10. Internal Control

Internal Controls and Internal Audit

1. Internal Controls

SCG has developed the internal control system to attain the
international standards. The organization is structured to suit with
business operations. Well-defined segregation of duties and
responsibilities is applied to all functions. SCG recruits and develops
its employees to thrive in the changing business conditions and
encourages them to adhere to the corporate governance and SCG Code of
Conduct. The awareness of risk management is cultivated throughout the
organization and the responsibilities lie with all employees. SCG also
develops tools for accurate and timely internal communications, employs
information technology to manage various internal control procedures,
and uses computer systems which are modern and appropriate with current
business operations. The Group monitors the internal control system so
as to ensure constant compliance that leads to the sustainable
development. The efficient internal control system is implemented and
maintained in order to provide reasonable assurance that financial
reports are reliable and consolidated financial statements are prepared
in accordance with Thai Accounting Standards and the regulations,
stipulated by the Securities and Exchange Commission and promulgated
under the Securities and Exchange Act. B.E. 2553,on preparation and
presentation of financial statements. Accounting policy, appropriate and
consistent with the generally accepted accounting principles, was
adopted. In addition, SCG has been preparing to adopt the international
accounting standards when they are announced. In order to reflect
constant transparency and clearness of reliable and verifiable
information, cautious consideration and justified estimation were
assumed, the results of operations and financial position are fairly
presented and significant information is sufficiently disclosed in the
notes to the financial statements.

The external auditors audited the financial statements and consolidated
financial statements including the notes and assessed efficiency of
internal control system of accounting responsible for the financial
reports. No major drawback which will significantly affect the
expression of opinions to financial statements was found. This is
congruent with internal auditors’ opinion concluded that no significant
drawback was discovered.

In the year 2009, SCG developed internal control instructions and
practiced guidelines of all important business activities. SCG Code of
Conduct and Corporate Governance principle are publicized across the
organization and all employees are encouraged to consistently adhere to
the certain code and principle. Employees at all levels are supervised
to perform their duties within the assigned scopes of responsibility.
Emphasis is also placed on development of internal control system and
assessment to ensure compliance with the established system, especially
for the part responsible for reliability of financial information. SCG
has not only processes to regularly monitor and evaluate performance of
Control-Self Assessment of all business functions but also preventive
measures for fixing the drawbacks discovered during the audit. Adequacy
and effectiveness of corporate internal control system are assessed and
important issues are addressed and presented. SCG governs the accounting
practices to be consistent with Thai Accounting Standards announced
during the year, and is ready to adopt the Thai Accounting Standards
which will be changed to conform to the international accounting
standards during the year 2011. As the modification will considerably
impact the financial statements, SCG collaborates with external auditors
to study the impacts and defines preventive practice guidelines. In
addition, the Audit Committee who is independent and receives no benefit
from business operations of SCG satisfactorily reviewed the aforesaid
assessments, conducted by both external and internal auditors, of
internal control relevant to financial reports and was confident that
the particular assessments were fair, reliable and appropriate with SCG
business operations. This opinion aligns with that of the Board of
Directors expressing that the internal control system and the internal
audit of SCG can assure that the financial statements of the company and
its subsidiaries present fairly, in all material respects, the financial
position, the results of operations, and the cash flows.

2. The Internal Audit

The Audit Committee is responsible for supervision of the internal audit
office to ensure independence, fairness and sound corporate governance
and code of conduct. The Committee assesses the efficiency of the
internal control system, the correctness of the financial statements,
the adequacy and transparency of the information disclosure, the
assessment of risk management activities and trustworthy IT systems to
ensure that everything goes in the same direction with the business plan
and the constant changes of the business environment. The objective is
to enable employees at all levels to perform their duties with
competency and efficiency that meet the standards of the good corporate
governance principle.

  2.1 Medium-term and Annual Audit Plan In 2009, the medium-term audit
  plan was reviewed with the vision to “ensure preventive audit which
  are creatively and up-to-date with the current situations, adherence
  to corporate governance and code of conduct, and lead to the
  sustainable development”. The mission was incorporated in the annual
  audit planning, which includes promoting and improving preventive
  audit facilitated by modern technology, communicating the result to
  related parties, independent and fair consultations, fostering
  participation by all parties to add value to the organization,
  strictly adhering to the audit ethics, continuous development of
  knowledge, skills and quality of the audit in line with the change of
  environment and technology, providing support to staff in respect of
  internal audit scholarship, encouraging our internal auditors to
  complete the requirements of international standard for internal audit
  certifications, putting in place the assessment process and receiving
  recommendations from the audited functions. Additionally, strategies
  revised in alignment with the vision, mission and business environment
  of SCG with emphasis on proactively creating value-added activities
  for each business, planning the audit in time and ensuring that
  communications regarding preventive measures are made in a timely
  manner.

