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|Subject: Financial Reporting Question||Date: 3/31/2006 8:58 AM|
|Author: roochyroo||Number: 756 of 766|
I am a Hidden Gem subsriber and recently read the "6 Danger Signs You Can Check in 15 Minutes" report and found it to be quite informative. I am a shareholder of TIE (Titanium Metals) and read their most recent 10-K. In Item 9A entitled "Controls and Procedures" there was a discussion about material weaknesses in TIE's disclosure controls and procedures. There were conflicting opinions (what a surprise) on TIE's Yahoo message board regarding the significance of this disclosure (i.e. ranging from whether it is a simple statement designed to comply with Sarbanes-Oxley requirements to whether this is a red flag for what is obviously a high-flying company). I figured I would ask the Fools and and/or their subscribers' for their opinion on this subject since they have undoubtedly reviewed far more 10-Ks than I. So that the opinion is "informed" I have pasted below a portion of Item 9-A from TIE's 10-K:
"A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In connection with management's assessment of the Company's internal control over financial reporting, management has determined that the following control deficiencies constitute material weaknesses in the Company's internal control over financial reporting as of December 31, 2005:
(1) The Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training commensurate with the Company's financial reporting requirements. Specifically, the Company did not have accounting and finance personnel with sufficient depth and skill to allow the Company's global accounting and financial reporting group to function effectively. This control deficiency contributed to the second and third control deficiencies discussed below.
(2) The Company did not maintain effective controls over the accuracy, authorization and review of recurring and non-recurring manual journal entries recorded in the general ledger. Specifically, the Company did not have consistent and comprehensive procedures designed and in place to ensure that manual journal entries were properly reviewed and approved to ensure the entries recorded were accurate and valid. This control deficiency affects substantially all financial statement accounts. However, this deficiency did not result in an adjustment to the Company's 2005 consolidated financial statements.
(3) The Company did not maintain effective controls over the establishment, review and evaluation of the adequacy of its accounting policies and procedures. Specifically, the Company did not (a) have sufficient written policies and procedures insofar as they relate to the appropriate application of GAAP relating to revenue recognition and inventory, (b) consistently apply existing written policies and procedures throughout the Company or (c) update and communicate its accounting policies and procedures in a timely manner to reflect changes in the Company's business. This control deficiency primarily affected the Company's accounting for revenue recognition and several components of inventory, including accounting for production variances and obsolescence reserves. This control deficiency resulted in certain adjustments, including audit adjustments that were recorded in the 2005 third quarter consolidated financial statements and the 2005 annual consolidated financial statements.
Each of the control deficiencies described in (1) through (3) above could result in a misstatement of the Company's account balances or disclosures that would result in a material misstatement to the Company's annual or interim consolidated financial statements that would not be prevented or detected.
Management determined that each of these control deficiencies discussed in
(1) through (3) above constitutes a material weakness.
As a result of the material weaknesses described above, management of the Company has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2005, based on the criteria in the COSO framework.
Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K.
Remediation of material weaknesses. In response to the identified material weaknesses, management of the Company intends to take the following actions during 2006:
(1) The Company intends to increase its global accounting and finance staff in order to have sufficient resources to meet the Company's rapidly growing needs. The Company currently expects to hire the additional personnel in 2006. This remediation will also be a significant component of the remediation of the second and third material weaknesses described above.
(2) The Company intends to modify and expand the functionality of its computer system (an "IT solution"), where possible, to ensure evidence is available to verify that personnel with the appropriate level of authority have reviewed and approved manual journal entries prior to the entries being recorded in the Company's general ledger. Additionally, the Company will continue to maintain evidence supporting the sufficiency of the manual journal entries in conjunction with the IT solution. For any location where an IT solution is not readily available, additional reviews will be required by personnel independent of those personnel recording the manual journal entries. The Company currently expects to complete the modification and expansion of the functionality of its computer system in 2006, to implement alternate controls until such functionality is in place and otherwise to complete the remediation of this control deficiency in 2006.
(3) The Company intends to (a) prepare and distribute written policies and procedures covering all significant accounting processes for which such procedures do not already exist, (b) implement additional training and review processes to ensure all accounting procedures are implemented and applied properly and timely on a consistent basis throughout the Company and (c) implement guidelines surrounding the contemporaneous review and updating of all significant accounting procedures when business conditions so indicate. Although the control deficiency as of December 31, 2005 only related to certain financial statement accounts, this remediation plan will apply to all significant financial statement accounts. The Company has already updated certain of its key accounting procedures, and it will prioritize the preparation and distribution of additional procedures and related training based on the Company's risk assessment of the areas that are the most important.
Changes in internal control over financial reporting. There have been no changes to the Company's internal control over financial reporting during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting."
Your responses on this subject are appreciated. I would obviously like to know if this is something that I should be concerned about.
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