ADT 2008 Annual Report Download - page 184

weakness in our internal controls over financial reporting, relating to accounting for income taxes,
which we view as an integral part of our disclosure controls and procedures.
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. The following significant changes were made to our
internal controls over financial reporting during 2008:
• Increased number of tax accounting resources;
• Enhanced policies and procedures relating to tax account reconciliation and analysis;
• Conducted extensive company wide training for all company personnel engaged in tax accounting
activities;
• Improved the level and quality of cross-company communication and information flows regarding
the tax accounting process and requirements; and
• Improved process for tax effecting consolidating entries.
While significant progress has been made, several new tax accounting and control procedures have
only recently been implemented during 2008 and further time is required to assess and ensure the
sustainability of these procedures. Further, our current environment is still characterized by a highly
complex structure of approximately 1,100 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 over the next several years 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. We are also actively simplifying the company’s
legal entity structure and expect a significant reduction in the number of legal entities over the next
18 months.
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 26, 2008. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—
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