Internal control System

The Board defines the guidelines of the internal control system, considered as a combination of processes aimed at monitoring the efficiency of corporate operations, the reliability of financial information, compliance with laws and regulations and the safekeeping of corporate assets.
The Board (i) prevents and manages corporate risks regarding the Issuer and the group which reports to the Issuer by defining suitable control guidelines that ensure that such risks are correctly identified and adequately measured, monitored, managed and assessed, even as regards safeguarding corporate assets and the fit and proper management of the company; (ii) periodically inspects – at the very least on an annual basis – the appropriateness, effectiveness and actual functioning of the internal control system.

In exercising these functions, the Board collaborates with a director who is in charge of overseeing the functioning of the internal control system (the Director In Charge), and with the Internal Control Committee. The Board also takes into consideration the organisational and management models adopted by the Issuer and the Group of which the Issuer is Parent Company, in accordance with Legislative Decree 231/2001.
Upon the proposal of the Director In Charge and having obtained the opinion of the Internal Control Committee, the Board appointed an Internal Control Supervisor, ensuring that this person is supplied with the resources suitable to carry out his/her functions – resources that also regard the operating structure and internal organisational procedures to access the information needed for the role – granting powers to the Chief Executive Officer and the General Director of Finance to formalise the terms and conditions of this appointment.

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The Internal Control Committee referred back to the Board on a regular basis during the financial year regarding its work, the result of its inspections and the functioning of the internal control system, highlighting how the system proved to be largely in line with the size and organisational and operational structure of the Issuer.

The Board of Directors of the Issuer, also considering the information provided by the Internal Control Committee, was able to give an evaluation of the adequacy, effectiveness and efficient functioning of Issuer’s internal control system, in the meeting of 26 February 2010.

Executive director in charge of the internal control system

The Board has appointed Chairman and Chief Executive Officer Roberto Colaninno as the Executive Director In Charge of overseeing the functioning of the internal control system.

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The Executive Director In Charge of overseeing the functioning of the internal control system:

  • conducted an identification of the main corporate risks (strategic, operational, financial and compliance risks), taking account of the characteristics of the Issuer and its subsidiaries’ business activities, and subjected them to periodic examination by the Board
  • implemented the guidelines defined by the Board, arranging for the design, creation and management of the internal control system, continuously inspecting its overall suitability, effectiveness and efficiency
  • arranged for the adaptation of this system to the dynamics of the business’ operating conditions and its legislative and regulatory position
  • proposed the appointment of the Internal Control Supervisor to the Board.

Internal control supervisor

As from 1 January 2009 the consortium company Immsi Audit S.c. a r.l. has been providing services, performing all internal auditing activities for IMMSI Group companies.
The Board of Directors, upon the proposal of the appointed Board Director and after consulting with the Internal Control Committee, resolved to appoint Maurizio Strozzi, CEO of Immsi Audit S.c. a r.l., to replace Pierantonio Piana as Designated Internal Control Supervisor.

The Designated Internal Control Supervisor is not the head of any operational area, and does not report hierarchically to any operational area managers, including the administration and finance areas.

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During the financial year, the Internal Control Supervisor:

  • had direct access to all information useful for carrying out his duties;
  • reported on his work to the Internal Control Committee and to the Board of statutory Auditors;
  • also reported on his work to the Executive Director In Charge of overseeing the functioning of the internal control system.

During the year, the Internal Control Supervisor, assisted by the Internal Audit department, audited the internal control system in conformity to the 2009-2011 Internal Audit Plan approved by the Board of Directors on 26 February 2009, undertaking risk analysis, financial, operational and compliance auditing activities, monitoring for the use of improve ment/corrective action plans agreed on downstream internal auditing activities and monitoring for standards assurance (with particular reference to provisions of Law 262/2005 and Legislative Decree 231/2001). In particular internal auditing in 2009 concerned: “sales network management and development” and the “identification of customer satisfaction by brand/product and after sales” and the administrative/ management processes of the foreign subsidiaries Piaggio Croazia, Piaggio Asia Pacific and Piaggio Group Americas, monitoring of undertakings made in disclosures, monitoring of the procedural framework supporting legal and regulatory compliance for funded research projects, compliance and operational efficiency of personnel (Italy - non-managerial) / outsourcer administration processes, monitoring of information periodically disclosed to the Supervisory Body pursuant to Legislative Decree 231/2001 by Company functions, the random monitoring of reported information on sensitive processes for the purposes of Legislative Decree 231/2001 identified in the annual activity plan drawn up by the Body, as well as administrative/accounting audit activities defined by the compliance officer in accordance with Law 262/2005 (now a part of the Consolidated Finance Act)

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The Issuer has established an internal audit department, headed by the Internal Control Supervisor.
During the financial year, the internal audit department was run by Maurizio Strozzi, CEO of the company Immsi Audit S.c.a r.l.

