Health Net 2003 Annual Report Download - page 64

three quarters of 2003. For a detailed description of the restatements, see Amendment No. 1 to our Annual Report on
Form 10-K/A for the year ended December 31, 2002 and Amendment No. 1 to our Quarterly Report on Form 10-Q/A for
each of the quarterly periods ended March 31, 2003, June 30, 2003 and September 30, 2003. Our independent auditors, in
connection with their audit of our 2003 financial statements, have noted certain matters involving our internal control and
its operation in connection with the improper recording of workers’ compensation liabilities and operating leases in the
periods affected by the restatements that they consider to be reportable conditions under standards established by the
American Institute of Certified Public Accountants and have advised us that, in their judgment, the reportable conditions
constitute a material weakness under such standards.
Even before we received this communication from our independent auditors, we had instituted changes to our
disclosure controls and procedures and to our internal control over financial reporting to provide greater assurance that we
have mitigated the control deficiencies that resulted in the restatement of our financial statements. Such changes include,
among other things, changes in our operating and accounting procedures to, among other things, provide more detailed
reviews of estimation procedures for worker’s compensation liabilities and account properly for operating leases and
termination benefits. We had also commenced the process of defining and implementing other changes to enhance our
internal control over financial reporting and to ensure that our disclosure controls and procedures are effective at the
reasonable assurance level. For example, we are in the process of defining and implementing enhanced communication
practices to ensure that persons outside the finance department are aware that they must notify the finance department of
any contractual or other financial commitment involving Health Net so that the finance department can determine whether
any such commitment could give rise to a financial reporting obligation. In addition, we have initiated a reorganization of
our finance department, including the hiring of additional senior-level personnel, which we expect to complete by mid-
2004. We believe that the process we have undertaken to address the factors that gave rise to the restatements constitutes
an appropriate response to the reportable conditions discussed above.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the period covered by this report. In making this
evaluation, we considered matters relating to the restatement of our consolidated financial statements for 2002 and 2001
and for the first three quarters of 2003, including the material weakness in our internal control over financial reporting.
Our management, including our Chief Executive Officer and our Chief Financial Officer, believe that certain of the errors
giving rise to restatement adjustments occurred because our control processes and procedures related to the matters
underlying such adjustments were not effective during the periods in which the errors occurred. Our evaluation
considered, among other things, the substantial process that was undertaken to ensure that all material adjustments
necessary to correct the previously issued financial statements were recorded as part of the restatements, as well as the
actions described above to enhance our internal control over financial reporting and our disclosure controls and
procedures.
Based upon the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that,
except as described above, our disclosure controls and procedures were effective at the reasonable assurance level as of
the end of such period.
Except as described above, there have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period to which
this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item as to (1) directors and executive officers of the Company and (2) compliance
with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Company’s definitive proxy statement, which
will be filed with the SEC within 120 days of December 31, 2003, under the captions “Director Nominees,” “Information
Concerning Current Members of the Board of Directors and Nominees,” “Executive Officers” and “Section 16(a)
Beneficial Ownership Reporting Compliance.” Such information is incorporated herein by reference and made a part
hereof.
62