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56
MANAGEMENT RESPONSIBILITY FOR
FINANCIAL INFORMATION
Responsibility for the integrity and objectivity of the financial informa-
tion presented in this Annual Report rests with IBM management. The
accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists,
in part, of organizational arrangements with clearly defined lines of
responsibility and delegation of authority, and comprehensive sys-
tems and control procedures. An important element of the control
environment is an ongoing internal audit program. Our system also
contains self-monitoring mechanisms, and actions are taken to cor-
rect deficiencies as they are identified.
To assure the effective administration of internal controls, we
carefully select and train our employees, develop and disseminate
written policies and procedures, provide appropriate communication
channels and foster an environment conducive to the effective func-
tioning of controls. We believe that it is essential for the company to
conduct its business affairs in accordance with the highest ethical
standards, as set forth in the IBM Business Conduct Guidelines.
These guidelines, translated into numerous languages, are distrib-
uted to employees throughout the world, and reemphasized through
internal programs to assure that they are understood and followed.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, is retained to audit IBM’s Consolidated Financial
Statements and the effectiveness of the internal control over financial
reporting. Its accompanying report is based on audits conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States).
The Audit Committee of the Board of Directors is composed
solely of independent, non-management directors, and is responsible
for recommending to the Board the independent registered public
accounting firm to be retained for the coming year, subject to stock-
holder ratification. The Audit Committee meets periodically and
privately with the independent registered public accounting firm,
with the company’s internal auditors, as well as with IBM manage-
ment, to review accounting, auditing, internal control structure and
financial reporting matters.
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting of the company. Internal
control over financial reporting is a process designed to provide rea-
sonable 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.
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 and fairly reflect the
transactions and dispositions of the assets of the company; (ii) pro-
vide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisi-
tion, 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 conducted an evaluation of the effectiveness of inter-
nal control over financial reporting based on the framework in Internal
Control — Integrated Framework issued by the Committee of Sponsor-
ing Organizations of the Treadway Commission (COSO). Based on this
evaluation, management concluded that the company’s internal con-
trol over financial reporting was effective as of December 31, 2007.
Samuel J. Palmisano
Chairman of the Board,
President and Chief Executive Officer
February 26, 2008
Mark Loughridge
Senior Vice President,
Chief Financial Officer
February 26, 2008
Report of Management
International Business Machines Corporation and Subsidiary Companies