10. Internal Control

Internal Controls and Internal Audit

1. Internal Controls

Internal control is a crucial process assisting the organization in
achieving targets. SCG places an importance on this issue by stipulating
the duties of the Audit Committee in review of internal control systems,
internal audit activities, and risk management to ensure that they are
rigid, appropriate, cutting edge, and efficient. Enterprise Risk
Management (ERM) has been used as a management tool to robust the risk
management process and internal control activities. The internal control
systems have been leveraged to comply with the international standards
according to the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), a joint committee with members from five professional
institutes in the United States of America. Five components of
Enterprise Risk Management including internal environment, risk
assessment, control activities, information and communication, and
monitoring have already been incorporated into business operations.
Likewise, three additional COSO risk components have been integrated as
follows.

1. Objective Setting The management defines objectives at both strategic
and operational levels, reporting, and regulatory compliance for
employees to use as policies in carrying out their duties.

2. Event Identification The risk committee of each Business Group
regularly meets to identify major external and internal factors
affecting business operations in order to ensure complete coverage of
risk factors signaling difficulties. Such risk factors are cautiously
managed and monitored.

3. Risk Response The management and the risk committee of each Business
Group collaborate to devise strategies to manage the risks to the
acceptable level. The results are consistently satisfactory.

Except the abovementioned internal controls, in the year 2010, SCG has
developed various systems and procedures in order to affect efficient
and effective internal controls contributing to sustainable development.
Such developments are summarized as follows.

1. Fraud prevention programs of major business functions

  A fraud risk is considered crucial presently. If an organization can
  establish adequately rigid controls, the impacts would be diminished.
  As SCG realizes such importance, related preventive measures, audit
  activities, and corrective measures are stipulated. The ethical value
  has been instilled in employees at all levels since their entry on
  duty through employee orientation program whilst training on
  compliance of SCG code of conduct is regularly arranged. In addition,
  sound oversight system has been set up and the Board of Directors act
  as a role model to employees. Fraud prevention manuals of all major
  business functions have been developed in order to raise consciousness
  and ethics while performing duties. The certain manuals define
  objectives, principles, potential circumstances which are conceivable
  in relation to fraudulent actions, and prevention guidelines for daily
  works. Then, SCG has stipulated the Control Self Assessment (CSA). The
  fraud audit is conducted by Internal Audit Office whereas employees
  can inform about non-compliance with regulations, rules, and laws, and
  suspicious fraudulent activities via the Whistle Blower system. When
  suspected fraudulent activities are revealed, the investigation
  committee is appointed to ensure fairness to all concerned parties.
  The preventive measures are developed subsequently and the particular
  situation will be used for organizing a case study and lesson learned.

  2. Development of Information Technology Control Self Assessment
  System (IT CSA)

  Due to success in employing the Control Self Assessment systems in
  several functions, the certain principle has been applied to the
  information technology system. The objectives are to make the system
  efficient, effective, reliable, able to deliver timely information,
  and secured, to ensure compliance with rules and regulations, and to
  create an efficient IT Governance system. Internal Audit Office
  collaborated with related business functions to develop work
  procedures used for prevention and self assessment of contract
  arrangement and various computer systems, and IT Control Self
  Assessment forms in critical areas, for instance, hire of contractors
  to enhance computer systems, computer system security, user rights
  assignment and efficiency evaluation of software application.

3. Integration of preventive systems for sustainable development

  SCG conducts business by bearing in mind the responsibilities for
  economy, society, and environment in order to achieve sustainable
  development. Important preventive systems i.e. Good Corporate
  Governance, Risk Management, and Control Self Assessment have been
  integrated to synergize internal control and audit systems. The
  process commences from evaluation of weaknesses arising from
  non-compliance with Corporate Governance principles. Then, risks are
  assessed and prioritized by impact levels. The significant risks are
  selected to further develop control self assessment by order of
  importance. The results are monitored, causes of difficulties are
  examined, and relevant processes are developed until attaining the
  stage of knowledge capital for constant passing on to responsible
  persons at the equal standard.

