LeapFrog 2005 Annual Report Download - page 65

Information Technology
Staff capabilities were improved with the addition of a new Chief Information Officer, Senior Director
Global Network Operations and Senior Director of Information Technology. A comprehensive information
technology system strategy has been developed and is aligned with our overall business strategy.
We upgraded our ERP system capabilities resulting in improved information quality, increased automation
of controls and improved segregation of duty controls in both financial and operational activities. Automated
systems were also installed to enhance our ability to identify and monitor segregation of duties controls within
our business.
Information technology department processes have been established, documented and enforced to ensure
system initiatives, including upgrades, patches and problem fixes, are appropriately prioritized, approved,
documented and reported.
Cost of Goods Sold and Inventory
Staffing capabilities were improved with the addition of a new Senior Vice President of Supply Chain and
Operations, Vice President of Supply Chain Planning and a Senior Director of Supply Chain Finance.
Corporate ERP systems have been upgraded and redesigned to confirm the proper, necessary and
appropriate levels and breadth of access and control to functional areas of our systems. Additionally, software
controls were applied to the existing ERP systems to enforce appropriate segregation of duties.
The process for review and approval of inventory reconciliations was strengthened, and a variance analysis
process was implemented.
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 the effectiveness of controls 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
Except as noted above, there have been no changes in our internal control over financial reporting during the
quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. The discussion above under “Remediation Actions to Address 2005
Internal Control Weaknesses” describes a number of changes we have initiated since December 31, 2005, as well
as other changes that we plan to implement in 2006, that we believe will materially improve our internal control
over financial reporting.
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