Audit Report / Information • Apr 18, 2017
Audit Report / Information
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Dear Shareholders,
This report presents the activities performed by the Board of Statutory Auditors during the 2016 financial year and up to today's date, as required by Consob Notice no. DEM/1025564 of 6 April 2001 and subsequent amendments and supplements.
The Board of Statutory Auditors has carried out the supervisory activities required by the law, taking account of the standards of conduct for listed companies recommended by the Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili (national association of chartered accountants and auditors) and the Consob notices on company controls and the activities of the board of statutory auditors.
The Control Body acquired the information necessary for the performance of the tasks of general supervision assigned to it by attending the meetings of the Board of Directors and internal board committees (i.e. the Control and Risk Committee, the Nomination and Remuneration Committee and the Strategy Committee), meetings with Executive Directors questioning of Company management, meetings with the external auditor and control bodies of Group companies, analysis of information flows from the competent company structures, as well as further inspection and control activities. Where deemed necessary, the Control Body availed itself of its own legal consultants, performing its supervisory activities in a completely autonomous and independent way.
In 2016 the following bonds were issued:
on 20 January 2016 Telecom Italia S.p.A. issued bonds for the amount of 750 million euros, with coupon rate 3.625% and maturity on 19 January 2024;
on 29 June 2016, a transaction was undertaken to buy back a Telecom Italia S.p.A. bond with maturity May 2023 and a nominal value of 25 million euros.
All the transactions indicated above are listed in the notes to the consolidated financial statements of the Telecom Italia Group and the notes to the separate balance sheet of Telecom Italia S.p.A., as well as in the report on operations for the year 2016.
The Board of Statutory Auditors has verified that the above transactions comply with the law, the Company bylaws and the principles of correct administration, and has made sure that they were not manifestly imprudent or hazardous, or contrary to the resolutions adopted by the Shareholders' Meeting or likely to compromise the integrity of the corporate assets; the transactions with Directors' interests or with other related parties, were subjected to the transparency procedure set out in the applicable regulations.
The information relating to the principal intra-group transactions and with other related parties executed in the financial year 2016, and the description of their characteristics and economic effects is contained in the notes to the separate financial statements of Telecom Italia S.p.A. and to the consolidated financial statements of the Telecom Italia Group.
The external auditor also considers that the report on operations and the information in the Report on corporate governance and share ownership indicated in art. 123-bis, subsection 4 of the CLF are consistent with the Company's financial statements for the period and the consolidated financial statements for the Group at 31 December 2016.
residential fixed offers and the notice from AGCom requiring it to refrain from the remodulation of the basic price plans for mobile telephony.
The Board of Statutory Auditors undertook appropriate investigation of the complaints received, with the support of the Audit department and the competent offices of the Company, and, where present, also tested the adequacy of the initiatives undertaken after the issue of the notes cited in some of them, and also monitored the ascertainment of any individual responsibilities. After its investigations, it found no irregularities to report to the shareholders' meeting.
With specific reference to the contract with Havas for the media centre business, it should be noted that the Board of Statutory Auditors undertook an in-depth investigation, including a meeting with the Chairman of the Company and representatives of the management involved in the issue, to check that the laws and procedures for conducting the tender used to select the supplier had been correctly observed, and also undertook a specific analysis to consider the issue of whether or not TIM and Havas are related parties. On completion of the investigation, the Board of Statutory Auditors, by majority vote of its members, decided that the elements of information in its possession did not permit it to qualify Havas Media as a related party of TIM, at the time of its investigation. Furthermore, taking account of the relevance of the relations between the Bolloré Group and Vivendi, the Board of Statutory Auditors unanimously recommended to the Board that the safeguards with reference to transactions with Bolloré and Vivendi Group companies be strengthened.
In particular, in implementation of the obligations that derive from its role as Audit Committee of the Company, the Board of Statutory Auditors adopted in due course a specific procedure for handling reports received by the control body. These reports may consist of:
There are instructions on the About Us section of the Company's website (Corporate Bodies – Board of Statutory Auditors – Role, tasks and responsibilities), for sending such reports - in paper or electronic format - to the Board of Statutory Auditors/Audit Committee of the Company.