2. The Internal Audit

Under the audit committee’s guideline, the audit committee supervises
the Internal Audit Office to work with independence, integrity, and
ethic by assessing the sufficiency and efficiency of the internal
control and risk within the organization so as to creating an in-line
operation with SCG vision and changed business environment. Also, in
2010, it can facilitate all SCG employees to perform their jobs with
efficiency and effectiveness, as followings:

1. Audit development to create the sustainable development

  To be sustainable development, the internal audit office has developed
  the preventive and value creation auditing, which founded on generally
  accepted concepts: Control Self Assessment (CSA), consulting service
  system, risk management, and good governance. Furthermore, the
  internal audit office also applied the 4 concepts above to
  continuously guide and develop the efficient and effective audit.
  According to the first vision of internal audit office in 2005, the
  internal audit office focused on “innovative preventive audit” and
  also set key issues to audit in each year to be aligned with the
  vision. Therefore, in this year, the internal audit office has set a
  vision for 2011 to 2013, which goes with SCG’s vision, as “innovative
  proactive audit” in order to create the sustainable development for
  localize and regional auditing by the 5 mission statements as follow:

  • Developing from preventive auditing to be professional proactive
  auditing to create value to the auditees.

  • Creating significant and sustainable value in audit work and work
  being audit with by working together with all business units at SCG

  • Developing the auditors to gain competencies for continuous growth.

  • Obtaining technology and information technology for internal
  control, control self-assessment (CSA), and risk management to develop
  foreign entities to achieve the same standard with SCG

  • Assuring the quality of audit work to attain to international
  standards

  In order to achieve the mission statements, the internal audit office
  conducts an annual action plan by supporting the “Global Auditing
  Excellence”. The internal audit office will identify the leading
  professional internal audit firm as a benchmark, build audit works
  that bring HVA to auditees and develop the auditors to gain
  competencies for continuous growth. Furthermore, the internal audit
  office develops IT for supporting an internal control process, adopt
  good governance, risk assessment, and control self-assessment (CSA) to
  accomplish the efficiency in business operation.

2. Auditor’s Competency development

  To increase auditor’s knowledge to be complied with the international
  standard, the Competency concept would be used as a tool in
  determining auditor’s knowledge in each level. The Competency concept
  is divided in two parts as follows;

  • Common Competency is the main ability supporting for audit’s
  mission. It composes of knowledge and behavior.

  • Functional Competency is the necessary ability concerning the audit
  work. It composes of knowledge and skill.

  The Competency concept applies to all auditors to firstly perform
  self-assessment according to each level. Each self-assessment result
  for each auditor would then be determined by the Human Resource
  Committee of Internal Audit office. The HR committee then gives the
  recommendation to the auditor in order to use as a guideline for
  continuously improves according to each Competency level. In-house
  training would be provided to auditors every month for the development
  purpose to become more effective and efficient with the same standard.
  Self-study and self-assessment activities would be provided by using
  e-learning concept. These are provided for the important task relates
  to audit work in which the system is systematically managed. Besides,
  the Internal Audit office also supports its auditor to achieve for the
  important audit certificate in the international level.

3. IT Developing Department

  During 2010, Developing Department has developed IT audit application
  to improve IT workflow to be more effective in terms of preventive
  concept by developing program such as SAP Authorization Audit System
  in order to audit the authorization transaction ECSA System –
  Inventory Management, ECSA – Accounting, and ECSA – Credit Management,
  to manage and follow-up for stock transaction, accounting transaction,
  and credit management to be more effective. This also includes
  Information System (IT) assessment for oversea company to improve and
  develop its operation to be effective and complied with SCG’s
  standards and regulations. Besides, other IT applications would be
  developed to increase the effectiveness of the internal control and
  internal audit in terms of preventive action. When weakness and
  problem are discovered from the operation, these shall be coordinated
  with such department to determine standard for correcting and
  improving the system’s weakness found by the external auditor and
  audit findings arisen from internal audit office.

