The Group’s activities are varied, depending on each entity’s position in the value chain, and consequently require differentiated forms of management and follow-up. Good internal management systems are essential for success, and these must be continuously developed to accommodate fluctuating conditions. The Group’s regional structure with independent entities, including in terms of short-term reporting, facilitates good control and a powerful focus. Internal control is based on daily and weekly reports that are summarised into monthly reports tailored to the individual company, and at Group level. There is an emphasis on developing uniform reporting procedures and formats to ensure correct reporting from all entities and up to an aggregate level. As Lerøy Seafood Group is an international seafood corporation with decentralised operations and a significant volume of biological production, the company is exposed to a number of risk factors. The Board of Directors therefore works hard to ensure that the Group implements all measures required to control risk, to limit individual risks and to keep risk as a whole within acceptable constraints.
Operating risk. Fish farming takes place in relatively open seas, which provide the best conditions for fish farming in terms of the environment and health of the fish. However, this places significant demands on both personnel and equipment. The production plants are continuously subjected to the forces of nature, representing a certain risk of damage to equipment which, in turn, may result in accidental release of fish. The company reported three incidents involving the accidental release of fish in 2017, cf. the more detailed description in the Group's Environmental Report. Keeping animals in intensive cultures will always entail a certain risk of illness. Fish are particularly vulnerable to illness when they start life at sea, as they are exposed to stress during this period and have to adapt to a completely new environment. The risk of illness can be reduced by ensuring high-quality smolt, vaccinations, good conditions and the correct locations for the fish. The Group also has a focus on sustainable feed.
Market risk. The Group's results are strongly dependent on developments in global salmon and trout prices, and now increasingly on whitefish prices, in particular cod. The Group seeks to reduce this risk factor by ensuring that a certain proportion of sales are so-called contract sales. In addition, Norwegian fish farming and the fish-processing industry in Norway and the EU have a history of exposure to the risk represented by the constant threat of long-term political trade barriers imposed by the European Commission. In 2008, the European Commission abolished the programme which involved so-called minimum prices for Norwegian salmon and punitive duties on Norwegian trout. In 2011, punitive duties on whole salmon exported to the USA were also lifted. Russia introduced a ban on imports of salmon and trout from Norway on 7 August 2014. As Russia is normally a major market for Norwegian salmon and trout, the import ban again had a negative impact on realised prices for trout in 2017.
Currency risk. The Group has international operations and is thus exposed to currency risk. The Group makes use of currency derivatives combined with withdrawals/deposits in multi-currency accounts to minimise currency risk on outstanding trade receivables, signed sales contracts and ongoing contractual negotiations. The Group’s long-term liabilities are mainly in Norwegian kroner.
Credit risk. Pursuant to the Group’s strategy for managing credit risk, the Group’s trade receivables are mainly covered by credit insurance or other forms of security. All new customers are subject to credit rating.
Interest rate risk. The majority of the Group’s long-term debt is at floating rates of interest, representing exposure to increases in the market interest rate. Interest rate swap agreements are signed to reduce interest rate risk.
Liquidity risk. The most significant individual factor related to liquidity risk is fluctuation in salmon prices and now, increasingly, prices for whitefish, in particular cod. Liquidity is also affected by fluctuations in production and slaughter volumes and changes in feed prices, which are the predominant single factor on the cost side. Feed costs are impacted by developments in prices for marine raw materials and agricultural products.
Review by the Board of Directors. A significant share of the work of the Board of Directors involves ensuring that the company management is familiar with and understands the Group's risk areas, and that risk is managed by means of appropriate internal control. Frequent evaluations and assessments are conducted of both the management's and Board's understanding of risk and internal control. The audit committee plays an important role in these evaluations and assessments.
Description of the main elements of risk management and internal control related to financial reports. Internal control within the Group is based on the recommendation from the "Committee of Sponsoring Organizations of the Treadway Commissions" (COSO), and covers control environment, risk assessment, control activities, information and communication, and monitoring. The content of these various elements is described in detail below.
Control environment. The core of an enterprise is the employees' individual qualities, ethical values and competence, as well as the environment in which they work.
Guidelines for financial reporting. On behalf of the CFO, the Group’s Chief Accountant provides guidelines to entities within the Group. These guidelines set out requirements for both the content of and process for financial reporting.
Organisation and responsibility. The Group’s Chief Accountant reports to the CFO and is responsible for areas such as financial reporting, budgets and internal control of financial reporting within the Group. The Directors of the reporting entities are responsible for continuous financial monitoring and reporting. The entities all have management groups and financial functions which are adapted to their organisation and business.The entity managers shall ensure implementation of appropriate and efficient internal control, and are responsible for compliance with requirements.
The audit committee shall monitor the process of financial reporting and ensure that the Group's internal control and risk management systems function efficiently. The audit committee shall also ensure that the Group has an independent and efficient external auditor. The financial statements for all companies in the Group are audited by an external auditor, within the framework established in international standards for auditing and quality control.
Risk assessment. The Group’s Chief Accountant and the CFO identify, assess and monitor the risk of errors in the Group's financial reports, together with the managers of each entity.
Control activities. Reporting entities are responsible for the implementation of adequate control actions to prevent errors in the financial reports. Processes and control measures have been established to ensure quality assurance of financial reports. These measures comprise mandates, division of work, reconciliation/documentation, IT controls, analyses, management reviews and Board representation within subsidiaries. The Group’s Chief Accountant provides guidelines for financial reporting to the different Group entities. The Group’s Chief Accountant ensures that reporting takes place in accordance with prevailing legislation, accounting standards, established accounting principles and the Board's guidelines. The Chief Accountant and the CFO continuously assess the Group's and the entities' financial reports. Analyses are carried out in relation to previous periods, between different entities and in relation to other companies within the same industry.
Review by Group management. Group management reviews the financial reports on a monthly basis, including the development in the income statement and balance sheet figures.
Reviews by the audit committee, Board and general meeting. The audit committee and Board review the Group's financial reports on a quarterly basis. During such reviews, the audit committee has discussions with the management and external auditor. At least once a year, the Board holds a meeting with the external auditor without managerial presence. The Board reviews the interim accounts per quarter and the proposal for the year-end financial statements. The financial statements are adopted by the annual general meeting.
Information and communication. The Group has a strict policy of providing correct and open information to shareholders, potential shareholders and other stakeholders. Item 13, "Information and communication", contains more detailed information.
Follow-up of reporting entities. Those persons responsible for entities which issue reports shall ensure appropriate and efficient internal control in accordance with requirements and are responsible for compliance with such requirements.
Group level. The Chief Accountant and CFO review the financial reports issued by the entities and the Group, and assess any errors, omissions and required improvements.
External auditor. The external auditor shall provide the audit committee with a description of the main elements of the audit from the previous financial year, in particular significant weak points identified during internal control related to the process of financial reporting.
The Board of Directors. The Board, represented by the audit committee, monitors the financial reporting process.