HR Block 2006 Annual Report Download - page 82

access to these funds. To meet our future financing needs, we may issue processes and procedures that may occur during the implementation of
additional debt or equity securities. new information and transaction systems.
LITIGATION –We are involved in lawsuits in the normal course of our TAX SERVICES
business related to RALs, our Peace of Mind guarantee program, COMPETITIVE POSITION –Increased competition for tax preparation
electronic filing of tax returns, Express IRAs, losses incurred by clients in our retail offices, online and software channels could
customers in their investment accounts, mortgage lending activities and adversely affect our current market share and limit our ability to grow
other matters. Adverse outcomes related to litigation could result in our client base. See clients served statistics included in Item 7, under
substantial damages and could adversely affect our results of ‘‘Tax Services.’’
operations. Negative public opinion can also result from our actual or REFUND ANTICIPATION LOANS –Changes in government regulation
alleged conduct in such claims, possibly damaging our reputation and related to RALs could adversely affect our ability to offer RALs or our
adversely affecting the market price of our stock. See Item 3, ‘‘Legal ability to purchase participation interests. Changes in IRS practices
Proceedings’’ for additional information. could adversely affect our ability to use the IRS debt indicator to limit
PRIVACY OF CLIENT INFORMATION –We manage highly sensitive our bad debt exposure. Changes in any of these, as well as possible
client information in all of our operating segments, which is regulated litigation related to RALs, may adversely affect our results of
by law. Problems with the safeguarding and proper use of this operations. See discussion of RAL litigation in Item 3,
information could result in regulatory actions and negative publicity, ‘‘Legal Proceedings.’’
which could adversely affect our reputation and results of operations.
INTERNAL CONTROL CERTIFICATION –We have documented and MORTGAGE SERVICES
tested our internal control procedures in accordance with various SEC COMPETITIVE POSITION –The majority of our mortgage loan
rules governing Section 404 of the Sarbanes-Oxley Act (SOX 404). applications are submitted through a network of brokers who have
SOX 404 requires us to assess the effectiveness of our internal controls relationships with many other mortgage lenders. Unfavorable changes
over financial reporting annually, and obtain an opinion on the in our pricing, service or other factors could result in a decline in our
effectiveness of this internal control from our Independent Registered mortgage origination volume. A decline in our servicer ratings could
Public Accounting Firm. We may encounter problems or delays in adversely affect our pricing and origination volume. Increased
completing the review and evaluation, the implementation of competition among mortgage lenders can also result in a decline in
improvements and the receipt of an attestation from our independent coupon rates offered to our borrowers, which in turn lowers margins
auditors. Additionally, management’s assessment of our internal and could adversely affect our gains on sales of mortgage loans.
controls over financial reporting may identify deficiencies that need to MARKET RISKS –Our day-to-day operating activities of originating
be addressed in our internal controls over financial reporting or other and selling mortgage loans have many aspects of interest rate risk.
matters that may raise concerns for investors. Should we, or our Additionally, the valuation of our retained residual interests and
independent auditors, determine in future periods that we have a mortgage servicing rights includes many estimates and assumptions
material weaknesses in our internal controls over financial reporting, made by management surrounding interest rates, prepayment speeds
our results of operations or financial condition may be adversely and credit losses. Variation in interest rates or the factors underlying
affected and the price of our common stock may decline. our assumptions could affect our results of operations. See Item 7A,
OPERATIONAL RISK –There is a risk of loss resulting from under ‘‘Mortgage Services,’’ for discussion of interest rate risk, and
inadequate or failed processes or systems, theft or fraud. These can Item 7, under ‘‘Critical Accounting Policies,’’ for discussion of our
occur in many forms including, among others, errors, business valuation methodology.
interruptions, inappropriate behavior of or misconduct by our LEGISLATION AND REGULATION –Several states and cities are
employees or those contracted to perform services for us, and vendors considering or have passed laws, regulations or ordinances aimed at
that do not perform in accordance with their contractual agreements. curbing predatory lending and servicing practices. The federal
These events can potentially result in financial losses or other damages. government is also considering legislative and regulatory proposals in
We rely on internal and external information and technological systems this regard. In general, these proposals involve lowering the existing
to manage our operations and are exposed to risk of loss resulting from federal HOEPA thresholds for defining a ‘‘high-cost’’ loan and
breaches in the security, or other failures of these systems. establishing enhanced protections and remedies for borrowers who
Replacement of our major operational systems could have a significant receive such loans. If unfavorable laws and regulations are passed, it
impact on our ability to conduct our core business operations and could restrict our ability to originate loans. If rating agencies refuse to
increase our risk of loss resulting from disruptions of normal operating rate our loans, loan buyers may not want to purchase loans labeled as
‘‘high-cost,’’ and it could restrict our ability to sell our loans in the
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H&R BLOCK 2006 Form 10K