The Board is ultimately responsible for the group?s system of internal controls and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate risk of failure to meet business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.

Consistent with the guidance provided for directors on internal control by the Financial Reporting Council (?Internal Control: Guidance for Directors on the Combined Code?), the Board confirms that there is an ongoing process for identifying, evaluating and managing assessed significant risks faced by the group, that this has been in place for the year under review and up to the date of approval of the annual report and accounts, that this process has been reviewed by the Board during the year and that the group accords with the guidance. The Board affirms the importance it attaches to the continuous review and application of the guidance, the regular and systematic assessment of the risks facing the group and the value of embedding risk management and internal control systems within its business processes. The group has an internal audit function which reviews the design and effectiveness of internal controls across the group?s operations.

The processes which the Board and the audit committee have applied in reviewing the effectiveness of the group?s system of internal controls are summarised below:

The key potential risks and uncertainties which could have a material impact on the group?s long-term performance are described below.

Spectris has a broad spread of markets, products and customers, as described previously in this review, and this limits, to a large extent, any specific risk to the ability to implement our strategy due to changes in the political and economic environments in the countries in which we operate. This broad spread of markets also provides a good averaging of individual sector investment cycles. Our products typically involve low capital outlay but provide significant and rapid payback. These benefits become even more attractive to customers as they seek to reduce their own costs of production.

A key element of Spectris? strategy is to grow the business portfolio through acquisition of stand-alone or bolt-on businesses which complement or extend the range of products and applications Spectris can provide. Potential risks exist in successfully integrating acquisitions. However, Spectris believes that its track record of carefully selecting businesses which fulfil its acquisition criteria and rigorous financial assessment of the potential acquisition?s ability to contribute to growth will continue to ensure that any businesses acquired will be successfully integrated.

In order to sustain competitive advantage, the group invests significantly in research and development. The development of all new technologies and products involves risk including the product being more expensive, or taking longer, to develop than originally planned; that the market for the product is smaller than originally envisaged; or that the product fails to reach the production stage. However, we endeavour to reduce this risk by ensuring that new product development is carried out in conjunction with customers to ensure that the products meet expectations of the market. All businesses are exposed to risk from competitive activity. However the diversity of Spectris? products and markets, and the high barriers to entry, limits the overall risk from any single competitor.

Although the majority of our business is to supply products only, there may be instances where Spectris companies enter into complex long-term or multi-site contracts with customers. Spectris has a strict approval process for such contracts in order to manage any risks they may present. Potential risk from loss of a key customer is limited as no single customer accounts for more than 1% of turnover, and credit control procedures limit the risk from non-payment by customers. Group operating companies also monitor customer satisfaction to ensure they are meeting customers' product, delivery and service requirements. The company is also exposed to the risk that some of the components it sources, particularly for custom-built items or older components, are provided by a single supplier and are vulnerable to interruption of supply. The group seeks to address this risk by finding alternative sources to reduce dependency on single-source suppliers and building sufficient safety stock of critical components.

Spectris? operations are characterised by short lead times and seasonal fluctuations in sales, with some businesses exhibiting a greater trend towards sales in the second half of the year. This limited forward visibility and the potential for delays in the shipment of orders exposes the company to the potential risk that it may not meet its sales forecast for the year.

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