ADT 2007 Annual Report Download - page 176

Over the past five years, significant internal control, informational systems and process
improvements have been implemented in our tax accounting processes, including certain recently
implemented controls in response to the identified material weakness. During the third and fourth
quarters of 2007, the following significant changes were made to our internal controls over financial
reporting:
• Hired additional experienced personnel to augment tax accounting resources;
• Implemented enhanced review and analytical procedures to evaluate accuracy of various tax
accounts;
• Improved process for gathering and reviewing tax jurisdictional information; and
• Strengthened the organizational linkage between the Tax department and the Controller’s group,
and substantially improved communication and information flows between the two teams.
While progress has been made, several new tax accounting and control procedures have only
recently been implemented and our current environment is still characterized by a highly complex
structure of approximately 1,200 legal entities. In light of this, the Company believes the material
weakness relating to accounting for income taxes has not been remediated and the Company plans to
implement further improvements to achieve appropriate levels of controls, reliability and sustainability
in this area.
In addition to the above, we continue to proactively identify opportunities for control
improvements. We have ongoing initiatives to standardize, consolidate and upgrade various financial
operating systems and eliminate many of the manual and redundant tasks previously performed under
older systems or processes. These changes will be implemented in stages over the next several years.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. Internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that the Company’s receipts and expenditures are being made only in accordance with
authorizations of the Company’s management and directors and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of
September 28, 2007. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—
Integrated Framework. Management’s assessment included an evaluation of the design of the Company’s
internal control over financial reporting and testing of the operational effectiveness of its internal
control over financial reporting. Management reviewed the results of its assessment with the Audit
Committee of our Board of Directors. Based on our assessment, we believe that our internal controls
84 2007 Financials