Kodak 2004 Annual Report Download - page 45

Financials
43
2 0 0 4 ฀ S U M M A R Y ฀ A N N U A L ฀ R E P O R T
n฀Management’s฀Report฀on฀Internal฀Control฀Over฀Financial฀Reporting
The฀management฀of฀the฀Company฀is฀responsible฀for฀establishing฀and฀maintaining฀adequate฀internal฀control฀over฀financial฀reporting฀as฀defined฀in฀Rules฀13a-
15(f)฀and฀15d-15(f)฀under฀the฀Securities฀Exchange฀Act฀of฀1934.฀The฀Company’s฀internal฀control฀over฀financial฀reporting฀is฀designed฀to฀provide฀reasonable฀
assurance฀regarding฀the฀reliability฀of฀financial฀reporting฀and฀the฀preparation฀of฀financial฀statements฀for฀external฀purposes฀in฀accordance฀with฀generally฀
accepted฀accounting฀principles฀in฀the฀United฀States฀of฀America.฀The฀Company’s฀internal฀control฀over฀financial฀reporting฀includes฀those฀policies฀and฀proce-
dures฀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)฀provide฀reasonable฀assurance฀that฀transactions฀are฀recorded฀as฀necessary฀to฀permit฀preparation฀of฀financial฀statements฀in฀accordance฀
with฀generally฀accepted฀accounting฀principles,฀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฀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.฀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฀compli-
ance฀with฀the฀policies฀or฀procedures฀may฀deteriorate.฀Management฀assessed฀the฀effectiveness฀of฀the฀Company’s฀internal฀control฀over฀financial฀reporting฀as฀
of฀December฀31,฀2004.฀In฀making฀this฀assessment,฀management฀used฀the฀criteria฀set฀forth฀by฀the฀Committee฀of฀Sponsoring฀Organizations฀of฀the฀Treadway฀
Commission฀(COSO)฀in฀Internal฀Control-Integrated฀Framework.฀Management฀excluded฀the฀NexPress-related฀entities฀and฀Scitex฀Digital฀Printing฀(renamed฀
Kodak฀Versamark)฀from฀its฀assessment฀of฀internal฀control฀over฀financial฀reporting฀because฀they฀were฀acquired฀by฀the฀Company฀in฀purchase฀business฀
combinations฀during฀2004.฀The฀NexPress-related฀entities฀and฀Kodak฀Versamark฀are฀wholly฀owned฀subsidiaries฀of฀the฀Company฀that฀represent฀2%฀and฀2%,฀
respectively,฀of฀consolidated฀total฀assets฀and฀1%฀and฀1%,฀respectively,฀of฀consolidated฀revenue฀as฀of฀and฀for฀the฀year฀ended฀December฀31,฀2004.฀
฀
Based฀on฀our฀assessment฀and฀those฀criteria,฀management฀has฀concluded฀that฀the฀Company฀did฀not฀maintain฀effective฀internal฀control฀over฀financial฀
reporting฀as฀of฀December฀31,฀2004฀as฀a฀result฀of฀material฀weaknesses฀in:฀(a)฀internal฀controls฀surrounding฀the฀accounting฀for฀income฀taxes฀and฀(b)฀internal฀
controls฀to฀validate฀the฀accuracy฀of฀participant฀census฀data฀and฀the฀monitoring฀of฀benefit฀payments฀for฀pension฀and฀other฀postretirement฀benefit฀plans.฀
A฀material฀weakness฀is฀a฀control฀deficiency,฀or฀combination฀of฀control฀deficiencies,฀that฀results฀in฀more฀than฀a฀remote฀likelihood฀that฀a฀material฀misstate-
ment฀of฀the฀annual฀or฀interim฀financial฀statements฀will฀not฀be฀prevented฀or฀detected.฀฀
Internal฀Controls฀Surrounding฀the฀Accounting฀for฀Income฀Taxes
The฀principal฀factors฀contributing฀to฀the฀material฀weakness฀in฀accounting฀for฀income฀taxes฀were฀as฀follows:
•฀฀Lack฀of฀local฀tax฀law฀expertise฀or฀failure฀to฀engage฀local฀tax฀law฀expertise฀resulting฀in฀the฀incorrect฀assumption฀of฀reduced฀tax฀expense฀associated฀with฀
restructuring฀charges฀in฀various฀foreign฀locations฀in฀2004฀and฀2003;
•฀Inadequate฀knowledge฀and฀application฀of฀the฀provisions฀of฀SFAS฀No.฀109฀by฀tax฀personnel฀resulting฀in฀errors฀in฀the฀accounting฀for฀income฀taxes;
•฀Lack฀of฀clarity฀in฀roles฀and฀responsibilities฀within฀the฀global฀tax฀organization฀related฀to฀income฀tax฀accounting;
•฀฀Insufficient฀or฀ineffective฀review฀and฀approval฀practices฀within฀the฀global฀tax฀and฀finance฀organizations฀resulting฀in฀the฀errors฀not฀being฀prevented฀or฀
detected฀in฀a฀timely฀manner;฀and
•฀฀Lack฀of฀processes฀to฀effectively฀reconcile฀the฀income฀tax฀general฀ledger฀accounts฀to฀supporting฀detail฀and฀adequate฀verification฀of฀data฀used฀in฀computa-
tions.
