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Internal control system and risk management system

Internal control is an instrument supporting the management in the process of managing and taking decisions, and also in preventing and detecting faults, abuse or any irregularities.

ELEKTROBUDOWA SA has implemented multi-stage control mechanisms, strictly inter-related and complementing one another, which operate according to the three lines of defense model.

The first line of defense: operational management.

Generally, it is performed by low- and mid-level managers who design and implement risk management controls in day-to-day operations.
Senior managers have overall responsibility for all activities performed by the first line. In practice it means that in certain high-risk areas senior management directly oversees low- and mid-level managers and join in the performance of first line duties.

Both services provided by ELEKTROBUDOWA SA and its products are unique in the sense that each time they are tailored according to particular needs of a particular customer. Each service and each product is different and may generate different risks. A project is an attempt to use certain opportunity, and each opportunity is bound with certain risk.
A risk in a project and in a production order comes from impossibility of eliminating an uncertainty associated with future events at each stage of performance.

The objective of risk management on the operational level is to:

  • ensure better control of problem which may arise during the performance of a project,
  • reduce the probability of an event to occur,
  • mitigate or eliminate negative impact of a risk,
  • draft plans of preventative actions in case of occurrence of unforeseen situations,
  • correctly formulate estimates of costs.

The second line of defense: internal monitoring and supervision.

Comprises control functions, risk management and compliance functions established by the management in order to ensure that the existing risk management processes implemented by managers of the first line of defense are adequate and operating as intended.
They are management functions, separated from the first line operational management but still under oversight and influence of the senior management. Basic responsibilities of the second line functions include current monitoring of risks and control of performance of tasks.

The staff in the second line of defense collaborates closely with the operational management and collect information necessary for the senior managers. 
Monitoring by the second line of defense in ELEKTROBUDOWA SA is adjusted to the specific character of the organization and changes with time.

The separated functions or appointed staff perform control independently of the day-to-day activity of the operational staff.
They cover the following areas:

  • financial controlling,
  • control of financial and accounting documents,
  • control of signed contracts,
  • purchases,
  • quality assurance and environmental protection,
  • occupational health and safety,
  • IT security,
  • fraud management,
  • risk management,
  • other, depending on the needs of the company referred by the Management Board or the Supervisory Board.

The second line of defense should have some degree of objectivism and should provide important and useful information for senior management. Therefore the above functions serve a vital purpose and are conferred with rights to report directly to senior management.

Third line of defense: Internal audit.

In ELEKTROBUDOWA SA, Internal audit is an independent, objective activity which purpose is to add value to and facilitate the operating activity. It is performed by regular, periodic evaluation of processes of risk management, internal control framework and organizational governance. The activity of Internal audit contributes to the improvement of operation of the organization. Organizational independence and objectivism is supported by direct reporting to the Management board and the Supervisory Board; duties of the Internal audit do not include responsibility for the operating activity of the Company.

Each of the three lines has a different role in the risk management process and different tasks for which it is accountable and assessed.

Key roles in the model are those of senior management and the Supervisory Board. They are jointly responsible for establishing the Company goals, defining overall strategy for achieving these goals and establishing organizational structure to facilitate effectiveness of risk management. Their commitment is decisive for the success of the whole model.

External audits of the financial statements have an important role in the internal control in place in ELEKTROBUDOWA SA. They provide opinions and assessment of the financial reporting.

The accounting policy concerning financial reporting in place in the Company is applied both in budgeting and forecasting process and in periodical management accounting, so the Company uses coherent accounting principles in presenting its financial data in the financial statements, periodic financial reports and other reports submitted to the shareholders.

Organisation of the financial risk management process separates the functions of units responsible for negotiating market transactions from the functions of units responsible for their authorization, settlement and preparation of information about valuation of those transactions. Such an organizational structure, which follows global best practices of risk management, enables the control of business transacting process and elimination of the transactions which have not been authorized by the Company governing bodies.
The areas of risks to which the Company is exposed, are described in detail in Note 6 of the financial statements for the year ended 31 December 2017.

One of essential elements of control in the process of preparing the financial statements is their verification by an independent auditor. Tasks of an auditor include in particular: review of the half-year financial statements and the preliminary and basic auditing of annual financial statements. An auditor is selected by the Supervisory Board through tender invitation, from among prime auditing entities which guarantee high standards of service and required independence.

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