EADS maintains an integrated Group-wide IC framework with the purpose of providing reasonable assurance to the Board of Directors, the CEOs and the CFO that process-inherent risks arising from the Group’s activities are being effectively managed, based on a variety of IC procedures. The framework embodies the systems of policies and procedures within EADS designed to:

• ensure compliance with laws and regulations applicable to the Group, as well as with internal Group policies;
• enable the Group to identify and respond to significant operational, financial and compliance risks throughout EADS; and
• ensure the quality of financial reporting, including design and implementation of processes to generate a flow of timely, relevant and reliable information.

Certain subsidiaries, such as Airbus, and joint ventures, such as MBDA, operate IC procedures that are customized to their specific businesses – these procedures conform to the overall EADS IC framework. Conformity with the IC framework is ensured, inter alia, through EADS’ presence on such affiliates’ supervisory and management bodies (e.g., Airbus Shareholders’ Committee, MBDA Board of Directors, respective audit committees).

The core policies, procedures and thresholds that define EADS’ IC environment are communicated throughout the Group through:

• codes of conduct (e.g., EADS Code of Ethics, Corporate Social Responsibility policies (see “Part 2 / Corporate Social Responsibility”));
• handbooks (e.g., “EADS Corporate Management Principles and Responsibilities”, the “Financial Control Handbook”);
• manuals (e.g., Treasury Procedures, “Accounting Manual”, “Reporting Manual”); and
• guidelines (e.g., “Funding Policy”).

Written internal rules govern the operations of key elements of the EADS IC framework; that is the Board of Directors and its Audit Committee. IC procedures at certain subsidiaries and joint ventures are derived from the relevant shareholders’ agreements applicable thereto.

External standards influencing the EADS IC framework include the “Internal Control - Integrated Framework” defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), as well as industry-specific standards as defined by the International Standards Organization (ISO).

Responsibility for the operation of the IC system lies with the management of the Divisions and the BUs, as well as with the relevant EADS headquarters functions. They ensure that the appropriate controls to meet the control objectives defined in the IC templates are in place and operate effectively on an ongoing basis.

As part of the development of the IC framework, EADS has instituted formalized risk and control self-assessment mechanisms, to be applied by each business process owner on a regular basis. Based on these mechanisms, management of each Division, BU and headquarters function prepares formal statements as to the adequacy and effectiveness of the IC systems within their scope of responsibility.

The analysis and statements made by Divisions, BUs, and headquarters functions are discussed in depth between EADS CEOs and CFO and the respective Division and BU CEOs and CFOs or the headquarters functions heads. These discussions serve to prioritize potential issues at EADS level, define and commit appropriate actions if needed, and draw conclusions for the overall EADS IC and RM report.

The initial risk-based review of the effectiveness of the Group’s IC system started in 2005 and will continue throughout 2006 with the support of external auditors.

EADS’ ongoing monitoring activities include the following:

• Scoping: The scoping process delivers the foundation for all following IC process steps by identifying the significant business processes and sub-processes at Legal Entity (“LE”) level.
• Self-assessment: On the basis of the business processes in scope, the IC templates have to be completed by assessing the design (are the existing controls sufficient for meeting the control objective?) and operating effectiveness (are the controls working as intended?) of the controls in place.
• Evaluation and prioritization: Control deficiencies identified during the self-assessment process need to be evaluated and prioritized into minor deficiencies, significant deficiencies and material weaknesses.
• Remediation and monitoring: For each identified deficiency, a remediation action needs to be defined and implemented. The progress is monitored by the BUs and reported to EADS headquarters.
• Re-testing: To verify the successful implementation of the remediation actions, the remediated controls needs to be re-assessed.
• Sub-representation and management discussion: Once every year, identified significant deficiencies and material weaknesses have to be reported in sub-representation letters, providing assurance of management assessment of the quality of the IC systems and of the IC risk exposure.
• Independent review: Each year, corporate audit provides an independent review of the status of the IC systems in selected Divisions and BUs.
• Training: Relevant personnel (e.g., IC Coordinators, Process Owners) receive training in order to be informed of new / changed laws and regulations regarding IC and to be updated on relevant process steps and corresponding binding activities within the IC systems.

Since the 2004 reporting cycle, a formalized sign-off process is in place whereby EADS’ CEOs and CFO will confirm to the Board of Directors that, to the best of their knowledge:

• the IC system is adequately structured to ensure the reliability of financial reporting within EADS;
• the control activities in place are completely and accurately described in the IC templates and / or other relevant process documentation and guidelines;
• the owner of each control activity is clearly identified; and
• the controls in place are appropriate for EADS’ business and meet the defined control objectives.

The CEOs’ and the CFO’s IC statements, submitted to the Board of Directors through the Audit Committee, will be based on the self-assessment and review processes described above, and will be founded upon similar statements provided to the CEOs and CFO by Division and BU management as well as the management discussions mentioned above.