  4. Development of audit Procedure works by implying Total Quality
  Management (TQM) concept

  In order to increase the effectiveness and the efficiency of the audit
  work to be more updated and related with the continuous changes, Total
  Quality Management (TQM) would be implemented. This concept has been
  applied by SCG as a guideline to increase the products of all
  Departments and it would be implemented as the concept to audit with
  integrity and reasonableness when provides the value-added
  recommendation. The objective of this development is to create value
  and benefits to every Departments. In 2010, audit instruction manual
  has been developed to be more updated and related with the vision and
  work. This would be used as the manual with the same standard for both
  audit work and ethical standard so that the auditor would understand
  in the same direction. It can be self-study in terms of theory and
  applied in the real situation by the auditor.

The Audit Committee’s Report

As assigned by the Board of Directors in accordance with the Charter,
the Audit Committee has examined such important matters as the financial
reporting system, good corporate governance, evaluation of risk
management, internal control systems and internal audit, fraud audit,
and the appointment of auditor for 2011. The Committee arranged eight
meetings during 2010, at which attendance was 97%, slightly higher than
the previous year. The Audit Committee’s main activities in 2010 were as
follows:

1. Financial reporting system review The Audit Committee reviewed
significant information regarding the Siam Cement Public Company Limited
quarterly, annual and consolidated financial statements for 2010. It
reviewed material items, special items, as well as explanations and
evidence, to ensure that the information was compliant with laws,
accounting standards, and sufficient disclosure in notes to financial
statements. In addition, the external auditor, the management and the
internal audit office director have confirmed to the Committee that the
financial statements, which the auditor reviewed, audited, and approved
without reservation, provide sufficient disclosure and conform to
accepted accounting standards.

The Audit Committee met with the external auditor in meetings that
excluded management so as to independently discuss the material
information regarding the preparation of financial statements and
disclosure in notes to financial statements in accordance with
standards, as well as the usefulness of these statements and disclosure
notes. It also discussed potential indications of fraudulent action as
per the Security and Exchange Act B.E. 2535. In 2010, the auditor did
not discover any material misstatements or indications of fraud.
Moreover, the Audit Committee instructed the president to report such
fraud indications in accordance with SEC Act B.E. 2535. In this regard,
the final meeting in 2010 confirmed that no fraud indications were
found. This confirmation corresponds to that of the external auditor.
Thus, the preparation of financial statements and consolidated financial
statements was conducted with effectiveness, efficiency, transparency,
and verifiability.

Moreover, the Audit Committee has reviewed SCG’s readiness to prepare
financial statements in accordance with International Financial
Reporting Standards (IFRS). The Committee found that the Company has set
clear accounting procedures to be followed; proposed changes in
accounting principles to the Board of Directors for approval; and
prepared the 2010 financial statements in accordance with these
principles in order to be used for comparison with the 2011 financial
statements. The Company will use IFRS from January 1, 2011 onwards.

2. Corporate governance review The Audit Committee reviewed compliance
with corporate governance principles and the SCG code of conduct, and it
affirmed that board directors and employees are consistently following
the stated principles. One indication of this is the fact that the
Company has won major governance awards, which are listed in the Annual
Report’s section on corporate governance. In addition, SCG has strictly
complied with Securities and Exchange laws and regulations of the Stock
Exchange of Thailand, as well as all other relevant laws and
regulations. The Committee also examined related parties’ transactions
and other transactions that might result in a conflict of interest. It
oversaw the report on related directors and made correct and timely
disclosures to the Stock Exchange of Thailand.

This year, the Board of Directors has agreed to establish a written
stakeholder engagement policy so as to create a clearer picture of its
business practices, adding long-term shareholder value. This policy will
consider impacts on other stakeholders in order to facilitate
sustainable business practices based on true fairness.

In addition, the Audit Committee has evaluated the performances of its
collective membership (as a whole) and each individual member (using
self-assessment). It concluded that it is very satisfied, similar to the
previous year’s conclusion. The topics evaluated included directors’
preparedness, risk management, financial reporting, Board of Directors’
meetings and the performances of the Internal Audit Office and Corporate
Secretary Office.

