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Principal risks and uncertainties
The process for identifying, evaluating and managing any significant risks forms part of the group's system of internal controls.
Internal controls
The Board is ultimately responsible for the group's system of internal controls and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate risk of failure to meet business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.
Following publication of the updated guidance for directors on internal control ("Internal Control: Guidance for Directors on the Combined Code"), the Board confirms that there is an ongoing process for identifying, evaluating and managing any significant risks faced by the group, that this has been in place for the year under review and up to the date of approval of the annual report and accounts, that this process has been reviewed by the Board during the year and that the group accords with the guidance. The Board affirms the importance it attaches to the continuous review and application of the guidance, the regular and systematic assessment of the risks facing the group and the value of embedding risk management and internal control systems within its business processes.
The processes which the Board and the audit committee have applied in reviewing the effectiveness of the group's system of internal controls are summarised below:
- risk assessment and evaluation for each business unit takes place as an integral part of the annual strategic planning cycle. Having identified the principal risks to achievement of their strategic business objectives, each business unit is required to document the management and mitigating actions in place and proposed;
- the principal risks identified during the annual strategic planning cycle and the effectiveness of the management and mitigating actions in place are reviewed regularly by the executive directors and twice yearly by the audit committee;
- additionally, the executive directors consider those risks to the group's strategic objectives which are not addressed within the business units and develop appropriate approaches to managing and mitigating these risks;
- annual financial plans for each business unit, significant capital investments or contractual commitments and major acquisitions or divestments are all subject to review and approval by the Board;
- there is a Group Accounting and Policies Manual which sets out the minimum standards and procedures to be applied in relation to those risk areas which are regarded as significant in a group context;
- a process of self assessment of compliance with the Manual and reporting thereon has been established, providing for a documented trail of accountability from business unit presidents and finance directors to the audit committee. The necessary actions are taken by the audit committee to remedy any failings or weaknesses identified by its review of the internal control system;
- the executive directors report to the Board on changes in the business and external environment which present significant risks. The group finance director provides the Board with monthly financial information which includes key performance indicators. Regular reports on significant legal issues and insurance matters are received from the company secretary.
The key potential risks and uncertainties which could have a material impact on the group's long-term performance are described below.
Strategic risk
Spectris has a broad spread of markets, products and customers, as described previously in this review, and thus any risk to the ability to implement our strategy due to changes in the political and economic environments in the countries in which we operate is limited. This broad spread of markets also provides a good averaging of individual sector investment cycles. Our products typically involve low capital outlay but provide significant and rapid payback. These benefits become even more attractive to customers as they seek to reduce their own costs of production. In addition, the majority of sales are to customers who are looking to upgrade existing processes at modest cost rather than invest in new capacity.
A key element of Spectris' strategy is to grow the business portfolio through acquisition of stand-alone or bolt-on businesses which complement or extend the range of products and applications Spectris can provide. Potential risks exist in successfully integrating acquisitions. However, Spectris believes that its track record of carefully selecting businesses which fulfil its acquisition criteria and rigorous financial assessment of the potential acquisition's ability to contribute to growth will continue to ensure that any businesses acquired will be successfully integrated.