10. Internal Control

Internal Controls and Internal Audit

1. Internal Controls

SCG attaches importance to internal controls and internal audit. The
company defines and develops an efficient and effective internal
controls system according to international standards in terms of
internal environment, risk assessment, control practices, information
technology and communication systems, and continuous monitoring and
assessment. The organizational structure is created to suit a business
plan, with clear responsibility outlines, good corporate governance, and
systematic risk management. Regulations, guidelines, a procedure manual
suitable for the business, an efficient and up-to-date computer system
are provided. Moreover, the Group encourages employees to constantly
follow the internal controls. These must be regularly updated to keep up
with the changing business environment. For 2008, the efforts are
summarized below.

1.  Guidelines toward Sustainable Development

  SCG conducts business with responsibility and fairness. The company is
  committed to accountability to all stakeholders to ensure mutual
  sustainable benefits, a practice that has continued since the
  establishment of the company in 1913. Likewise, contributing to
  society and the environment is part of the corporate culture that has
  long been embraced. In 1991, the company elaborated a written
  environmental policy, which has been constantly updated to reflect the
  changing business environments. Most recently in 2008, “SCG
  Sustainable Development Guidelines” was prepared to provide a
  sustainable development framework encompassing economic, social, and
  environmental issues, giving an overview of the interconnection of
  each department. The guidelines also compile the environmental best
  practices adopted by different departments to ensure more effective
  implementation. The company was included in the Dow Jones
  Sustainability Index and had its standing upgraded from Silver Level,
  in the previous year, to Gold Level.

2.  Good Corporate Governance

  SCG realizes the importance of good corporate governance, therefore,
  it defines concrete policies, procedures, assessment, and appropriate
  performance index in response to the current business situation. These
  such efforts also extend to establishing management structure as well
  as the scope of authority of the Board of Directors and the committees
  to ensure good corporate governance. The Board of Directors has
  established regulations on the Board of Directors, the Audit
  Committee, the Corporate Governance and Nomination Committee, and the
  Remuneration Committee, to define their duties and responsibilities.
  The regulations are constantly updated, the latest being in 2008, to
  comply with the regulations of SEC and SET to move forward to
  international standards and ensure improved more effectiveness and
  efficiency.

3.  Development of Information Technology System

  SCG has an efficient and modern computer system with excellent data
  security. It is used as an operational tool in SCG’s internal
  communication on an accurate and timely basis. Information technology
  has been utilized in various processes from gathering, processing,
  filing, to presenting information, using an advanced computer system
  appropriate for the current business operations. This allows the
  executives to use the information in planning, supervision, and
  assessment systematically, ensuring timely and complete decision
  making, cause analysis, and follow-up.

4.  Collaboration among the Group for Transparency and Verification

  SCG believes in the value and capabilities of its employees as well as
  the internal controls that have been clearly and transparently
  established. This contributes to creating a work environment that
  focuses on disclosure and transparency. Employees are continuously
  developed so they are fully capable in their performance of duty and
  adaptation. The management and work processes are improved so as to
  provide a solid foundation for operations and building upon product
  innovations. The moves have been taken in concerted efforts to ensure
  maximum efficiency and to achieve the goals by setting work processes
  that involve collaboration. SCG Whistleblower Policy, Code of Conduct,
  and Corporate Governance have been formulated to ensure enhanced
  effectiveness and efficiency as well as creating greater benefits for
  SCG’s businesses as a whole.

2. Internal Audits

The Audit Committee oversees the company’s internal audit to ensure the
independence, fair, and in compliance with business ethics by evaluating
the sufficiency and efficiency of the internal control system as well as
evaluating the risks associated with activities in the company and other
work systems that have material effects on the business operations. This
ensures compliance with the company’s policies and the ever-changing
business circumstances. The goal is to enable operating officers at all
levels to perform their duties efficiently in line with the audit vision
to establish a preventive and timely internal audit whilst adhering to
SCG Code of Conduct and good corporate governance and striding toward
sustainable development. To materialize this vision, the company is
committed to developing and improving a preventive system to bring
concrete benefits to the organization, the details of which are as
follows:

1.  Internal Control Instruction

  This defines the key control areas of the internal audit encompassing
  all aspects in business operations: revenue cycle, expenditure cycle,
  assets, liabilities, and shareholders’ equity, and business
  administration cycle. This ensures one unified internal control
  standard throughout SCG, enhancing the company’s efficiency in
  business operations which has continuously expanded investment in
  various businesses. The internal control instruction provides a
  guideline for SCG executives in management control, as well as
  allowing the operating officers to understand the key control areas
  related to their duties and responsibilities. The instruction is
  compiled into a manual as well as operating guideline and subsequently
  applied to the business operation processes in order to achieve the
  business unit’s objective and plan. In addition, this allows SCG to
  have an efficient, transparent, and verifiable management system which
  helps boost trust and confidence of shareholders, investors, and all
  stakeholders and conforms to the principles of corporate governance.