During the last financial year and until the date of this report, the Board of Statutory Auditors received 20 reports (or groups of "reports", treated as units in the case of several communications from a single individual, even if at separate times), of which 4 were anonymous, complaining, for the most part, of technical service issues and failures of a commercial, accounting and administrative nature.
The Board of Statutory Auditors investigated these complaints appropriately, with the support of the Audit Department and the competent Company departments, but no irregularities to be reported to the Shareholders' Meeting emerged. We should however point out that the relevant investigations are still being carried out regarding 1 report.
| PricewaterhouseCoopers S.p.A. | (in euros) |
|---|---|
| Accounting advice and consultation activities carried out in financial year 2015. | 215,000.00 |
| Agreed procedures connected with the issue of comfort letters in relation to the issue of | |
| notes | 83,000.00 |
| Agreed procedures for certification services regarding tender bids | 26,500.00 |
| Additional audit procedures on the internal control system - Rule 4040 of the Sarbanes | |
| Oxley Act | 120,000.00 |
| Agreed audit procedures on regulatory accounting areas | 47,000.00 |
| Activities connected with updating the 20,000,000,000 euros Euro Medium Term Note | |
| Programme | 29,000.00 |
| Total | 520,500.00 |
:
| Price Waterhouse & Co. S.R.L. (Argentina) | (in euros) |
|---|---|
| Auditing the 2016 final closure financial statements of "Sucursal Argentina" (Argentina Branch Office). |
|
| Equivalent of 62,000 Argentinian Pesos (ARS) at the average exchange rate on 31.12.2016: 1 Euro = 16.33204 ARS |
3,796.00 |
| PricewaterhouseCoopers Advisory S.p.A. | (in euros) |
|---|---|
| Analysis of the ISO 26000 requirements in the CSR approach to management | 18,000.00 |
| Grand total (total assignments in point 7 + total assignments in point 8) | 542,296.00 |
It should be noted that the Shareholders' meeting held on 29 April 2010, on the basis of the proposal put forward by the Board of Statutory Auditors, conferred the office of external auditor (separate financial statements of Telecom Italia S.p.A., annual consolidated financial statements, abbreviated half-yearly consolidated financial statements, annual report for the purposes of the US Laws) on PricewaterhouseCoopers S.p.A. for the nine year period 2010 -2018.
The external auditor appointed by the Parent company Shareholders' Meeting is the main external auditor for the entire Telecom Italia Group. In accordance with Brazilian law, the audit of the separate financial statements of TIM Participações S.A. was assigned to BDO RCS Auditores Independentes, while PricewaterhouseCoopers audits the reporting package produced by the Company for the purposes of the consolidated financial statements of the Telecom Italia Group.
To protect the independence of the appointed auditor, the Company has adopted special Guidelines for the appointment of the independent auditor to undertake assignments. These establish the principle under which the appointment of further assignments (when allowed by the reference regulations) is limited to the services and activities closely related to the audit of the financial statements. Conferment of a single further appointment is subject to the prior approval of the Board of Statutory Auditors of the Parent company; for some types of appointment ('preapproved appointments'), approval is given in advance. In any event, the Board of Statutory Auditors has the right to establish guidelines and qualitative and quantitative criteria regarding the appointment of external auditors, valid for the entire Group, which it did by requiring the introduction, from 1 January 2012, of an operative procedure which provides for prior examination by the Board of Statutory Auditors, even for pre-approved appointments, when certain qualitative conditions occur or when specific quantitative thresholds are exceeded.
Through an adequate flow of information, the Board of Statutory Auditors adopts the corresponding determinations adopted by the audit committees of the SEC registered subsidiary companies (i.e. TIM Participações S.A. and, prior to the sale of the whole remaining shareholding in Telecom Argentina, Nortel Inversora S.A. and Telecom Argentina S.A.) provided they are made based on rules that comply with the applicable law - including U.S. law - and the Group Guidelines on this subject.
The offices of the Company are undertaking a review to update the Guidelines for the conferment of assignments to the external auditor, in light of the recent changes to the regulatory framework.
Pursuant to article 2389, subsection 3, of the Italian Civil Code, the Board of Statutory Auditors formally expressed its disapproval of the increase in the variable part of the compensation of the Chairman of the Board of Directors for 2016.
Finally, pursuant to article 2389, subsection 3, of the Italian Civil Code, the Board of Statutory Auditors formally approved the attribution of additional remuneration for the director appointed Vice Chairman of the Company.
