Computer Associates 2007 Annual Report Download - page 71

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.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. 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 conducted its evaluation of the effectiveness of internal control over financial reporting as of March 31, 2007
based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of the Company’s
internal control over financial reporting and testing the effectiveness of the Company’s internal control over financial
reporting. Based on that evaluation, the Company’s management concluded that the Company’s internal control over financial
reporting was effective as of March 31, 2007.
(c) Changes in Internal Control Over Financial Reporting
Except as otherwise discussed herein, there have been no significant changes in the Company’s internal control over financial
reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Description of the Fiscal Year 2006 Material Weaknesses
As described in Item 9A of our prior year Annual Report on Form 10-K, management identified the following material
weaknesses in our internal control over financial reporting:
(i) The Company did not maintain an effective control environment due to a lack of effective communication policies and
procedures. Specifically, (a) there was a lack of coordination and communication among certain of the Company’s
senior executives with responsibility for the sales and finance functions and within the sales and finance functions
regarding potentially significant financial information; and (b) there were communications by certain senior executives
that failed to set a proper tone, which could discourage escalation of information of possible importance in clarifying or
resolving financial issues. These deficiencies resulted in more than a remote likelihood that a material misstatement of
the annual or interim financial statements would not be prevented or detected and contributed to the material
weaknesses in internal controls described in items (ii) and (iii) below.
(ii) The Company’s policies and procedures relating to controls over the accounting for sales commissions were not
effective. Specifically, the Company did not effectively estimate, record and monitor its sales commissions and related
accruals. The Company also did not reconcile its commission expense accrual to actual payments on a timely basis.
These deficiencies resulted in a material error in the recognition of commission expense, which resulted in a
restatement of the interim financial statements for the three and nine-month periods ended December 31, 2005.
(iii) The Company’s policies and procedures relating to the identification, analysis and documentation of non-routine tax
matters were not effective. The Company’s tax function also did not provide timely communication to management of
its assumptions regarding certain non-routine tax matters.This deficiency resulted in a material error in the recognition
of taxes associated with the Company’s cash repatriation, which occurred in the fourth quarter of fiscal year 2006.
(iv) The Company’s policies and procedures relating to the accounting for and disclosure of stock-based compensation
relating to stock options were not effective. Specifically, controls including monitoring controls, were not effective in
ensuring the existence, completeness, valuation and presentation of the Company’s granting of stock options, which
impacted the Company’s determination of the fair value associated with these awards and recognition of stock-based
compensation expense over the related vesting periods from fiscal year 2002 through fiscal year 2006. This deficiency
resulted in material errors in the recognition of compensation expense, additional paid-in capital, deferred taxes and
related financial disclosures relating to such stock options, which contributed to a restatement of annual financial
statements for fiscal years 2005 through 2002, and for interim financial statements for fiscal years 2006 and 2005.
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