Internal Control

In accordance with the Code, the Board acknowledges its responsibility to ensure that an adequate system of internal controls is in place which is essential for reliable financial reporting and also for the effective management of the Group. The Audit Committee assesses the quality of the control environment when monitoring and reviewing the integrity of the Group’s financial statements and any significant judgements that were made in their preparation.

Filtrona’s internal controls are designed to safeguard the Company’s assets and to ensure the integrity and reliability of information used both within the businesses and for public announcements. The Board has overall responsibility for the Company’s system of internal control and risk management and for reviewing the effectiveness of this system. Such a system can only be designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can therefore only provide reasonable, and not absolute, assurance against material misstatement or loss.

The following procedures are in place which enable the Board to review the effectiveness of the system of internal control:

• The Board receives detailed reports at each scheduled Board Meeting on the operational and financial performance of the businesses from the Chief Executive and the Group Finance Director, together with regular updates on any material issues which may impact on the Group.
  The Board receives reports from the Company Secretary & General Counsel on any material legal and compliance issues which may impact on the Group.
• The Board receives copies of the minutes from all Executive Committee meetings and discuss any material issues arising therefrom at each scheduled Board meeting or as otherwise appropriate. The Executive Committee, which meets at least twice per month, is made up of the Chief Executive, the Group Finance Director, the Company Secretary & General Counsel and the Director of Group Human Resources.  Each meeting includes a review of health and safety and trading performance, acquisition and investment activity, material contract and litigation issues, risk management and any concerns arising from personnel matters.
• The Audit Committee meets regularly and reviews the effectiveness of the internal control environment of the Group, supported by the external auditor and the Group Head of Audit. The Group Head of Audit provides detailed reports and the external auditor advises the Audit Committee in writing of any areas of concern identified during the course of their audit programmes during the year. The Audit Committee considers any issues raised in any reports and monitors the actions taken by the Company in response to those issues. The internal audit programme for each year is planned using a number of factors, including the size and nature of the operations, any previous year’s findings and any changes in the day to day management processes or teams, and the programme is discussed and agreed with the Audit Committee.
• The Audit Committee meets with the external auditor and the Group Head of Audit without the Executive Directors or other senior executives in attendance.
• The Audit Committee reviews a risk management report from the Chairman of the Risk Management Committee at each meeting. The risk management report includes an analysis of the key risks at a Group level and within the operating businesses, summarises developments potentially impacting the Group from a risk, governance or compliance perspective and proposes actions for the Company in response to such developments. The Audit Committee considers any issues raised in the report and monitors the actions taken by the Company in response to those issues.
• The Audit Committee receives regular risk management presentations from senior management within the respective divisions
• The Audit Committee receives a report from the Company Secretary & General Counsel on any issues raised pursuant to the Company’s Whistleblowing policy and monitors the actions taken by the Company in response to those issues.
• The Board has the opportunity to review the internal control environment at local sites when Board meetings are held away from the Company’s head office.
• Every month each division submits detailed operating and financial reports covering all aspects of performance. These are reviewed within the Group’s central finance function and summary reports are communicated to the Executive Committee and the Board.
• Compliance certificates are required from the businesses to confirm compliance with the Group’s policies and procedures.

Operational matters and the responsibility for the day-to-day management of the businesses are delegated to the Chief Executive supported by the Executive Committee and to the respective Divisional Managing Directors or Presidents as appropriate within delegated authority limits and in accordance with clearly defined systems of internal control.

During 2009 the GOC which consists of the Executive Committee members and the Divisional Managing Directors or Presidents, as appropriate, met quarterly to discuss health and safety performance, risk management, business performance, employee-related matters, including succession planning, and key operational and financial management issues across Filtrona’s international businesses. The GOC was particularly focused on the management responses to the rapidly changing economic environment, ensuring that the Group was able to react quickly as their stakeholders also changed their focus during the year.

Policies and procedures, which are subject to ongoing review and updated as required in response to strategic, operational, business, legal or regulatory developments, with the approval of the Board or its respective Committees as appropriate, are communicated across the Company and designed to ensure significant risks, investment decisions and management issues are identified, considered and escalated as necessary at the earliest opportunity. Divisional Managing Directors and Presidents are responsible for ensuring the communication of and compliance with Filtrona’s internal controls across their respective divisions.

The Board considers that there is considerable comfort in the fact that the Group’s cash flow from operating activities represented in excess of 100% of underlying operating profit in 2009, reflecting what is believes to be a robust control environment.

The Board believe that this management structure ensures a strong link between Filtrona’s overall corporate strategy and its implementation within an effective internal control environment.