bat plc annual report 2007 - Key Group risk factors (2 of 4)

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Annual Report and Accounts 2007

Risk management in summary

The risk factors listed in this section and the specific processes in place to manage them should be considered with reference to the Group’s internal control framework. The main aspects of this are summarised below, and it is addressed in greater detail in the statement on internal control.

The Group maintains a sound system of internal control with a view to safeguarding shareholders’ investment and the Group’s assets. It is designed to manage risks that may impede the achievement of the Group’s business objectives rather than to eliminate these risks and can therefore provide only reasonable, not absolute, assurance against material misstatement or loss.

The Group uses audit committees at central, regional, area and individual market levels to support the Audit Committee in monitoring risks and control. This framework provides a continuing process for identifying, evaluating and managing the significant risks faced by the Company and its subsidiaries. The Group’s regional audit committees focus on risks and the control environment within each region and are in turn supported by end market or area audit committees.

The corporate Audit Committee addresses risks and the control environment within the Group’s operations which do not fall under the responsibility of the regional, area and local audit committees, for example, central functions, global programmes and above-region projects. Their reviews include consideration of the effectiveness of the process for identifying, evaluating and managing the risks of the business and the assessments of internal control and business risks completed by operating companies.

In addition, the Corporate Social Responsibility (CSR) Committee is responsible for identifying and assessing, in conjunction with management, the significant social, environmental and reputational risks facing the Group’s business and for evaluating management’s handling of such risks. In this, it is similarly supported by a framework of regional and end market CSR committees.

Illicit trade and intellectual property

Illicit trade in the form of counterfeit products, smuggled genuine products and locally manufactured product on which applicable taxes are evaded, represents a significant and growing threat to the legitimate tobacco industry. Increasing excise rates are encouraging more consumers to switch to illegal cheaper tobacco products and providing greater rewards for smugglers. Illicit trade can have an adverse effect on Group volumes, restrict the ability to increase selling prices and damage brand equity.

The brand names under which the Group’s products are sold are key assets. Investments over a period of time have led to many of the Group’s brands having significant brand equity and global appeal to consumers, essential for delivering sustainable profit growth into the future.

The protection and maintenance of the reputation of these brands is important to the success of the Group. In a number of countries around the world, the risk of intellectual property rights infringement remains high as a result of limitations in judicial protection and/or inadequate enforceability. Any substantial erosion in the value of the brands could have an adverse effect on the Group.

Excise and sales tax

Tobacco products are subject to substantial excise and sales taxes in most countries in which the Group operates. In many of these countries, taxes are generally increasing but the rate of increase varies between countries and between different types of tobacco products.

Increased tobacco taxes, or changes in relative tax rates for different tobacco products, or adjustments to excise structures, may result in a decline in overall sales volume for the Group’s products or may alter the Group’s sales mix in favour of Value-for-Money Brands. Increases in tobacco taxes can also lead to consumers rejecting the Group’s legitimate tax-paid products for products from illicit sources.

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