the specific needs of ProSiebenSat.1 Group. They are regularly reviewed and updated as necessary. Nevertheless, even appropriate and properly functioning systems cannot offer any absolute assurance that all risks will be identified and controlled. The company-specific principles and procedures to ensure that the Group’s single-entity and consolidated reporting is effective and correct are described below.
GOALS OF THE RISK MANAGEMENT SYSTEM IN REGARD TO FINANCIAL REPORTING PROCESSES
The Executive Board of ProSiebenSat.1 Media SE views the internal control system with regard to the financial reporting process as an important component of the Group-wide risk management system. Controls are implemented in order to provide an adequate assurance that in spite of the identified risks inherent in recognition, measurement and presentation, the single-entity and Consolidated Financial Statements will be in full compliance with regulations. The principal goals of a risk management system in regard to single-entity and consolidated reporting processes:
- To identify risks that might jeopardize the goal of providing single-entity and Consolidated Financial Statements and a single-entity and Group Management Report that comply with regulations.
- To limit risks that are already known by identifying and implementing appropriate countermeasures.
- To analyze known risks as to their potential influence on the single-entity and Consolidated Financial Statements, and to take these risks duly into account.
In addition, our process descriptions and our risk control matrices are subject to an annual review. This ensures that the descriptions are up-to-date and thus also brings about the establishment of consistently effective control mechanisms. These updates combined with regular tests on the basis of samples were part of the PRIME project. Since then, they have been an integrated part of the internal control and risk management system in relation to the (consolidated) reporting process. On the basis of the test results there is an assessment of whether the controls are appropriate and effective. Any identified deficiencies in the controls are eliminated, taking into account their potential impact.
STRUCTURAL ORGANIZATION
- The material single-entity financial statements that are incorporated into the Consolidated Financial Statements are prepared using standardized software.
- The single-entity financial statements are then consolidated to form the Consolidated Financial Statements using stable market-based standardized software.
- The financial statements of the main individual entities are prepared in compliance with both local financial reporting standards and the Group’s accounting and reporting manual based on IFRS, which is available via the Group intranet to all employees involved in the reporting process. The individual companies included in the Consolidated Financial Statements provide their financial statements to Group Accounting in a defined format.
- The financial systems employed are protected with appropriate access authorizations and controls (authorization concepts).
- The entire Group has a standardized plan of accounting items, which must be followed in recording the various relevant transactions.
- Certain matters relevant to reporting (e.g. expert opinions with regard to pension provisions) are determined with the assistance of external experts.
- The principal functions of the reporting process — accounting and taxes, controlling, and finance and treasury — are clearly separated. Areas of responsibility are assigned without ambiguity.
- The departments and other units involved in the reporting process are provided with adequate resources in terms of both quantity and quality. Regular professional training sessions are held to ensure that financial statements are prepared at a consistent and reliable level of quality.
- An appropriate system of guidelines (e.g. accounting and reporting manual, intercompany transfer pricing guideline, purchasing guideline, travel expense guideline, etc.) has been set up and is updated as necessary.
The efficiency of the internal control system in regard to processes relevant to financial reporting is reviewed on a sample basis by the Internal Audit unit, which is independent of the process.
PROCESS ORGANIZATION
- For the planning, monitoring, and optimization of the process of compiling the Consolidated Financial Statements, the Company uses tools that include a detailed calendar and all important activities, milestones, and responsibilities. All activities and milestones are assigned specific deadlines. Compliance with reporting duties and deadlines is monitored centrally by Group Accounting.
- In all accounting-related processes, controls are implemented such as the separation of functions, the dual-control principle, approval and release procedures, and plausibility testing.
- Tasks for the preparation of the Consolidated Financial Statements are clearly assigned (e.g. reconciliation of intragroup balances, capital consolidation, monitoring of reporting deadlines and reporting quality with regard to the data of consolidated companies, etc.). Group Accounting is the central point of contact for specific technical questions and complex accounting issues.
- All material information included in the Consolidated Financial Statements is subjected to extensive systematic validation to ensure the data is complete and reliable.
- Risks that relate to the (consolidated) accounting process are recorded and monitored continuously as part of the risk management process described in the Risk Report.