Interest rate fluctuation risks Interest rate fluctuations may have an impact on our net results. A significant part of Vedior’s interest bearing debt consists of floating rate debt and as a result any change in interest rates may affect Vedior’s cost of borrowing. Our policy is to hedge only a minor part of our interest bearing debt against interest rate movements as we believe our exposure to cyclical economic conditions provides a natural hedge against interest rate movements in itself, assuming these interest rate changes are also mainly affected by economic cycles. A 1% variation in average floating rate interest would have impacted the cost of borrowing by €6 million in 2006.
Business development risks These risks relate to Vedior’s ability to further increase its position in the provision of professional/executive recruitment and improve the geographical balance of Vedior’s business. To successfully expand its professional/executive recruitment staffing services and improve the geographical balance of its business, Vedior is dependent on its ability to pursue acquisitions that meet its strategic criteria and to expand in existing markets and develop new sectors in its current markets as well as in new markets.
In 2006, Vedior’s cash outflow relating to acquisitions amounted to €157 million. Risks related to acquisitions include the possibility that the acquired company will be unable to retain key staff and clients, the possibility that the acquired company many not achieve the levels of revenue and profitability that Vedior anticipates and the possible impact on Vedior’s operating results from impairments of goodwill. Vedior has implemented a number of procedures to limit these risks, such as due diligence reviews, approval procedures and financial criteria for acquisitions. When making acquisitions, Vedior’s policy is to leave a minority shareholding in the acquired company with senior management of the company which helps to increase staff retention and aligns management’s interests with Vedior’s objectives.
Top strategic, operational and financial risks that required action include:
Human capital risks In certain markets and sectors there are severe shortages of available qualified candidates. This is perceived as a key risk. A tight labour market also makes the recruitment and retention of internal staff difficult. As we are dependent on our personnel to establish and maintain client relationships, staff retention is considered as a key risk by some of our operating companies.
Actions taken include the provision of local internal and external training programmes, competitive compensation schemes and incentive systems, the identification of new channels to recruit staff, and local advertising and recruitment campaigns. In addition, our multibrand approach provides focus in targeting specific employee groups.
ICT risks In keeping with our decentralised management model, each operating company within the Group has its own ICT systems. As a result, the risk of, for example, system failures and data corruption, is diversified internally. However, in certain markets the functionality of systems can be improved. This is considered a key risk by some of our operating companies.
Actions taken include the updating of software and analysing new software, enhancing ICT related controls, training of staff in system knowledge and sharing of best practices between operating companies.
Each operating company is required to have an appropriate and tested disaster recovery/business process continuity plan in place to avoid loss of data or business.
Margin risks The market in which we operate is highly susceptible to economic changes. In addition, some of our companies operate in highly competitive and price driven markets that can hinder margin growth. The Group’s focus on achieving a sound geographic and industry sector balance helps to mitigate this risk. As such, our active development in local and regional sectors gives us a presence in these generally higher margin areas.
2. Compliance risk management In 2006, all corporate policies were reviewed and where necessary updated including those in place to mitigate strategic and operational risks. This review and updating is undertaken as an ongoing process. We are evaluating several training options including e-learning applications to sustain or raise risk awareness, and to verify and monitor compliance with our policies and other controls. One area that is receiving increasing attention from regulatory authorities is compliance with competition/anti-trust laws and regulations; although this is already addressed in the Company’s procedures and guidelines, the Company is considering what further steps it should take to ensure compliance.
We believe that our corporate policies and Code of Conduct support our internal control environment. In 2007, we will focus on increasing the awareness of our revised Code of Conduct and other corporate policies by training our staff.
3. Financial reporting risk management The financial reporting risk management approach is focused on assisting operating companies in assessing their key financial reporting controls and in designing and implementing action plans to further improve or sustain these controls.
A financial control framework has been implemented within a selection of operating companies. These operating companies covered 78% of sales. This framework focuses on the key controls for the primary financial processes and assesses their effectiveness.
Action plans are based on the results of the financial control framework, including recommendations provided by the external auditors.
With respect to financial reporting risks, Vedior’s internal risk management and control systems specifically include:
- Annual preparation of business plans and budgets that require Board of Management approval;
- A comprehensive and uniform financial reporting system with which operational and financial performance is measured monthly against budget and market developments;
- Monthly operational board meetings in which, with some minor exceptions, the relevant member of the Board of Management will participate and the highlights of which will be reported by such member at monthly meetings of the Board of Management;
- Vedior’s internal control systems and accounting procedures are reviewed by the Group’s external auditor in connection with their audit of Vedior’s financial statements.
In connection with the audit of the 2006 financial statements of the Company, the external auditor reviewed the design and implementation of the key financial reporting controls based on the financial control framework. The review was focussed on revenue, registration of temporary workers and clients, payroll for temporary workers, billing of clients, information resources and financial reporting.
The auditor concluded that the overall level of the design and implementation of key financial reporting controls is adequate. Recommendations and suggestions made by the external auditor, mainly relating to the above mentioned key controls, have been discussed with the Board of Management and the Audit Committee, and improvement actions are closely monitored by the Board of Management.
In-control statement The Board of Management is of the opinion that the risk management and control systems relating to financial reporting risks, as outlined above, provide reasonable assurance that the financial reporting does not contain any material inaccuracies and that these systems have worked properly in 2006. There are no indications that these systems will not continue to work properly in the current year. However, projections regarding future effectiveness are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the company’s policies, procedures and instructions may deteriorate.
Amsterdam, 7 February 2007
Board of Management