With the prior approval (by majority vote) of the Control and Risk Committee, the Board of Directors appointed Daniele Gulinatti as Head of the Audit Department on 26 July 2016, to replace Silvia Ponzoni, who resigned from the position she had held since 15 September 2015. As required by the Corporate Governance Principles, the Board of Statutory Auditors discussed this issue, and expressed its approval by a majority vote (although their role was purely consultative).
Pursuant to the Corporate Governance Principles the Board of Statutory Auditors formally approved the functional objective scorecards for the short term incentive scheme (2017 MBO) for the Heads of the control departments who report directly to the Board (Audit Department, Compliance Department and IT & Security Compliance Function ).
The Control and Risk Committee met 16 times (of which 9 jointly with the Board of Statutory Auditors, due to the topics dealt with). The Nomination and Remuneration Committee met 12 times.
On 26 July 2016, the Board of Directors created a Strategy Committee, which met once in 2016.
During 2016, there were 50 meetings of the Board of Statutory Auditors (including those meetings held jointly with the Control and Risk Committee).
The Board of Statutory Auditors attended the meetings of the Control and Risk Committee (not held jointly), the meetings of the Nomination and Remuneration Committee, and the meeting of the Strategy Committee, by the attendance of its Chair or another Statutory Auditor designated by the latter.
The Statutory Auditors took part in the Shareholders' Meeting, held on 25 May 2016. The Chair of the Board of Statutory Auditors attended the meeting of the savings shareholders of the Company on 16 June 2016.
Following on the comments made about the analysis in last year's report regarding the applicability of the competition prohibition, pursuant to art. 2390 of the Italian Civil Code, to the Directors appointed by the shareholders' meeting of 15 December 2015, nominated by Vivendi, the Board of Statutory Auditors has continued to monitor the actual activities undertaken by TIM and Vivendi, and has not - to date - found that there have been any instances in which said provisions were applicable.
The Board of Statutory Auditors believes that the governance arrangements and tools adopted by the Company constitute a valid supervisory framework to ensure that the principles of correct administration are respected in operational practice. In particular, in relation to the decision-making processes of the Board of Directors, the Control Body has supervised, including by attendance at board meetings, that the management decisions made by the Directors be substantially legitimate and in the interests of the Company, and checked that the Board resolutions were adequately supported by information, analysis and audit – also involving consultation with the board committees and external professionals, when necessary.
Following the resignation of Marco Patuano from the office of Chief Executive Officer, the Board of Statutory Auditors duly and promptly monitored events, attending board meetings and those of the Nomination and Remuneration Committee, collecting information, including by interviews with the Chairman and resigning Chief Executive Officer and ascertaining effective compliance with the law, the articles of association and with standards of correct administration, also with reference to the agreement stipulated for the termination of his relationship as an employee and Director.
The Board of Statutory Auditors also monitored the process for the replacement of the Chief Executive Officer, attending the meetings of the Nomination and Remuneration Committee aimed at identifying the new Chief Executive Officer and defining his compensation, ensuring the release of the opinion envisaged by Art. 2389, subsection 3 of the Italian Civil Code. On this point, see the comments in paragraphs 9 and 18.
To ensure ever better alignment of the Company's rules of corporate governance with best practices and the most accredited interpretations of provisions of law, regulations and selfregulatory provisions, the Board of Statutory Auditors proposed and intends to continue to propose both changes to the current regulations and procedures adopted by the Company (including the application of the stricter, more rigorous optional rules already envisaged therein) and supplementation of these regulations and procedures.
The Board of Statutory Auditors has proposed to proceduralise the disclosure on transactions in which there are interests pursuant to art. 2391 of the Italian Civil Code. The Company did not agree with this recommendation, although it made provision for suitable induction sessions to be provided for the Company's Directors.
In any event, the Board of Statutory Auditors has monitored the decision-making procedure adopted by the Directors, ensuring that decisions are based on principles of reasonableness and correct information, that they comply with the applicable regulations and are consistent and compatible with the Company's resources and assets, that Directors are aware of the risks and effects of every decision they take, and that these decisions are taken in the interest of all the shareholders.
