Corporate risk management enables us to identify and manage risks. At present, we are not aware of any risks that could jeopardize the continued existence of the Merck Group.
Risk and opportunity management
Every business decision is based on weighing the associated risks and opportunities. Merck is part of a complex, global business world and is therefore exposed to a multitude of external and internal risks. The aim of our risk management activities is to identify risks early on as well as to assess, manage, and deal with them. The basis for this is a Group-wide risk management process, which we use to systematically record the risks of the Merck Group and to present them in a transparent and comparable manner. Opportunity management in the Merck Group is conducted in the operating units on the basis of the corporate strategy. In this connection, we refer to the Report on Expected Developments starting on page 95.
Within the context of the Group-wide risk management process, the division heads, managing directors of Merck subsidiaries, and the heads of Group functions are specified as employees with responsibility for risks. Every six months, they report their active risk status and report to the risk manager their entire risk portfolio using a uniform, Group-wide reporting system. Risks are assessed based on their potential impact on EBIT and the likelihood of their occurrence. Furthermore, executives with responsibility for risks report existing and planned measures to avert risks and to minimize damage. The risk manager reviews the information and uses it to produce a risk report that reflects the current risk portfolio of the Group and the individual companies. All major aspects of the risk management process are described in a Group guideline. The Executive Board, Supervisory Board and Finance Committee receive the risk report every six months. Significant changes in the assessment of already known risks as well as new, significant risks are reported on an ad hoc basis.
Internal control system for the consolidated accounting process
The objective of the internal control system for accounting is to implement controls that provide assurance that the financial statements are prepared in compliance with the relevant accounting laws and standards. It covers measures designed to ensure the complete, correct and timely transfer and presentation of information that is relevant for the preparation of the consolidated financial statements and the management report of the Merck Group. The control system is subject to continuous further development and is an integral component of the accounting and financial reporting processes in all relevant local units and Merck Group functions. With respect to the accounting process, the internal control system measures are intended to minimize the risk of material false statements in the consolidated accounting process of the Merck Group.
Key tools
The internal control system is geared to ensuring the accuracy of the consolidated accounting process and the preparation of compliant financial statements.
Group Accounting and Controlling centrally steers the preparation of the consolidated financial statements of Merck KGaA as the parent company of the Merck Group. This Group function defines the reporting requirements that the Merck subsidiaries must meet as a minimum requirement. At the same time, this function steers and monitors the scheduling and process-related requirements of the consolidated financial statements.
The Group-wide accounting guidelines form the basis for the preparation of the statutory financial statements of the parent company as well as the subsidiaries in Germany and abroad. These are available to all employees in the relevant units via the Merck intranet. The intranet is also used to adapt the guidelines to changes in the financial regulatory environment and update them in accordance with internal reporting requirements. One of the requirements of the Group-wide guidelines is to present Group-internal business processes as the basis for proper settlement of intercompany balances. Additional controls have been implemented in the consolidation process.
Group Accounting and Controlling also ensures the timely central management of changes to the equity holding structure and correspondingly adapts the Merck Group’s scope of consolidation. The individual companies have a local internal control system. Where finance processes are covered via the Shared Service Center, the internal control system of the Shared Service Center is additionally applied. They ensure that accounting complies with IFRS accounting standards and with the Merck Group accounting guidelines.
Group Accounting and Controlling provides support to the local contacts throughout the entire reporting process. In case of important innovations in the reporting process and IT applications, the function trains employees involved and thus ensures a consistently high quality of reporting.
The reporting process, either via the individual company or the Shared Service Center directly to Group Financial Reporting, ensures fast reporting cycles. The reported financial figures of the subsidiaries are validated via a three-step process between the local finance organization, divisional controlling and Group-wide controlling. Financial figures are checked for their plausibility and content by comparing them with the figures of the previous year and the budget.
The accounting process is designed at all levels to ensure a clearly defined segregation of duties and assignment of responsibilities to the units involved in the accounting process at all times within the scope of continuous dual control.
For the assessment of balance sheet items, the Group Accounting and Controlling function closely cooperates with Merck Group Risk Management in order to correctly reflect potential balance sheet risks. For special issues, such as the evaluation of intangible assets and pension obligations, external experts are additionally involved where necessary.
For the Group accounting process, Merck globally uses a standard SAP software tool. Via a detailed authorization concept to limit user rights on a need-to-have basis, the system contains both single entity reporting and the consolidated financial statements. The financial data are transmitted in encrypted form. Routine system backups are performed in order to prevent a potential loss of data.
The local management of the individual companies is responsible for implementation. The effectiveness of Merck’s internal control system with regard to accounting and the compliance of financial reporting is confirmed by the local managing director and the head of finance by signing the single entity reporting.
All of the structures and processes described are subject to constant review by Internal Auditing based on an annual audit plan specified by the Executive Board. The results of these audits are dealt with regularly in meetings of the Executive Board, the Supervisory Board and the Finance Committee.
The internal control system at Merck makes it possible to lower the risk of materially false accounting statements to a minimum. However, no internal control system – regardless of its design – can prevent a residual risk.
Management assessment of the overall risk situation
Currently no risks can be identified that could jeopardize the continued existence of the Merck Group. This is the finding of this risk report, which was prepared in accordance with German Accounting Standard 5.
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