LeapFrog 2004 Annual Report Download - page 68

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In relation to the material weakness in the area of information technology controls, we plan to take the
following actions in 2005:
• Our new Chief Information Officer will develop a comprehensive information technology system
strategy that is in line with and supports our business strategy and our need for appropriate processes
and policies related to internal controls.
• Corporate ERP systems will be re-designed and implemented to properly align these systems with
corporate business objectives. The re-design will be intended to ensure that these systems properly enable
and support our corporate business objectives and include appropriate levels of control and security.
• The number of different software vendors and information system architectures that constitute our
current ERP systems will be reduced in order to decrease complexity and increase the uniformity,
usability, reliability, efficiency, security and effectiveness of these systems.
• System end users will be formally identified and trained in the proper set-up, testing and use of the
corporate ERP systems, in order to establish functional accountability and responsibility for corporate
ERP systems within a core of educated and responsible end users across our company.
• Proper controls for our ERP systems will be implemented and documented that limit access to system
functions consistent with appropriately segregated duties of our financial and operation staff in the
normal execution of their respective duties.
• Information technology functional capabilities will be upgraded or added to establish stronger
communication and planning between the information technology department and the functional teams
within the company that use the systems in order to provide decision makers with accurate, timely, and
appropriate information required for them to make proper business decisions.
• Information technology department processes will be established, documented, and enforced to ensure
that all information system initiatives, including upgrades, patches and bug fixes, are appropriately
prioritized, approved, documented and reported.
Inherent Limitations on Effectiveness of Controls
LeapFrog’s management, including our CEO and CFO, does not expect that our disclosure controls or our
internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. 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. Further, because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the controls. The design
of any system of controls is based in part on certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over
time, controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended
December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. The discussion above under “Completed and Planned Remediation Actions to
Address Internal Control Weaknesses” describes a number of changes we have made since December 31, 2004
that we believe have materially improved our internal control over financial reporting, as well as other
improvements that we plan to make in 2005.
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