For the execution of its resolutions and the management of the company, the Board of Directors may, in accordance with the legal limits, delegate the appropriate powers to one or more Directors who report to the Board of Directors and Board of Statutory Auditors on the activities carried out, the general trend of operations and on the transactions of greatest economic and financial significance concluded by the Company or its subsidiaries.
On 16 April 2014, the Shareholders' Meeting appointed Giuseppe Recchi Chairman of the Board of Directors.
Following the resignation of the then Chief Executive Officer, Marco Patuano, on 21 March 2016, the Board of Directors appointed Director Flavio Cattaneo as Chief Executive Officer of the Company on 30 March 2016. In the same meeting, the Board of Directors conferred powers on the newly-appointed Chief Executive Officer and reattributed the powers of the Chair of the Company, with some changes.
On 27 April 2016 the Board of Directors appointed Director Arnaud Roy de Puyfontaine to the office of Vice Chairman, without delegated powers.
During 2016 the Company started a process to profoundly reorganise and simplify its organisational structures. The interventions made have resulted in the broadening of controls on the management, with reference to the efficient execution of the assigned tasks, in line with strategic priorities that the company has set itself. The Board of Statutory Auditors has monitored the principal changes in the organisation and supervised the adequacy of the organisational structure with respect to the strategic objectives of the Company, by specific meetings with the Executive Directors, the Head of Human Resources and Organisational Development and the Heads of the individual company departments.
Given the complexity of the organisational structure of the Company and the Telecom Italia Group, subject, as such, to continuous evolution, the Board of Statutory Auditors believes that the organisational structure of the Company and Group is adequate.
It is organized and operates according to the principles and criteria of the Corporate Governance Code, to which the Company adheres, and involves several components that act in a coordinated way according to their respective responsibilities – the responsibility of the Board of Directors to direct and provide strategic supervision, the responsibility of the Executive Directors and management to control and manage, the responsibility of the control and risk Committee and the Head of the Audit Department to monitor and provide support to the Board of Directors, and the supervisory responsibilities of the Board of Statutory Auditors.
In exercising its responsibilities regarding the internal control and risk management system, the Board of Directors resolved that the Head of the Audit Department, the Group Compliance Officer and the Head of the IT & Security Compliance Department report directly to the Board
The Head of the Audit Department has an adequate level of independence and means suitable for the execution of this function. They are responsible for supporting the management and control bodies in assessing the adequacy, full functioning and effectiveness of the internal control and risk management system and for proposing corrective measures in case of anomalies and/or deficiencies.
Within the scope of its powers of inspection and control, the Board of Statutory Auditors, when it considers it necessary or advisable, assigns tasks on specific topics to the Audit Department and the Compliance Department.
The Head of the Audit Department reports on his work to the Directors in charge of the internal control and risk management system, i.e. the Chairman and the Chief Executive Officer, each with respect to their area of competence, to the Control and Risk Committee and, through the latter, to the Board of Directors, as well as to the Board of Statutory Auditors.
The oversight role of the Head of the Audit Department is directed, in particular, towards expressing an assessment of the capacity of the internal control and risk management system to impact on the actual achievement of the objectives assigned to individual company structures (effectiveness profile), taking account of the rational use of resources for their realization (efficiency profile) in the light of the qualitative/quantitative risk factors present and the probability of their affecting the achievement of those objectives. This oversight is assured through:
The Head of the Audit Department also carries out their activities in the subsidiary companies without corresponding audit structures, acting in their interests and reporting to their governing bodies. If subsidiary companies have their own audit departments, the Audit Department of the Parent Company interfaces and collaborates with it, for coordination purposes.
The Board of Statutory Auditors has acknowledged the overall assessment of the internal control and risk management system by the Head of the Audit Department, which is set forth below: "With reference to the specific operating contexts analysed, considering the findings of the analysis of the internal control and risk management system, and having assessed the process of implementation of the improvement actions undertaken by the other control department, also taking account of the assessments of the Audit departments of the Group listed companies (TIMPart and INWIT), it should be noted that no significant elements emerged that could have a negative effect on the overall adequacy and functioning of the Group Internal Control and Risk Management System".
The Board of Statutory Auditors shares the assessment of overall adequacy of the internal control and risk management system as formulated by the Audit Department. The Control body, on its part, constantly monitored its effectiveness and monitored the work of the main players in the internal control and risk management system and, in particular, the implementation of risk improvement and mitigation actions identified and, in some cases, prompting further specific interventions to strengthen the controls.