  2.2 Setting the Key Performance Indicators (KPI) In 2009, SCG has set
  and improved the key performance indicators (KPI) to ensure alignment
  with the vision, strategies, mission and changes of the business
  operations, especially in the area where changes are made to enhance
  effectiveness and efficiency of audit work and to improve the audit
  process to cover changes. Moreover, the KPIs are the tool for the
  follow-up on performance of auditors at all levels in order to ensure
  that the quality of work meet the international standards. Also
  introduced was the audit competency evaluation, which is applied to
  the evaluation and development of our auditors at all levels in order
  to enhance the skills they need to improve their performance. The
  internal auditors are encouraged to acquire additional knowledge and
  skills needed in applying for certifications and to meet the
  international standards.

  2.3 Development of IT Audit System In 2009, a website was developed as
  the communication portal to give knowledge and advices on internal
  audit system, risk management, internal control self assessment, the
  scope of authority, and correct practice, all of which minimized
  errors and enabled the Group to cope with any incidents in a timely
  manner. As a result, the audit was carried out with higher efficiency
  and required less manpower. The IT internal control self-assessment
  manual is also issued for each business to use as reference in order
  to ensure reliable IT systems with sound control and security as
  required by the SCG e-policy. Efficient tools and filing systems are
  provided to create a learning database which facilitates improvement
  of the electronic system for audit work, since it is the reference
  source for the auditors when they carry out the audit of the IT
  services and the web applications of SCG’s subsidiaries.

  2.4 Development of Website Consultancy System One problem identified
  in the audit is that the wrongdoer does not have intention to commit
  wrong deeds and some break rules simply because they are not aware of
  its existence. Therefore, a website consultancy system was developed
  to provide advice and answers for employees so that they can make
  inquiries about rules, regulations, the internal control and the scope
  of authority etc. Providing timely recommendations leads to correct
  practice, which is in line with our policy to minimize errors and to
  perform the preventive audit. This is very helpful for all businesses,
  since it helps reducing operational weaknesses and flaws. Moreover,
  questions are categorized to make it more convenient for employees to
  study and communicate with their colleague, which enhances the
  efficiency of the preventive audit.

The Audit Committee’s Report

The Audit Committee performed its duties as assigned by the Board of
Directors in accordance with the Charter of the Audit Committee. These
duties included reviewing the financial statements and good governance
practices, monitoring risk management, internal control, internal audit
and fraud investigations as well as proposing the appointment of
external auditors for the year 2010. In 2009, the committee held 9
meetings and the attendance of the Audit Committee members was 94%. The
duties are summarized as follows:

1.  Review of financial statements: The Audit Committee reviewed
    significant information of the company’s quarterly and annual
    financial statements for the year 2009 as well as consolidated
    financial statements of the company and its subsidiaries with SCG
    management, the director of the audit office, and the external
    auditors. There were thorough discussions and clarifications on the
    financial statements information in compliance with laws and
    accounting standards as well as the adequacy of disclosures in the
    notes to financial statements in compliance with accounting
    standards to ensure satisfactory results prior to approving the
    financial statements.

  Besides, the committee held a meeting with the external auditors
  without the presence of SCG management so as to freely discuss
  important issues in the preparation of the financial statements and
  the disclosure of information beneficial to users of these financial
  statements as well as to hear whether there was any suspicious
  information which indicated corruptions following the Securities and
  Exchange Act B.E. 2535. No such incidents were identified in 2009 and
  as a result, the company’s financial statements and the consolidated
  financial statements were prepared with efficiency and effectiveness
  and they are transparent and auditable. Moreover, the Audit Committee
  reviewed the readiness of the company for preparing the financial
  statements in accordance with the International Financial Reporting
  Standards (IFRS) and found that SCG is ready to comply with the IFRS
  in all aspects.

