Shutterfly 2007 Annual Report Download - page 78

Table of Contents
Not applicable.
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 of the end of the period covered by this Annual Report on
Form 10-K. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the Company’s management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2006, our chief executive officer and chief financial officer concluded
that, as of such date, the Company’s disclosure controls and procedures were effective.
Remediation of Prior Material Weaknesses
As previously reported in our Registration Statement on Form S-1 (File No. 333-135426), as amended (the
“S-1”), in connection with the audit of our 2005 consolidated financial statements for the year ended and as of
December 31, 2005 and the review of our 2006 quarterly financial statements for the quarter ended June 30, 2006,
our independent registered public accounting firm identified three control deficiencies that represent material
weaknesses in our internal control over financial reporting.
The material weaknesses in our internal control over financial reporting were as follows:
We have implemented and will continue to implement changes to our processes to improve our internal control
over financial reporting. The following steps have been taken to remediate the conditions leading to the above stated
material weaknesses: (1) hiring a corporate controller, senior tax manager and additional experienced financial
personnel, (2) developing and implementing formal policies and procedures to manage and track the monthly
accounting close process, (3) modifying our website system controls to remove the capability of our customer
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
ITEM 9A.
CONTROLS AND PROCEDURES.
• We did not maintain effective controls to ensure adequate analysis, documentation, reconciliation and review
of accounting records and supporting data. Specifically, we did not maintain effective controls to ensure that
accruals and accounts payable were completely and accurately recorded in the proper period. We believe this
occurred primarily because of insufficient management oversight and because several positions in our
accounting and finance organization were unfilled or were staffed by temporary personnel unfamiliar with our
policies and procedures. In addition, some personnel performing these functions did not have an appropriate
level of accounting knowledge, experience and training.
•
We did not maintain effective controls over the completeness and accuracy of revenue and deferred revenue to
prevent our personnel from reinstating expired prepaid print plans. Under our prepaid print plans, we offer
customers the opportunity to purchase in advance larger quantities of prints at a discounted price from our
current list price for prints. Our lack of controls resulted in the overstatement of revenue and understatement
of deferred revenue.
• We did not maintain effective controls over the accounting for income taxes, including the completeness and
accuracy of our deferred income tax assets and liabilities and the related provision for income taxes.
Specifically, we did not maintain effective controls to properly estimate and reconcile the change in our
deferred tax assets and liabilities in the calculation of our income tax provision or properly calculate the
applicable tax rate to be applied to income on an interim basis.