In this context, the Board of Statutory Auditors has held periodic meetings with the Head of the Audit Department, the Group Compliance Officer, the Head of the IT & Security Compliance Function, the executive responsible for preparing the corporate accounting documents and the external auditor.
The Board of Statutory Auditors has engaged and exchanged information with the corresponding control bodies of the principal domestic subsidiary companies, taking note of the assessments that the internal control systems of the domestic Group companies are adequate overall.
The control body has also met, through its Chair, with the Comitê de Auditoria Estatutário of TIM Participações, reviewing the shortcomings raised by its external auditors (cf. paragraph 16) and taking note of the assessment that the internal control system of the Brazilian company is adequate overall.
The internal control and risk management system also includes the Organisational Model 231, the organisation and management model designed to prevent the commission of offences that could result in liability for the Company, pursuant to Legislative Decree No. 231/2001.
In fact, Organisational Model 231 is intended to intercept the predicate offences specified in the reference law that could be attributable to the characteristic functioning of the Group.
The Organisational Model 231 has been adopted by domestic subsidiaries of the Group as well as by Telecom Italia, and consists of:
The Organizational Model 231 is a dynamic instrument, which affects the corporate operation and must, therefore, be constantly checked and updated in the light of the elements that emerged from experience of its application and of the evolution of the regulatory framework. The amendments were drafted by the management committee called the 231 Steering Committee, advised by the Supervisory Board and approved by the Board of Directors of the Company when they were of significant extent.
The Organisational Model represents an integral part of the reference compliance program for the application of foreign anti-corruption legislation such as the US Foreign Corrupt Practices Act and the UK Bribery Act. In this context, a foreign version of the Organisational Model has been defined for adoption by the non-Italian subsidiaries, also taking account of the possible application of similar regulations at local level.
The duties of Supervisory Body are assigned (since 2012) to the Board of Statutory Auditors, which uses a dedicated company structure which is part of the Compliance Department.
The Board of Statutory Auditors oversees the operation and observance of the Organisational Model 231 and reports to the Board of Directors on the oversight and verification activities which it has performed and the corresponding outcomes.
During 2016, the Board of Statutory Auditors formally approved the proposed revision of the Group anti-corruption policy intended to update and refine the document in light of the evolution of best practice, as well as of regulatory changes, domestic and international.
The Board of Statutory Auditors expresses an opinion of conformity of the Organisational Model 231 adopted by the Company with the reference legal framework.
The Telecom Italia Group has adopted an Enterprise Risk Management Model (ERM) which enables risks to be identified, assessed and managed in a homogenous way within the Group companies, highlighting potential synergies between the players involved in the assessment of the internal control and risk management system. The ERM process is designed to identify potential events that may impact on business activity, to manage the risk within acceptable limits and to provide reasonable assurance of the achievement of the objectives.
The process is guided by the ERM Steering Committee, which assures governance of Group risk management, aimed at guaranteeing the operational continuity of the business, monitoring the effectiveness of the countermeasures adopted.
During 2016 oversight of the Enterprise Risk Management process was reassigned to the Security area, with the Risk Management Department, which reports directly to the Head of Security. The intervention revised a major component of the internal control system with the aim of, on the one hand, strengthening the independence of Enterprise Risk Management, and, on the other, promoting integration between complementary activities responsible for identifying and monitoring business risks.
The control body has ascertained that, on 3 February 2017, the Board of Directors defined the risk that was acceptable for the Group (Risk Appetite) and the acceptable levels of deviation from the principle company objectives (Risk Tolerance).
On the question of transactions with related parties, the Board of Statutory Auditors would point out that the company procedure, drawn up in compliance with Consob Regulation no. 17221 of 12 March 2010 and adopted in November 2010, was last updated in March 2016. In particular, references to the undertakings given at the time to the Brazilian regulatory authorities (Anatel and CADE) have been eliminated and, at the suggestion of the Board of Statutory Auditors, some changes have been made to the part relating to the dispensation of intra-group operations from application of Consob Regulation no. 17221/2010. It has in fact been specified that the presence of a significant interest of the related third party excludes beneficial treatment, where a "significant interest" is meant as a shareholding of the related third party in the capital of the related intra-group party that exceeds 5% of said capital.