2.  Electronics-Control Self-Assessment (eCSA)

  More eCSAs were provided on website in 2008 including eCSA-Inventory
  management and eCSA-accounting management. The move was intended to
  expand the self-assessment efforts to encompass all work processes,
  giving the supervisors tools to use in management to achieve
  objectives/goals in an efficient and timely manner and in accordance
  with the policy to maintain an optimum level of inventory, an
  operating approach in the light of economic slowdown.

3.  Medium-Term Planning and Key Performance Indicators of Internal
    Audit

  SCG has defined and improved the Key Performance Indicators (KPI) to
  ensure the continuously enhanced effectiveness and efficiency of the
  internal audit in tune with the established vision. Major strategies
  and missions are to promote and develop the preventive internal audit
  process constructively, using advanced technology, and to communicate
  the audit results to involved parties as case studies. Added to these
  are providing consultations in an independent and fair manner with
  strict adherence to code of conduct; developing the body of knowledge
  and skills; and improving the internal audit quality continually in
  response to the changing technology and business environment. The
  missions also extend to encouraging employees to qualify for an
  internal audit certificate under international standards and providing
  the assessment of internal audit by both internal and external
  organizations.

4.  Development of Computer System Audit

  A number of audit programs have been developed to enhance the
  preventive efficiency of the computer system, for example, the
  accounts payable audit program to ensure accurate information, the ACL
  Script program to facilitate the audit of accounts receivable, and the
  deferred input tax program to conform to the accounting standard. The
  audit programs to ensure an efficient audit system in response to the
  specific needs of SCG’s businesses have also been developed such as
  the distribution control program to prevent faults and damages from
  failing to meet the product delivery terms and conditions as agreed
  with the customers.

5.  Auditor’s Knowledge Enhancement with Focus on Innovative Thinking

  SCG encourages self-learning and knowledge sharing among auditors
  through the organizing of in-house trainings and seminars on a regular
  basis. Various workshops and idea sharing sessions where auditors
  exchange their audit knowledge and experiences are also organized
  periodically in accordance with the e-Learning approach with focus on
  developing and improving the audit guidelines manual, keeping it
  updated and in line with the changing environments.

6.  Consultation System

  SCG provides a consultation system via its website which is effective
  in reducing operational weakness points; for example, lack of
  understanding about the regulations has been reduced. In 2008, the
  company formulated and published SCG Code of Conduct and Whistleblower
  Policy to provide channels for employees to contact, and make
  inquiries so as to gain better understanding and follow the guidelines
  accordingly to strengthen the preventive audit approach.

The Audit Committee’s Report

The Audit Committee performed its duties in 2008 as assigned by the
Board of Directors in accordance with the Charter of the Audit
Committee. These duties included reviewing the financial statements;
reviewing good governance practices to conform to SCG Corporate
Governance and SCG Code of Conduct; monitoring risk management, internal
control and internal audit as well as proposing the appointment of
external auditors for the year 2009. During the year 2008, the committee
held six meetings and the attendance of the Audit Committee members was
96%. The duties are summarized as follows:

  1. Review of financial statements: The Audit Committee reviewed the
  company’s quarterly and annual financial statements for the year 2008
  as well as consolidated financial statements of the company and its
  subsidiaries with SCG management, the director of the Audit Office,
  and the external auditor attended all the meetings. There were
  thorough discussions on the financial statements information in order
  to comply with laws and accounting standards, including changes during
  the year as well as adequate disclosures in the notes to financial
  statements in compliance with accounting standards prior to approving
  the financial statements. Besides, the committee held one 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 in addition to those of the previous year
  as stated in the company’s annual report. The efforts have enabled the
  company to propose unaudited financial statements ahead of the
  quarterly and annual submission deadlines of the Securities and
  Exchange Commission (SEC) since 1998. There was no significant change
  made after the auditors’ review.