No connections exist between the Issuer and person appointed as head of the internal audit department.
The internal audit department has been outsourced, to ensure full independence and autonomy in carrying out relative activities.

 

Organisational model pursuant to legislative decree 231/2001

On 12 March 2004 the Issuer adopted the organisational, management and control model for the purpose of preventing corporate crimes indicated in Legislative Decree 231/2001, as amended (the “Model“). The Supervisory Body in office was appointed by the Board of Directors on 16 April 2009 for the years 2009-2010-2011, and thus up until approval of the financial statements as of 31 December 2011. The Supervisory Body comprises Giovanni Barbara, Chairman of the Issuer’s Board of Statutory Auditors, Ulisse Spada, Manager of the Issuer’s Legal Affairs Department and Antonino Parisi (replacing Enrico Ingrillì, who passed away during the year), who acts as chairman, selected from eligible external professionals.

The Model currently consists of the Code of Ethics and Code of Conduct, in addition to the Internal Control Process Charts, subdivided into Instrumental and Operational processes, as well as the Disciplinary System. The Model is currently being revised and updated to include new statutory offences and crimes specifically indicated in Legislative Decree 231/2001.
During the final part of 2008, an e-mail account was set up on the corporate Intranet allowing Piaggio employees to send a message directly to the Supervisory Body to report information. These messages may only be read by the Supervisory Body, thereby rendering the relationship between the Supervisory Body and the actual corporation compliant with the Model. During 2009, the Issuer’s Supervisory Body met 7 times, with all members attending.
In its meeting of 15 February 2010, the Supervisory Body approved the 2010 Activity Plan. At least 5 (five ) meetings of the Supervisory Body are planned for the year. In addition to the meeting already held on 15 February 2010, meetings are scheduled for: 15 March 2010, 15 June 2010, 13 September 2010 and 15 November 2010.

The Model has been sent to all Piaggio Group executive managers and has been published on the corporate Intranet and is available on the Issuer’s institutional website www.
piaggiogroup.com under “Investor Relations / Corporate Governance/ Governance Model”.

External auditors

The audit has been entrusted to Deloitte & Touche S.p.A..
This appointment was approved by the Shareholders’ Meeting on 30 March 2006, and expires on approval of the financial statements as of 31 December 2011.

Financial reporting manager

The financial reporting manager of the Issuer is Alessandra Simonotto, Head of the Issuer’s Credit Administration and Management.

Pursuant to art. 17.3 of the Issuer’s Articles of Association, the financial reporting manager must have the professional requisites characterised by detailed expertise in administration and accounting, as well as the reputation requisites prescribed by the legislation in force for those who carry out administrative and management functions. This expertise, which must be assessed by the Board of Directors, must be acquired through work experience in a role having a suitable level of responsibility for a sufficient period of time.

The financial reporting manager is appointed by the Board, subject to obligatory approval by the Board of Statutory Auditors.

At the time of this appointment, the Board attributed financial reporting manager with all the powers and means necessary to execute the prescribed duties.

 

Main characteristics of the risk management and internal control systems in relation to the financial disclosure process (article 123-bis, section 2, letter b), consolidated finance act)

Introduction

Purpose and objectives
The risk management and internal control system in relation to Piaggio Group financial disclosure was developed using the “COSO Report” 1 as a reference model. According to this report, the Internal Control System, given its broadest meaning, is defined as “a process, carried out by the Board of Directors, by senior managers and other subjects of the company structure, intended to provide reasonable certainty as to achieving objectives in the following categories:

  • effectiveness and efficiency of operating activities;
  • reliability of financial statement information;
  • conformity to laws and regulations in force”.
    As concerns the financial disclosure process, these objectives refer to the credibility, accuracy, reliability and timeliness of disclosure.