The Board of Statutory Auditors has monitored compliance of the procedure adopted by the Company with provisions of law and regulations and its effective implementation and its actual functioning.
Also following the critical aspects highlighted by the sanctions imposed on the Company by the industry regulators, the Board of Statutory Auditors has monitored the evolution of the new equivalence model, and verified that continuous and progressive improvement of the performance of the provisioning and assurance processes is underway. The Board of Statutory Auditors will continue to monitor the ongoing transformation process to assure wholesale access to the TIM fixed network by the company Retail departments and the Other Licenced Operators happens under the same terms and conditions, using the same organisation and the same processes and IT systems.
The Board of Statutory Auditors evaluated and supervised the adequacy of the administrative and accounting system of the Company and its reliability to fairly represent operations, also by collecting information from Company management, examining company documents and analysing the results of the activities undertaken by the External Auditor.
The Board of Statutory Auditors acknowledged the statements issued by the Chairman, Chief Executive Officer and the Manager responsible for preparing the corporate accounting documents of Telecom Italia S.p.A. concerning the adequacy in relation to the characteristics of the company and the actual application during 2016 of the administrative and accounting procedures for the preparation of the financial statements and the consolidated financial statements.
On the question of goodwill impairment test, the Board of Statutory Auditors observed that in Telecom Italia it is applied in a consolidated and structured way, coordinated by the Administration, Finance and Control Department, with the intervention of independent external experts of acknowledged professional expertise. The implementation of the process is also analysed and discussed in special joint meetings of the Control and Risk Committee and Board of Statutory Auditors, that precede the Board of Directors meetings to approve the financial reports to which the impairment test must be applied.
The Board of Statutory Auditors has checked that the impairment test procedure applied to the 2016 financial statements was conducted in terms coherent with the procedure approved by the Board of Directors on 4 November 2016 and with the applicable IFRS standards.
For a more detailed analysis, the Board of Statutory Auditors refers to the explanations given in the "Goodwill" Note to the consolidated financial statements as of 31 December 2016 of the TIM Group.
Regarding the provisions of article 36, subsection 1, letter c, ii) of the Market Regulations (conditions for the listing of shares of controlling companies and of companies registered in and regulated by the laws of States that are not members of the European Union), the Board of Statutory Auditors has not ascertained facts and circumstances that would indicate that the administrative-accounting system of the controlled companies is not adequate to ensure that the data on the revenues, finances and assets of the companies needed for the preparation of the consolidated financial statements regularly reaches the management and auditor of the controlling company.
Finally, the Board of Statutory Auditors monitored the financial disclosure process including through the collection of information from the Company's management.
After EU Regulation 596/2014 (the "Market Abuse Regulation" or MAR) came into force in July 2016, the Board of Directors, on 3 February 2017, notwithstanding the non-completion of the Italian regulatory framework, approved the replacement of the Procedure for the internal management and disclosure to the public of inside information (adopted on 5 August 2014) and its replacement with the new inside information and insider dealing Procedure, currently being deployed.
The procedure will also apply as an instruction to all subsidiaries in order to obtain from them, without delay, the information necessary for the timely and proper fulfilment of the public disclosure obligations. The procedure, which also disciplines the maintenance of the register of persons having access to inside information, has been affected by the adoption of a new IT support application.
The Board of Statutory Auditors has continuously monitored the application of the procedure for the management and disclosure to the public of sensitive information, through specific interviews with the management and requests for information and documentation. From the checks of the correct application of the company procedure, the Board of Statutory
Auditors ascertained that, with respect to some projects entered in the register, the persons informed had not signed the confidentiality agreement, and ensured that the management and most recently the Executive Directors, were made aware of the need for rigorous respect of the instructions in the procedure. These circumstances were reported to Consob.
The Board of Statutory Auditors acknowledges that, from the report issued, pursuant to article 19, subsection 3, of Italian Legislative Decree 39 of 27 January 2010, on the year that ended on 31 December 2016 by PricewaterhouseCoopers S.p.A., there emerged "significant difficulties, significant uncertainties, disagreements with the company senior management or findings" during the external audit, while two significant shortcomings have been identified in the internal control system on the financial reporting of TIM Participações. Firstly, in the context of contracts for revenue sharing with suppliers of added value content, the controls to ensure that the company procedure for agreeing contracts with suppliers were found to be weak. Secondly, after the check procedures instituted on the controls on critical accesses in SAP, users were identified with accesses to certain functions without adequate monitoring of the activities they were undertaking.