This฀material฀weakness฀contributed฀to฀the฀restatement฀of฀the฀Company’s฀consolidated฀financial฀statements฀for฀2003,฀for฀each฀of฀the฀quarters฀in฀the฀year฀
ended฀December฀31,฀2003฀and฀for฀the฀first,฀second฀and฀third฀quarters฀for฀2004,฀and฀in฀the฀Company฀recording฀audit฀adjustments฀to฀the฀fourth฀quarter฀
2004฀financial฀statements.฀Additionally,฀if฀this฀material฀weakness฀is฀not฀corrected,฀it฀could฀result฀in฀a฀material฀misstatement฀of฀the฀income฀tax฀accounts฀
that฀would฀result฀in฀a฀material฀misstatement฀to฀annual฀or฀interim฀financial฀statements฀that฀might฀not฀be฀prevented฀or฀detected.฀฀
Internal฀Controls฀Surrounding฀the฀Accounting฀for฀Pension฀and฀Other฀Postretirement฀Benefit฀Plans
The฀principal฀factors฀contributing฀to฀the฀material฀weakness฀in฀the฀internal฀controls฀to฀validate฀the฀accuracy฀of฀participant฀census฀data฀and฀the฀monitoring฀of฀
benefit฀payments฀for฀pension฀and฀other฀postretirement฀benefit฀plans฀included฀the฀following฀control฀deficiencies฀as฀discovered฀by฀management฀during฀year฀
end฀2004฀closing฀procedures฀and฀in฀conjunction฀with฀testing฀of฀controls฀during฀management’s฀assessment฀of฀internal฀control฀over฀financial฀reporting:
•฀฀A฀deficiency฀in฀the฀design฀of฀controls฀to฀validate฀actual฀versus฀estimated฀benefit฀payments฀in฀the฀accounting฀for฀other฀postretirement฀benefits.฀The฀
design฀deficiency฀was฀an฀erroneous฀belief฀that฀actual฀payment฀data฀could฀not฀be฀captured฀at฀the฀required฀level฀of฀detail฀to฀enable฀adjustment฀of฀actuarial฀
estimates฀on฀a฀quarterly฀basis.
•฀฀A฀failure฀to฀demonstrate฀operating฀effectiveness฀in฀controls฀surrounding฀reconciliation฀of฀participant฀census฀data฀between฀source฀systems฀and฀the฀
plan฀actuary฀models฀for฀various฀domestic฀and฀international฀pension฀and฀other฀postretirement฀benefit฀plans.฀While฀analytical฀procedures฀to฀validate฀the฀
reasonableness฀of฀census฀data฀extracts฀were฀employed,฀they฀were฀not฀sufficiently฀robust฀to฀prevent฀or฀detect฀errors฀in฀census฀data฀which฀could฀result฀in฀
more฀than฀a฀remote฀possibility฀of฀a฀material฀misstatement฀of฀the฀Company’s฀financial฀statements.
฀฀฀