NetFlix 2005 Annual Report Download - page 56

Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only
provide reasonable, not absolute, assurance of achieving their control objectives. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
ineffective as of the end of the period covered by this report due to the material weakness identified in
Management’s Report on Internal Control Over Financial Reporting, below.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 as amended (the Exchange Act)).
Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2005. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than
a remote likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected.
Management identified a material weakness in our internal control over financial reporting as of
December 31, 2005 related to our accounting for income taxes. Specifically, our policies and procedures do not
include adequate management review of the calculations and related supporting documentation to ensure that its
accounting for income taxes is in accordance with generally accepted accounting principles. This material
weakness resulted in a material error in the Company’s consolidated financial statements related to the
understatement of Deferred Tax Assets in the consolidated balance sheet and the understatement of the Benefit
from Income Taxes in the consolidated statement of income. This error was corrected prior to the filing of our
2005 consolidated financial statements included in Item 8 of this Form 10-K.
As a result of the material weakness described above, management has concluded the Company did not
maintain effective internal control over financial reporting as of December 31, 2005. Our independent registered
public accounting firm has issued an auditors’ report on management’s assessment of our internal control over
financial reporting as of December 31, 2005, which report appears on page F-3 of this Annual Report on Form
10-K.
(c) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended
December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
We are taking the following action to remediate the material weakness described above: implementing
additional review procedures to ensure complete supporting documentation is available to ensure compliance
with generally accepted accounting principles; this action will be in place in connection with the preparation of
our financial statements for the first quarter of 2006.
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