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Internal control

Internal control of financial reporting

Internal control aims to ensure accurate and reliable financial reporting and accounting in line with applicable laws and regulations, accounting standards and other requirements for listed companies.

Control environment

The control environment comprises the values and ethics which the Board of Directors, Audit Committee, the CEO and Group Management communicate and operate under. The basis of internal control for financial reporting consists of the control environment together with the organisation, decision making paths, authorities and responsibilities which are documented and communicated in governing documents.

One example is the division of responsibilities between the Board and the CEO and instructions regarding the delegation of authority, as well as instructions applying to the accounting and reporting. Important internal control instruments include Fagerhult Group’s Code of Conduct and core values. The Code includes principles governing how business is to be conducted and is reinforced every two years with the most recent being during 2023 when 1,761 managers and key individuals across the group underwent an online training and testing process. This will continue to be repeated every two years, the next being in 2025. These values represent a long-term commitment and a shared base connected to the business concept and strategies guiding employees in daily operations.

Fagerhult Group is characterised by a decentralised organisation based on goal-oriented management, where good performances are rewarded.

Financial reporting to the Board

The CEO is responsible for ensuring that the Board receives the reports required for its ongoing assessment of the company’s and the Group’s financial positions. Fagerhult Group’s Board receives monthly financial reports and the Group’s financial situation is addressed at each Board meeting.

Risk assessment

Regarding financial risk assessment, the risks are assessed as mainly relating to the potential for material misstatement in the reporting of the company’s financial position and performance. To minimise these risks, governing documents have been established for accounting, for procedures for annual reporting and for follow-up of reported annual accounts. Fagerhult Group’s Board regularly assesses reporting from a risk perspective. As a support for these assessments, profit/loss items and balance-sheet items are compared with previous reports as well as budgets and forecasts.

The risks identified in the financial reporting are managed through the Group’s control structure. In addition to assessing the risks in the financial reporting, the Board and management work continuously to identify and manage significant risks affecting Fagerhult Group’s business from an operational and financial perspective. During 2023 each brand company performed their own internal risk assessment and this will be repeated during 2024. 

Control activities and follow-up

Control activities involve all levels of the organisation and concern the measures selected to manage the Group’s risks. To ensure completeness and accuracy in the financial reporting, instructions and guidelines are in place that have been communicated to the relevant personnel. The activities also limit risk from the identified risks. The Group’s central control function analyses and monitors budget deviations, prepares forecasts, monitors significant variations between periods, and reports these to others within the organisation, thereby minimising the risk of errors in the reporting. Control activities also include follow-up and comparisons of earnings trends or significant individual items, account reconciliations and balances, and the approval of all proxy and attestation instructions, as well as accounting and valuation principles.

Monitoring of the effectiveness and compliance with these control activities takes place through programmed controls and through individually established procedures. The Group has a shared reporting system in which all reporting is carried out. Financial follow-up is carried out by Group Management in conjunction with regular visits to the subsidiaries, in parallel with development of the control function.

Information and communication

Fagerhult Group continuously provides information about the Group’s performance and financial position to the market. The quality of external financial reporting is ensured through various activities and procedures. The CEO is responsible for the accuracy and quality of all information provided, for example, capital markets days, quarterly webcasts of the financial results, financial press releases and presentation materials for various meetings with the media, shareholders and investors.

The policy is intended to ensure that Fagerhult Group’s information requirements are met in an accurate and complete manner. The most important governing documents, in the form of policies and instructions, are kept up-to-date and are communicated via the appropriate channels, mainly electronically. Internal information and communication is about creating awareness among the Group’s employees about external and internal governing instruments, including authorities and responsibilities.

During 2021 the CFO re-issued to the relevant personnel an update of the Group’s Financial Internal Control Guidelines as well as the Group’s Financial Policy document. A self-assessment for each significant subsidiary was then completed and during 2022 these were issued to KPMG, for inclusion in the third quarter and end of year audit process. This process has been repeated during 2023 and during 2024 the CFO will issue an update of the Group’s Financial Internal Control Guidelines to include a more significant emphasis on IT and cyber-security.

Fagerhult Group’s whistle-blower policy means that each employee has the right to report suspected breaches of laws or regulations without fear of reprisal.

Evaluation of the need for a separate audit function

The Board and management have determined that a separate internal audit function will not be established in the Fagerhult Group. The Group’s Finance, Legal and HR departments continually monitors compliance with the company’s governance model, reporting principles and policies. In addition, the Finance department conducts ongoing analyses of the company’s reporting and financial results to gain assurance regarding the trend.

During the last four years the Group’s Finance department has established a forum focussed on addressing financial reporting and tax matters and through these regular forum meetings many matters are addressed and progressed.

Together with the controls implemented by the Group’s management and the different business areas existing control functions, discussions with the company’s external auditors concerning the audit approach, as well as the auditing firm’s extensive organisation are assessed as providing a satisfactory level of assurance. This means that a separate internal audit function is not considered necessary.

Activities in 2023

During the year Group Management continued to focus on the core strategic areas as well as dedicated time given to those external events that have an impact on the business. As a result of the supply chain difficulties during 2022 and the associated cost pressures there was a considerable focus on pricing management and the Group dealt with this situation well and delivered a much improved industrial margin in 2023.

The activity level on the Group’s address to sustainability increased further. The Group’s Science Based Target initiative targets were validated during 2023 and actions take place to support the delivery of the scope 1, 2 and 3 near term and long-term targets.

During the year, the HR agenda turned to talent development and succession planning as well as a programme to establish updated leadership principals. During the year the Group has made many good new recruitments, at many levels across the Group and the recruitment of increased talent and competence is a corner stone for long term development. This remains a core priority.

From the business area perspective, the continued focus has been on developing the new business area setup combined with making progress on those identified key areas for organic growth. These key areas are focussed at long term sustained growth and for example include the address at the North American market, the approach to the retail application area, the DACH market for education, healthcare and offices and the internationalisation of the high end designer brand atelje Lyktan. Lastly, worth mentioning, is the rapidly growing market in the retrofit and refurbishment segment where the Group’s successes continues to increase. Here, fueled by higher energy costs, the increasing sustainability agenda and the autumn 2023 ban of the production of and the import into Europe of fluorescent lamps and many of our businesses have good success.

From a technology/connectivity perspective the year has seen significant progress. The volumes of the Organic Response sensor node 3 (SN3) reached yet another all-time high and we are sure that this growth will continue as we expand our knowledge and increase the investment levels. The late 2022 recruitment of the CTO has been beneficial in taking the technology solutions to market and this address will also support the growth and development in the coming years.