In defining its own internal control system in relation to the financial disclosure process, the Group observed relative requirements of the following reference laws and regulations:

  • Legislative decree no. 58 of 24 February 1998 (Consolidated Finance Act).
  • Law no. 262 of 28 December 2005 (as amended, including the legislative decree implementing the ”Transparency” directive approved on 30 October 2007) on the preparation of company accounting documents.
  • Consob Regulation on Issuers of 4 May 2007 “Statement of the financial reporting manager and of delegated administrative bodies concerning the financial statements, consolidated financial statements and half-year report pursuant to article 154-bis of the Consolidated Finance Act”;
  • Consob Regulation on Issuers of 6 April 2009 “Implementation of the Transparency directive (2004/109/EC) on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, amending the directive 2001/34/EC”;
  • the Civil Code, which extends liability in company management (article 2434), the offence of disloyalty following settlement or the promise of benefits (article 2635) and the offence of obstructing public and supervisory authorities in performing their functions (article 2638) to include managers in charge of financial reporting.
  • Legislative Decree 231/2001 which, referring to the above provisions of the Civil Code and the administrative liability of corporate bodies for offences committed by employees against the public administration sector, considers the Manager in charge of financial reporting as a key figure.

The risk management and internal control system in relation to Group financial disclosure was implemented also considering guidelines from some industry associations concerning the activities of the Manager in charge of financial reporting, and in particular:

  • Position Paper Andaf “financial reporting manager”;
  • Position Paper AIIA “Law no. 262 on the Protection of Savings”;
  • Confindustria (Italian manufacturers’ association) “Guidelines for the activities of financial reporting manager pursuant to article 154-bis Consolidated Finance Act) in addition to the “Format for the corporate governance report and corporate ownership “ issued by Borsa Italiana.

Main characteristics of the risk management and internal control system in relation to the financial disclosure process

Methodological approach

The risk management and internal control system in relation to Piaggio Group financial disclosure is part of the Group’s wider-ranging Internal Control System, which includes the following:

  • Code of Ethics,
  • The Organisational and management model pursuant to Legislative Decree 231/2001 and relative protocols,
  • Procedures for internal dealing notices,
  • Principles and procedures for carrying out significant transactions and transactions with related parties,
  • the System granting powers and authority,
  • the Company organisation chart and job profiles,
  • the Procedure on reporting information to the Market,
  • the Risk analysis process adopted (Risk Assessment),
  • the Accounting control system.

Piaggio’s Accounting and Administrative Control System comprises a number of operating procedures and documents, including:

  • The Accounting and Administrative Control Model – a document issued to all employees directly involved in preparing and/or controlling accounting information, which defines the operating procedures of the Accounting Control System.
  • Group Accounting Manual – a document promoting the development and application of consistent accounting criteria within the Group as regards the identification, classification and measurement of operating activities;
  • Operating instructions for financial statements and reporting, and closing schedules – documents informing company functions in detail about operating procedures for managing financial statement preparation activities, within defined, shared deadlines;
  • Administrative and accounting procedures – documents defining the responsibilities and control rules to follow with particular reference to administrative/accounting processes.

Piaggio’s Accounting and Administrative Control Model defines a methodological approach for the risk management and internal control system comprising the following stages:

a) Identification and assessment of financial disclosure risks;
b) Identification of controls for identified risks;
c) Evaluation of controls for identified risks and management of any problems detected.

System Elements

a) Identification and assessment of financial disclosure risks

Risks relative to accounting disclosure are identified and assessed based on a structured risk assessment process. The process identifies the objectives of the financial disclosure internal control system in order to guarantee a true and accurate financial disclosure. These objectives are based on financial statement “assertions” (existence and occurrence of events, completeness, rights and obligations, valuation/ recording, presentation and disclosure), and other control objectives (such as compliance with authorisation limits, separating duties and responsibilities, the documentation and traceability of operations, etc.).
The risk assessment therefore focuses on parts of financial statements identified as having a potential impact on financial disclosure in relation to failure to achieve the control objectives.

