05 Feb Reading and Interpreting IBM’s Report of Managemen
Reading and Interpreting IBM’s Report of ManagementIBM’s 2006 annual report includes the following selected paragraphs from its Report ofManagement found on page 54:IBM maintains an effective internal control structure. It consists, in part, of organizationalarrangements with clearly defined lines of responsibility and delegation of authority, andcomprehensive systems and control procedures. An important element of the control environmentis an ongoing internal audit program. Our system also contains self-monitoringmechanisms, and actions are taken to correct deficiencies as they are identified. . . .PricewaterhouseCoopers LLP, an independent registered public accounting firm, is retainedto audit IBM’s consolidated financial statements and management’s assessment ofthe effectiveness of the company’s internal control over financial reporting. Its accompanyingreport is based on audits conducted in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). . . .The Audit Committee of the Board of Directors is composed solely of independent,nonmanagement directors, and is responsible for recommending to the Board the independentregistered public accounting firm to be retained for the coming year, subject tostockholder ratification. The Audit Committee meets periodically and privately with theindependent registered public accounting firm, with the company’s internal auditors, aswell as with IBM management, to review accounting, auditing, internal control structureand financial reporting matters.Required:1. Describe the main components of IBM’s internal control structure.2. Who is IBM’s external auditor? In addition to auditing IBM’s financial statements, what elsedoes this firm audit? What body’s standards does the firm follow in conducting its audit?3. What is the composition of IBM’s Audit Committee? Describe its role.