These weaknesses were reported by the external auditor to the Board of Statutory Auditors, which will continue to carefully monitor the initiatives implemented to remedy the shortcomings found.
In particular, it should be noted that Telecom Italia has adopted the criteria established by the Corporate Governance Code of Borsa Italiana for qualifying Directors as independent.
Following the appointment of Flavio Cattaneo to the office of Chief Executive Officer, on 30 March 2016 the Board of Directors ascertained that he no longer met the independence requirements pursuant to the CLF and the Corporate Governance Code and that he was therefore qualified as non-independent executive director.
In its meeting on 3 February 2017, the Board of Directors checked that its members continued to meet the requirements for independence and took due note (i) that Directors Benello, Calvosa, Cattaneo, Cioli, Cornelli, Gallo, Herzog, Kingsmill, Marzotto and Valerio possessed the requirements of independence, pursuant to the Corporate Governance Code, and (ii) the same Directors, plus Mr Fitoussi possessed the requirements of independence pursuant to the Consolidated Law on Finance. The market was informed of the outcome of this verification.
On 15 February 2017, the Board of Directors checked that the criteria and ascertainment procedures adopted by the Board of Directors to assess the independence of its members were correctly applied. On the same date, the Board of Statutory Auditors checked that each of its own members continued to meet the requirements of independence pursuant to art. 148, subsection 3 of the CLF and the Corporate Governance Code, and that they continued to meet the professional parameters set out in art. 19, subsection 3 of Legislative Decree No. 2010/39 (as amended by Legislative Decree No. 135 of 17 July 2016.
The Board of Statutory Auditors checked the independence of the external auditor PricewaterhouseCoopers, in accordance with the provisions of article 19, subsection 1, lett. d) of Legislative Decree No. 39 of 27 January 2010, also acquiring the declaration from the external auditor as specified in article 17, subsection 9, letter a) of said decree.
The Board of Directors also has subcommittees comprising a Control and Risk Committee, a Nomination and Remuneration Committee, and, since July 2016, a Strategy Committee. Each board subcommittee is disciplined by its regulations approved by the Board of Directors on 5 August 2014 and, for the Strategy Committee, on 26 July 2016 (documents available for consultation on the website www.telecomitalia.com section About Us - Governance System/Regulations channel).
The Control and Risk Committee comprises non-executive Directors, the majority of whom are independent directors, with at least one Director from a minority slate. At least one member of the Control and Risk Committee shall possesses adequate expertise in accounting and finance or risk management. Without prejudice to the tasks attributed to it by the Corporate Governance Code, the Committee:
The Nomination and Remuneration Committee comprises non-executive Directors, the majority of whom are independent directors, with at least one Director from a minority slate. At least one member of the Nomination and Remuneration Committee possesses adequate expertise in financial matters or remuneration policies. Without prejudice to the tasks assigned by the Corporate Governance Code to the remuneration committee and to the nomination committee, the Nomination and Remuneration Committee:
The Strategy Committee is composed of the Chair of the Board of Directors and the Chief Executive Officer (who ensure its coordination with the management of the Group), as well as nonexecutive directors with expertise in technology, organizational strategies and corporate finance. The Committee carries out the duties of a fact-finding and consulting nature attributed to it by the Corporate Governance Principles. In particular:
The Board of Statutory Auditors monitored the activities performed by the Control and Risk Committee during 2016 in joint meetings or by the attendance of at least its Chairman or a Statutory Auditor designated by the Chairman at their meetings. The Board of Statutory Auditors also monitored the activities performed by the Nomination and Remuneration Committee and the Strategy Committee by the attendance of its Chairman or a Statutory Auditor designated by the Chairman at their meetings.
The point of reference and coordination for the issues and contributions of the independent Directors and the non-executive Directors in general is the Lead Independent Director, a role currently held by Mr. Davide Benello. He also has the right, inter alia, to convene special meetings of the Independent Directors only (Independent Directors' Executive Sessions) to discuss issues affecting the functioning of the Board of Directors or the management of the business.
See the Report on the corporate governance and share ownership of Telecom Italia S.p.A. for the 2016 financial year for further detailed information on the corporate governance of the Company, which the Board of Statutory Auditors evaluates positively.
