(LO 1, 2, 10) At the SEC website, obtain Management\'s Report on Internal Contro
ID: 2330798 • Letter: #
Question
(LO 1, 2, 10) At the SEC website, obtain Management's Report on Internal Control provided by Ford Motor Company for the year-end December 31, 2016. (See p. 100 of Form 10-K, via EDGAR at www.sec.gov.) Ford management comments on the fact that internal control over financial reporting has "inherent limitations." What are those inherent limitations? 1. 2. Locate the CEO certification toward the end of Ford's 10K (Exhibit 3.9). Summarize the main components of the certification. Why should users of the financial statements be assured by the statements made in the certification? How does management obtain comfort that internal control does not contain any material weaknesses? 3. From a conceptual point of view, assume that two companies are the same size, participate in the same industry, and have the same reported net income. However, one has a material weakness in internal control over financial reporting and the other does not have any material weaknesses. Should the stock price of the two be different? What is the rationale for your answer? 4.Explanation / Answer
1)Inherent limitations of internal control:
Cost-Management’s consideration that a control be cost-effective.
Unusual transactions-he fact that most controls do not tend to be directed at transactions of unusual nature.
Error-The potential for human error.
Collusion-The possibility of circumvention of controls through collusion with parties outside the entity or with employees of entity
Abuse of authority-The possibility that a person responsible for exercising control could abuse that authority, e.g. a member of Management overriding a control
Inadequacy-the possibility that procedures may become inadequate due to changes in conditions and compliance with procedures may deteriorate
Manipulations-Manipulations by Management with respect to transactions or estimates and judgments required in the preparation of Financial Statements, since these are prepared by the organisation internally
2)
The certification at the end of Ford’s 10K is signed by the CEO. There are five main points that he is certifying. First, he certifies that he has reviewed the annual report for the specific period. Secondly, he states that based on his knowledge this report is true and not misleading in any way. Next, he certifies that based on his knowledge the financial statements fairly presents the financial condition for all periods presented in the report. Next, he certifies that he is responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting. Lastly, he certifies that he has disclosed to the auditors and the audit committee all significant deficiencies and material weaknesses
3)
They take comfort by knowing that material weakness exists and do testing and evaluating of the design and operating effectiveness of internal controls based on the assessed risk. The current internal controls are constantly being tested and re-evaluated based on necessary circumstances and the risk assessed. As all these controls are reviwed by the audit committee and internal audit team , so these controls are flexible enough that they change according to circumstances
4)
As these reprts and financial statements are available in public domain, so the investor will be less keen to invest in a company whose internal controls are weak , as the chances of fraud/misstatements in that company are high.
I would believe that if material weaknesses are disclosed the stock prices for that particular company could dip or even crash. So, yes. I believe the stock prices should and would be different based on material weaknesses.
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