The purpose of the process which determines the scope of entities and processes that are significant in terms of their potential impact on financial disclosure is to identify the financial statement accounts, subsidiaries and administrative/ accounting processes considered significant, with reference to the Group’s consolidated financial statements, based on valuations made using quantitative and qualitative parameters.

In particular, these parameters are defined:

  • determining the quantitative threshold values to compare consolidated financial statements figures and the relative contribution from Group subsidiaries,
  • using qualitative valuations based on a knowledge of the company and specific risk factors inherent in administrative/ accounting processes.

Underlying company processes are related to financial statement accounts classified as significant, to identify controls that can meet the objectives of the financial disclosure internal control system. The adequacy of these controls and their application is then evaluated. In the case of automatic controls, this evaluation also considers general IT controls for applications that support processes which are considered significant.

b) Identification of controls for identified risks;

As stated above, controls necessary to mitigate risks identified in administrative/accounting processes are identified, considering control objectives associated with financial disclosure.

The functions involved in the financial disclosure process ensure that administrative and accounting procedures and relative controls are updated, as concerns areas in their remit.

If, after defining the scope of actions, sensitive areas are identified which are not regulated, either wholly or in part, by administrative and accounting procedures, existing procedures are supplemented and new procedures are formalised, overseen by the Manager in charge of financial reporting, in relation to management areas in his remit.

c) Evaluation of controls for identified risks and problems detected.

The Accounting Control System is periodically evaluated, at least every six months, when preparing the separate annual financial statements, consolidated annual financial statements and abbreviated consolidated half-year financial statements.

The adequacy and application of administrative and accounting procedures and controls are evaluated by monitoring (testing) based on best practices.

Testing is done throughout the financial year, as arranged and coordinated by the Manager in charge of financial reporting through his own department, supported if necessary by the internal audit department or appropriately selected external consultants.

Control tests are run on the administrative and functional departments coordinated by the Manager in charge of financial reporting or by his officers, assisted by the Internal Audit department to ensure that controls for administrative and accounting procedures are carried out, in addition to specific focused controls on companies, processes and accounting entries.

Delegated bodies and administrative managers of subsidiaries report to the Manager in charge of financial reporting on the monitoring of the adequacy and application of administrative and accounting procedures.

The Manager in charge of financial reporting, assisted by the Internal Control Supervisor, produces a report summarising the results of evaluations on controls for previously identified risks (Management Summary). This is based on the outcome of monitoring activities and on statements from delegated administrative bodies and administrative managers of subsidiaries. This evaluation may identify compensatory controls, corrective actions or improvement plans for any problems identified.

The Management Summary is issued to the Chief Executive Officer, and then submitted to the Board of Statutory Auditors of the Parent Company, the Internal Control Committee and Board of Directors.

Roles and functions involved

The risk management and internal control system for financial disclosure is governed by the Manager in charge of financial reporting. Appointed by the Board of Directors, the Manager, in conjunction with the Chief Executive Officer, is responsible for planning, implementing and approving the Accounting and Administrative Control Model, and assessing its application, issuing a statement relative to the interim and annual financial statements, including consolidated statements. The Manager in charge of financial reporting is also responsible for establishing adequate administrative and accounting procedures for drafting the financial statements and consolidated financial statements.
With the assistance of the Internal Audit department, it also provides subsidiaries considered significant in terms of preparing consolidated Group reporting, with guidelines on evaluating the Accounting Control System.
In carrying out activities, the Manager in charge of financial reporting:

  • liaises with the Internal Audit Department/Internal Control Supervisor, that independently audits the operation of the control system and assists the Manager in charge of financial reporting in monitoring the system;
  • is assisted by Function Managers. These managers ensure complete, reliable information flows to the Manager in charge of financial reporting, for areas in their remit, for accounting disclosure purposes;
  • coordinates the activities of administrative managers of subsidiaries considered significant. These managers, in conjunction with delegated bodies, are responsible for establishing adequate accounting control systems within their companies, to monitor administrative and accounting processes and to evaluate effectiveness over time, reporting results to the parent company, based on an internal statement process;
  • establishes reciprocal information flows with the Internal Control Committee and Board of Directors, reporting on activities carried out and on the adequacy of the Internal Control System.

Lastly, the Board of Statutory Auditors and Supervisory Body are informed of the adequacy and reliability of the administrative/accounting system.