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12_ ReportofManagement
ReportofManagement
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
ManagementResponsibilityfor
FinancialInformation
Responsibility for the integrity and objectivity of the financial
informationpresentedinthisAnnualReportrestswithIBMman-
agement. The accompanying financial statements have been
prepared in accordance with accounting principles generally
acceptedintheUnitedStatesofAmerica,applyingcertainesti-
matesandjudgmentsasrequired.
IBMmaintainsaneffectiveinternalcontrolstructure.Itcon-
sists,inpart,oforganizationalarrangementswithclearlydefined
lines of responsibility and delegation of authority, and compre-
hensivesystemsandcontrolprocedures.Animportantelement
ofthecontrolenvironmentisanongoinginternalauditprogram.
Our system also contains self-monitoring mechanisms, and
actionsaretakentocorrectdeficienciesastheyareidentified.
To assure the effective administration of internal controls,
wecarefullyselect andtrainour employees, develop anddis-
seminatewrittenpolicies and procedures,provideappropriate
communicationchannels,andfosteranenvironmentconducive
to the effective functioning of controls. We believe that it is
essential for the company to conduct its business affairs in
accordancewiththehighestethicalstandards,assetforthinthe
IBMBusinessConductGuidelines.Theseguidelines,translated
intonumerouslanguages,aredistributedtoemployeesthrough-
outtheworld,andreemphasizedthroughinternalprogramsto
assurethattheyareunderstoodandfollowed.
PricewaterhouseCoopers LLP, an independent registered
publicaccountingfirm,isretainedtoauditIBM’sConsolidated
Financial Statements and management’s assessment of the
effectivenessoftheinternalcontroloverfinancialreporting.Its
accompanying report is based on audits conducted in accor-
dance with the standards of the Public Company Accounting
OversightBoard(UnitedStates).
TheAuditCommitteeoftheBoardofDirectorsiscomposed
solely of independent, non-management directors, and is
responsible for recommending to the Board the independent
registeredpublicaccountingfirmtoberetainedforthecoming
year, subject to stockholder ratification. The Audit Committee
meetsperiodicallyandprivatelywiththeindependentregistered
publicaccountingfirm,withthecompany’sinternalauditors,as
wellaswithIBMmanagement, to reviewaccounting,auditing,
internalcontrolstructureandfinancialreportingmatters.
Management’sReportonInternalControl
OverFinancialReporting
Management is responsible for establishing and maintaining
adequateinternalcontroloverfinancialreportingofthecompany.
Internalcontroloverfinancialreportingisaprocessdesignedto
providereasonableassuranceregardingthereliabilityoffinan-
cial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generallyacceptedintheUnitedStatesofAmerica.
The company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately
andfairlyreflectthetransactionsanddispositionsoftheassets
ofthe company; (ii) providereasonableassurancethattransac-
tionsarerecordedasnecessarytopermitpreparationoffinancial
statements in accordance with accounting principles generally
acceptedintheUnitedStatesofAmerica,andthatreceiptsand
expendituresofthecompanyarebeingmadeonly inaccordance
withauthorizationsofmanagementanddirectorsofthecompany;
and (iii) provide reasonable assurance regarding prevention or
timelydetectionofunauthorizedacquisition,use,ordispositionof
the company’s assets that could have a material effect on the
financialstatements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also,projectionsofanyevaluationofeffectivenesstofutureperi-
odsaresubjecttotheriskthatcontrolsmaybecomeinadequate
becauseofchangesinconditions,orthatthedegreeofcompli-
ancewiththepoliciesorproceduresmaydeteriorate.
Managementconductedanevaluationoftheeffectiveness
ofinternalcontroloverfinancialreportingbasedon theframe-
work in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management
concluded that the company’s internal control over financial
reportingwaseffectiveasofDecember31,2005.Management’s
assessmentoftheeffectivenessofthecompany’sinternalcon-
troloverfinancialreportingasofDecember31,2005 hasbeen
auditedbyPricewaterhouseCoopersLLP, anindependentreg-
isteredpublicaccountingfirm,asstatedintheirreportwhichis
includedherein.
SAMUEL J.PALMISANO
ChairmanoftheBoard,
PresidentandChiefExecutiveOfficer
February 28,2006
MARK LOUGHRIDGE
SeniorVicePresident,
ChiefFinancialOfficer
February 28,2006