NetFlix 2006 Annual Report Download - page 49

Item 8. Financial Statements and Supplementary Data
See “Financial Statements” beginning on page F-1 which are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
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 Securities Exchange Act of 1934, as amended) as of the end of the period covered by this
annual report on Form 10-K. Based on that evaluation, and the remediation of the material weakness identified in
our internal control over financial reporting as of December 31, 2005, as described below, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the
period covered by this annual report on Form 10-K were effective in providing reasonable assurance that
information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that
our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Netflix have been detected.
Material Weakness Previously Identified
As previously reported in our annual report on Form 10-K for the year ended December 31, 2005,
management identified a material weakness in our internal control over financial reporting related to our
accounting for income taxes. Specifically, our policies and procedures did 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 Operations. This error was corrected prior to the filing of our 2005 Form 10-K.
The foregoing led our management to conclude that our disclosure controls and procedures were not
effective as of December 31, 2005 because of a material weakness in our internal controls over financial
reporting based on criteria established in the Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”).
Remediation of Material Weakness
In the first quarter of 2006, we implemented additional review procedures to ensure complete supporting
documentation is available to ensure that our accounting for income taxes is in accordance with generally
accepted accounting principles; this action was in place in connection with the preparation of our financial
statements for the first quarter of 2006. As such, we believe that the remediation initiative outlined above was
sufficient to eliminate the material weakness in internal control over financial reporting as discussed above.
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