Management Board Report on the activity of the JSW S.A. for 2012

5.3. Description of the primary attributes of the internal control and risk management systems in reference to preparing financial statements and consolidated financial statements

Jastrzębska Spółka Węglowa S.A. prepares standalone and consolidated financial statements based on the generally binding regulations of law and internal regulations.

For the purpose of procuring that the financial statements are true and fair and comply with the binding regulations of law and of generating high quality financial data, the Company employs elements of internal control and risk management systems. The JSW S.A. Management Board is responsible for the internal control system and its effectiveness in the process of preparing the financial statements and the periodic reports prepared and published in accordance with the principles of the Regulation.

Under the internal control and risk management system in the process of preparing financial statements, the Company applies a number of procedures and internal rules and regulations whose purpose is to procure effective and efficient control, identification and elimination of prospective risks. The solutions in force in the Company governing the process of preparing financial statements are based on the following:

• Company’s Organizational Bylaws,
• Documentation concerning the accepted accounting principles (policies),
• Corporate Risk Management Policy and Procedures,
• Rules and Regulations and procedures concerning the performance of the reporting duties in the laws governing the trading of JSW S.A.’s securities on the regulated market and the executive acts to these statutes prescribing the scope of reporting as well as the rules and regulations and split of duties for preparing financial statements,
• Instructions concerning documentary workflow,
• Scopes of employee rights and duties.

The Chief Financial Officer oversees the preparation of financial statements with the financial and accounting teams reporting to him as they perform tasks relating to recording and verifying economic events in the accounting ledgers and generating the data required to prepare the financial statements. The Management Boards of the consolidated companies are responsible for preparing the reporting packages for the Capital Group’s consolidated financial statements.

The Company continuously employs cohesive IFRS-compliant accounting rules to present financial data in the financial statements, periodic reports and other reports conveyed to shareholders. The same rules are in force in the companies belonging to the Capital Group for which JSW S.A. is the parent company.

The scope of disclosures stems from the reporting duties prescribed by IFRS. Amendments to IFRS are monitored on an ongoing basis to update the scope of disclosures in the financial statements. The data disclosed in the published periodic reports come from the Company’s accounting records and additional information transmitted by the various organizational cells of JSW S.A. However, the Capital Group companies transfer the required data in the form of reporting packages to prepare consolidated financial statements.

The documentation concerning the IFRS accounting rules (policies) adopted by JSW S.A. is binding on Group entities primarily with respect to the scope of preparing consolidation packages for the purposes of preparing consolidated financial statements. Group companies prepare IFRS-compliant standalone financial statements.

The data from the accounting ledgers provide for the accuracy of the financial statements as they contain evidence entered on the basis of the appropriate source documentation, while using the most modern IT technology to record, process and present economic and financial data. The system’s modular structure provides for a transparent split of areas and competencies, the coherence of the records of operations in the accounting ledgers and control between the ledgers. Access to data in different cross-sections and layouts is achievable through an expanded reporting system. On an ongoing basis the Company updates its IT system to the changing rules of accounting and other legal standards, which is supported by the high degree of flexibility in the functionalities of the system’s various modules. Consolidated financial statements are prepared using specialized IT tools. The IT solutions used by the Company secure control of access to the finance and accounting system and provide for the appropriate protection and archiving of accounting ledgers. The security of operating the IT system is afforded by the relevant structure of authorization. Control of access is exercised at every stage of preparing the financial statements, starting from entering source data, through data processing to generating output information.

The Supervisory Board evaluates the standalone and consolidated financial statements and appoints an Audit Committee, which is an advisory and opinion-giving body acting collectively within the structure of the Supervisory Board. The Audit Committee operates on the basis of the Bylaws of the Audit Committee of the Supervisory Board of Jastrzębska Spółka Węglowa S.A. A description of how the Audit Committee operates has been presented in Item 5.11 of this representation. The primary objective of the Audit Committee’s operation is to support the Supervisory Board in exercising financial supervision and delivering to the Supervisory Board accurate information and opinions making it possible to make the right decisions on financial reporting, internal control and risk management, as well as to procure independence and objectivity of the audit firm auditing the financial statements.

Moreover, by the power of art. 4a of the Accountancy Act of 29 September 1994, the duties of the Management Board and the Supervisory Board include ensuring that the financial statements and the activity report meet the requirements prescribed by law.

According to the binding regulations the Company submits its financial statements to a review and an audit by an independent statutory auditor. The Company’s Supervisory Board selects the statutory auditor from among reputable audit firms based on the Audit Committee’s recommendations. Within the framework of its audit work the statutory auditor makes an independent evaluation of the accuracy and correctness of the standalone and consolidated financial statements and confirms the effectiveness of the internal control and risk management system.

The fundamental element of risk management in the process of preparing financial statements is to audit the control mechanisms and the occurrence of risks in JSW S.A.’s operations. In performing these duties internal audit will assist the Audit Committee by conducting the relevant work to check the effectiveness of control and the efficiency of processes. In 2012 the cooperation between internal audit and the Audit Committee was continued. Internal audit operates on the basis of the Rules and Regulations of Internal Control and Audit at JSW S.A. as approved by the Company’s Management Board.

The internal control system in operation in the Company covers all the processes in the Company, including areas having a direct or indirect impact on the correctness of preparing financial statements.

In 2012, the Issuer took a number of steps to modify and develop the Corporate Risk Management System in place in JSW S.A. As a result, the Corporate Risk Management Policy and Procedures was developed based on comprehensive ERM (enterprise risk management) solutions were developed based on the practice of COSO, FERMA and ISO systems. Moreover, a Corporate Risk Management Officer was appointed in the organizational structure of JSW S.A. to analyze the current risk-mitigation control mechanisms and submits recommendations on risk responses. The purpose of corporate risk management is to:

• identify the potential events that may have an adverse effect on the Company,
• keep risk within the specified limits, and
• ensure the achievement of business objectives in a reasonable manner

Risk management is accomplished by identifying and assessing the areas of risk while simultaneously defining and taking measures to minimize them or eliminate them entirely, in the following areas:

• Organization and management;
• Strategy and its implementation;
• Operating activity;
• Support functions;
• Environment.

The assessment of effectiveness conducted in this area among others concerning the credibility and coherence of financial data supports the process of preparing financial statements required by the regulations of law and management accounts. Moreover, the Company maintains an obligation of self-control of employees and functional control exercised by all levels of management.

The adopted rules of procedure regarding the preparation of financial statements are supposed to procure compliance with the requirements of the law and the facts as well as to allow for early identification and elimination of prospective risks so that they do not affect the accuracy and correctness of the presented financial data.