2.  Review of corporate governance: The Audit Committee reviewed
    compliance with the SCG Code of Conduct and SCG Corporate Governance
    and found that directors and employees carried out business
    operations with integrity and effectiveness. There were a total of
    7,665 times of employees logging in to study and request for
    consultancy with regards to the code of conduct via the SCG website
    without any material ethical problems during the year. Additionally,
    SCG strictly complies with the laws relating to securities and stock
    exchange, regulations of the Stock Exchange of Thailand as well as
    the laws relating to other businesses, especially in terms of
    connected transactions and those which may result in conflict of
    interest. In this regard, proper reviews were conducted and
    information of related directors was disclosed to the Stock Exchange
    of Thailand in a timely manner. In 2009, the Audit Committee also
    conducted an annual assessment on the performance of the collective
    membership (as a whole) as well as that of each individual member
    (self assessment) with a satisfactory result close to that of last
    year. Topics of assessment included the committee’s preparedness,
    risk management, financial reports, committee meetings and the
    performance of the secretary and the audit office.

3.  Review of risk management: The Audit Committee reviewed the
    principles of the risk management guidelines relating to work
    procedures and methods as well as duties of business units involved
    in the preparation of risk analysis document, which acts as the
    reference for determination of risk factors, possibilities, impact,
    risk management and warning signals. Furthermore, the Audit
    Committee reviewed the quarterly risk management assessment as per
    the guidelines. Risk factors and significant risk management
    strategies are mentioned in the annual report. With regards to the
    risk management under the concept of sustainable development, SCG
    was evaluated “Gold Class” by Dow Jones Sustainability Indexes
    (DJSI) for the second consecutive year.

4.  Review of the internal control and internal audit: The Audit
    Committee conducted a review on the internal control system as per
    the quarterly report submitted by the Audit Office and agreed that
    the system was sufficient and effective. This year, improvement has
    been made to create the same standard of internal control
    regulations and guidelines for all business units. Moreover, the
    Total Quality Management principles are adapted to the SCG’s
    internal control system to raise the level of financial stability
    and growth. Top executives present the report on the result of
    control system assessment which has impact toward the financial
    statements to the Audit Committee and external auditors for review
    annually, both of which concurred that there were no significant
    issues or weaknesses that may affect the financial statements of the
    company.

  In respect of the internal audit review, the Audit Committee reviewed
  the performance of the audit office as per the approved annual and
  medium-term audit plan with satisfactory results. Furthermore, the
  appropriateness of the management workflow, manpower and investment
  and management budget is reviewed on an annual basis.

5.  Review of fraud investigations: The Audit Committee reviewed the
    result of corruption investigations on a quarterly basis. There were
    a total of 12 frauds, but none of them incurred serious damages to
    the company and the Committee already gave recommendations for
    adjustments. In addition, the Audit Committee reviewed the
    preventive measures, risk assessment of corruption actions, and the
    investigation protocols to ensure fair treatments to all employees
    and enable continuous compliance. With regard to the Whistleblower
    policy, there were a total of 11 issues filed during the year, seven
    of which were proven true; however, the impact was immaterial, two
    of which were misunderstandings and the other two were under
    investigation. Also, the Audit Committee was assigned to consider a
    case where a former employee committed theft (relating to ordinary
    share form of the company) and forged share certificates of a
    shareholder. The company shall disclose the facts to the Stock
    Exchange of Thailand to ensure that the violated shareholder is
    treated fairly while protecting the benefit of the majority of
    shareholders. The matter is now under court’s trial and therefore,
    the conclusion should be drawn once the case is finalized.

6.  Appointment of the external auditor for 2010: Out of 5 leading audit
    firms, KPMG Poomchai Audit Ltd. was selected as the external auditor
    of SCG for a period of 3 years from 2009 – 2011. Based on the review
    of the auditor’s performance and qualifications, the Audit Committee
    recommended that the Board of Directors seek approval at the
    ordinary general shareholders’ meeting for the appointment of Mr.
    Supot Singhasaneh, Certified Public Accountant Registration No.
    2826, and/or Mr. Charoen Phosamritlert, Certified Public Accountant
    Registration No. 4068, and /or Ms. Siripen Sukchareonyingyong,
    Certified Public Accountant Registration No. 3636 of KPMG Phoomchai
    Audit Ltd., as the company’s auditors for the year 2010.

On behalf of the Audit Committee

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  Air Chief Marshal

  (Kamthon Sindhvananda)

  Chairman of the Audit Committee