Costco 2007 Annual Report Download - page 20

Failure of our internal control over financial reporting could harm our business and financial
results.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting for external purposes in accordance with U.S.
generally accepted accounting principles. Internal control over financial reporting includes: maintaining
records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable
assurance that transactions are recorded as necessary for preparation of the financial statements;
providing reasonable assurance that our receipts and expenditures of our assets are made in
accordance with management authorization; and providing reasonable assurance that unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements would be prevented or detected on a timely basis. Because of its inherent limitations,
internal control over financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or detected. Any failure to maintain an
effective system of internal control over financial reporting could limit our ability to report our financial
results accurately and timely or to detect and prevent fraud.
Our success depends upon our ability to attract, train and retain highly qualified employees.
To be successful, we must attract, train and retain a large and growing number of highly qualified
associates, while controlling related labor costs. Our ability to control labor costs is subject to
numerous external factors, including prevailing wage rates and healthcare and other insurance costs.
We compete with other retail and non-retail businesses for these employees and invest significant
resources in training and motivating them. We also depend on our executives and other key
employees for our success. There is no assurance that we will be able to attract or retain highly
qualified employees in the future.
If we do not maintain the security of member-related information, we could damage our
reputation with members, incur substantial additional costs and become subject to litigation.
As do most retailers and wholesale club operators, we receive certain personal information about our
members. In addition, our online operations at www.costco.com and www.costco.ca depend upon the
secure transmission of confidential information over public networks, including information permitting
cashless payments. A compromise of our security systems or those of some of our suppliers, or other
business partners that results in our member’s personal information being obtained by unauthorized
persons could adversely affect our reputation with our members and others, as well as our operations,
results of operations, financial condition and liquidity, and could result in litigation against us or the
imposition of penalties. In addition, a security breach could require that we expend significant
additional resources related to the security of information systems and could result in a disruption of
our operations, particularly our online sales operations.
Privacy and Information Security
The use of individually identifiable data by our business and our business associates is regulated at the
international, federal and state levels. Privacy and information security laws and regulations change,
and compliance with them may result in cost increases due to necessary systems changes and the
development of new administrative processes. If we or our business associates fail to comply with
these laws and regulations or experience a data security breach, our reputation could be damaged,
possibly resulting in lost future business, and we could be subjected to additional legal risk as a result
of non-compliance.
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