3. Assessment of risk management review On a quarterly basis, the Audit
Committee has reviewed the assessment of risk management of all business
units according to the principles outlined in the risk management
manual. The results showed that risk indicators were identified, levels
of likelihood and impact were assessed, the risks were managed, and risk
warning signals were monitored compliant with the established
principles. Consequently, significant risks are within the acceptable
level. The Company’s operating performance and financial status improved
compared to the previous year despite problematic economic and political
factors. This year the company reached beyond management of risks from
economic conditions, to evaluate management of risks associated with
social and environmental conditions, in line with our focus on
sustainable development. SCG’s practices have now been classified in the
Gold Class level of the Dow Jones Sustainability Indexes (DJSI) for
three consecutive years. The key risk factors and management strategies
of each business unit are explained in the risk management section of
the Annual Report.

4. Internal control system and internal audit The Audit Committee has
reviewed results of the internal control system assessment, whereby the
Internal Audit Office has reported to the Committee on both a monthly
and quarterly basis. The results showed that these systems are
appropriate to the Company’s operations. Moreover, the external
auditor’s opinion stated that there were no material deficiencies
impacting the Company’s financial statements. To enhance the efficiency
of the internal control systems, the Company has developed fraud
prevention guidelines for each business system, implemented control self
assessment for information technology, and integrated preventive systems
to support sustainable development. Details of these developments are
described elsewhere in the Annual Report.

In terms of the internal audit function, the Audit Committee has
reviewed operations of the Internal Audit Office according to the
medium-term plan and the annual plan, which have already been approved.
This evaluation showed that the target KPIs were achieved. On an annual
basis, the Committee has reviewed the appropriateness of such key
matters as vision; mission; strategy for forming management; the audit
process; manpower; and capital expenditure and administrative expense
budgets. In addition, the Committee has overseen the implementation of
sustainable value-added audit, leveraged the knowledge and competency of
auditors, enhanced information technology audit systems and developed
audit procedures in accordance with the Total Quality Management (TQM)
concept, as detailed elsewhere in the Annual Report.

5. Fraud audit review The Audit Committee has reviewed the results of
fraud audits on both a monthly and quarterly basis. In 2010, fraud was
immaterial in terms of value, which was lower than the prior year. In
addition, the Committee has expressed opinions on preventive measures.
It has reviewed fraud prevention guidelines for each work process, fraud
audit based on risk assessment, and investigation protocols, to ensure
that they are state-of-the-art and appropriate. Regarding the
whistleblower system, which facilitates employees’ participation in
alerting the Company to suspicious activities involving potential fraud,
in 2010, there were a total of 15 incidents reported. Audits of all
cases have already been completed and two which regarded to be instances
of fraud. Regarding the instance of a particular employee engaged in
embezzlement and forgery of ordinary share certificate forms in 2009,
the case is now under the civil court trial.

6. Appointment of the external auditor for 2011 and audit fee review
KPMG Phoomchai Audit Ltd. has been appointed as the external auditor of
SCG for the three-year period from 2009 through 2011. Based on
satisfactory results of performance appraisal and review of auditor’s
qualifications, the Audit Committee recommended it to the Board of
Directors and the Board of Directors agreed to seek approval at the
shareholders’ meeting for the appointment of Mr. Supot Singhasaneh,
Certified Public Accountant Registration No. 2826, and/or Mr. Winid
Silamongkol, Certified Public Accountant Registration No. 3378, and/or
Mr. Charoen Phosamritlert, Certified Public Accountant Registration No.
4068; and/or Ms. Sureerat Thongarunsang, Certified Public Accountant
Registration No. 4409, all of KPMG Phoomchai Audit Ltd., as the
Company’s auditors for the year 2011, the company’s audit fee for the
fiscal year 2011 amounting to 0.25 Million Baht, and annual and
quarterly audit fees for subsidiaries and consolidated financial
statements amounting to 32.2 Million Baht.

On behalf of the Audit Committee

  []

  Air Chief Marshal

  (Kamthon Sindhvananda)

  Chairman of the Audit Committee