2.  Review of corporate governance: In the end of 2007, SCG Code of
    Conduct was updated and simplified. In addition, the Whistleblower
    Policy was promulgated to emphasize on ethical business operation
    and to provide an opportunity for employees to take part in the
    business monitoring following the good governance concept. The
    effort was well responded since a number of employees have sought
    for consultancy to ensure the correctness of their practices, which
    in turn, minimizing malpractice into only immaterial breach of SCG
    Code of Conduct. There were only twelve claims filed this year,
    eight of which were found insignificant violation while the other
    four were the cases of misunderstanding.

  Reviews were conducted on a regular basis to ensure the SCG Corporate
  Governance in compliance with the laws pertaining to SEC, the
  regulations of the Stock Exchange of Thailand (SET) and all other
  pertinent laws have earned respect and praise for SCG both in local
  and international arenas. Consequently, the company has received
  several awards.

  With regards to the conflict of interest, reviews were conducted to
  ensure compliance with the laws as well as rules and regulations of
  SEC and SET on a regular basis, the result of which were reported by
  the related committees while proper disclosure was proposed to SET in
  a timely manner. Moreover, connected transactions are disclosed in the
  annual report.

  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). Topics of assessment
  included the committee’s preparedness, risk management, financial
  reports, committee meetings, the performance of the secretary and the
  Audit Office. The assessment rate was 97% which was very satisfactory
  as last year.

  During the end of year, the Board of Directors approved the amendment
  of the scope and responsibilities of the Audit Committee in the
  Charter in compliance with the notification of SEC and SET. In
  addition, in October 2008, Mr. Tarrin Nimmanahaeminda, a committee
  member, was proposed as the representative who has knowledge and
  experience to review the reliability of the financial statement. This
  is to comply with the regulation of SEC.

3.  Monitoring of risk management: The Audit Committee monitored the
    risk management practices in all business units on a quarterly basis
    in accordance with the stipulated guidelines, in which significant
    risks of each business unit are presented in the annual report. This
    year, the risks were managed following the sustainable development
    concept, whereby they were assessed in economic, social, and
    environmental aspects as least on an annual basis. Furthermore,
    criteria for consideration of risk warning signals is constantly
    reviewed to ensure their appropriateness for business operation.

4.  Monitoring and development of internal control system: The Audit
    Committee conducted a review on the internal control system together
    with the Audit Office and external auditors, and agreed that the
    system was sufficient and effective, with no significant issue or
    weak point that could affect SCG performance and financial status.
    In addition, the information technology-based internal control was
    continuously developed namely, control self-assessment (CSA) system,
    consultancy system, power of attorney system, risk assessment
    system, related transactions review system, and connected
    transactions audit system. Such development ensures accurate and
    timely information for management of all units.

5.  Monitoring of internal audit: The Audit Committee monitored and
    reviewed the Audit Office along with approved annual and medium term
    plans regarding the KPIs, the quarterly review summary, the
    organizational structure, the manpower, the capital expenditure and
    management budgets on an annual basis, whereby the review is
    conducted on a semi-annual basis. These were resulted in the
    development of the internal Audit Office that offers a more
    preventive approach and benefits the company’s operations. Moreover,
    audited functions are allowed to freely evaluate and give
    suggestions to auditors, to ensure a continual development of the
    auditing system. In addition, the Audit Office coordinated with the
    external auditors for co-planning so as to enhance the audit
    effectiveness.

6.  Appointment of the external auditors for 2009: The Audit Committee
    evaluated the readiness performance, manners and ethics of the
    external auditors and the result was as satisfactory as that of last
    year. The committee also reviewed the qualifications of the external
    auditors and found they were in compliance with the rules and
    regulations of SEC and SET. Five leading audit firms were invited to
    submit their audit proposal and KPMG Poomchai Audit Limited was
    selected for 2009. Consequently, 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. Pisit
    Chiwaruangroch, certified public accountant Registration No. 2803,
    and/or Mr. Charoen Phosamritlert, certified public accountant
    Registration No. 4068, of KPMG Phoomchai Audit Limited, as the
    company’s auditors for 2009.

On behalf of the Audit Committee

Air Chief Marshal

(Kamthon Sindhvananda)

Chairman of the Audit Committee