The Board of Statutory Auditors reached its conclusions after it had carried out in-depth review of the complex issue.
After the analysis promptly carried out and formally submitted to Consob, on 20 January 2017 also in response to a request for information from the latter received on 15 December 2016 - and to the Company, the Board of Statutory Auditors, firstly, and unanimously, decided that the conditions to qualify Vivendi as controller of Telecom Italia pursuant to and for the purposes of art. 2359, subsections 1 and 2, of the Italian Civil Code, and of art. 93 of the CLF were not fulfilled. This opinion appears to correspond to the reference legal framework, as interpreted by the prevailing legal opinion and case law, also taking account of the indicators of relevance identified by Consob. However, the Board of Statutory Auditors continued to monitor the situation, and will continue to do so, to assess if the conclusions it reached at that time might and should be changed in light of the changes of circumstances of law and/or fact.
Secondly, and in contrast, the Board of Statutory Auditors, with a resolution passed by a majority of its members, ascertained that the conditions to qualify Vivendi as the controlling shareholder of Telecom Italia for the purposes of the Consob regulations on the subject of transactions with related parties and, in consequence, to deem it necessary to change the categorisation of Vivendi's relationship to Telecom Italia from notable influence to control. On this point, a majority of the members of the Board of Statutory Auditors were of the opinion that the combination of different legal and de facto circumstances reasonably supported the view that Vivendi could be qualified as the controlling shareholder of Telecom Italia for the purposes of the regulations on transactions with related parties. More precisely, a set of facts and circumstances, systematically assessed, led them to affirm that Vivendi has the power to determine, stably and with reasonable certainty of existence, the financial and operational policies of Telecom Italia in order to obtain benefits from its activities.
In formalising its conclusions for Consob, the Board of Statutory Auditors asked it - as regulator with responsibility for the supervision of the implementation of the regulation on transactions with related parties and, more generally, the promotion of interpretive certainty - to in its turn review its conclusions regarding the declaration made by the Board of Statutory Auditors itself, regarding the change in the relationship between Vivendi and the Company from one of notable influence to one of control.
On 23 March 2017 the Board of Directors decided that it did not need to proceed to requalify the relationship between Vivendi and TIM from one of notable influence to one of control, and thus disagreed with the conclusions reached by the Board of Statutory Auditors. In consequence, the supervisory body communicated the non-requalification, pursuant to art. 149, subsection 3, of the CLF, and the non-updating of the scope of the mapping of TIM's related parties, and the risk that in the future transactions would not be qualified as of major relevance that would not be classified as such by virtue of the continuation of the qualification of the relationship between Vivendi and TIM as one of notable influence.
No significant facts that should be mentioned in the Report to the Shareholders' Meeting have emerged from the further supervision and control activities carried out by the Board of Statutory Auditors, as described above, except for the issues encountered during the procedure adopted by the Company for the approval of the compensation package for the Chief Executive Officer appointed by the Board of Directors on 30 March 2016, as already mentioned in last year's report. In particular, the Board of Statutory Auditors,
The Board of Statutory Auditors reports that no observations or problems have emerged from its analysis of the information flows received in relation to the activity carried out by the control bodies of the subsidiary companies or the representations the external auditor has made in its reports on said subsidiaries.
Equally, no observations or problems have emerged from the review of the reports of the external auditor and the Boards of Statutory Auditors of Inwit S.p.A., Olivetti S.p.A. and Telecom Italia Sparkle S.p.A. pursuant to and for the purposes of article 153 of the CLF, article 2429, second subsection, of the Italian Civil Code and article 14 of Italian Legislative Decree no. 39 of 27 January 2010.
Finally, the Board of Statutory Auditors examined the external auditor's reports on Tim Participações S.A. on the financial statements at 31 December 2016, which contained no observations or remarks.
The mandate of the Board of Directors appointed by the Shareholders' Meeting of 16 April 2014, subsequently supplemented by the Shareholders' Meeting of 15 December 2015, expires with the approval of the financial statements for the year ending 31 December 2016. The Board of Statutory Auditors invites the Shareholders to provide for renewal of the Board of Directors.
Milan, 13 April 2017
For the Board of Statutory Auditors The Chair Signed Roberto Capone
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