Ford 10-K and Toyota 20-F - 2014 a. Both Ford and Toyota management comment on t
ID: 2415903 • Letter: F
Question
Ford 10-K and Toyota 20-F - 2014
a. Both Ford and Toyota management comment on the fact that internal control over financial reporting has “inherent limitations.” What are those inherent limitations?
b. Locate the CEO certification toward the end of Ford’s 10K. Summarize the main components of the certification. Why should users of the financial statements be assured by the statements made in the certification?
c. How does management obtain comfort that internal control does not contain any material weaknesses?
d. 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?
Explanation / Answer
a) Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, 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. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
b) In addition to creating great products and a strong business, we have a proud heritage of making the world a better place. As ford expand and realign globally and introduce new products, ford are contributing solutions to economic development, energy security and independence, and environmental sustainability. For example, today in the United States ford offer eight Ford brand vehicles that deliver 40 mpg or better - more than any of competitors' brands.
Community service is another important part of ford heritage. Ford Motor Company Fund and Community Services, our philanthropic organization, has donated more than $1.5 billion in its 65-year history. Ford Volunteer Corps, which will celebrate its 10th anniversary next year, encourages salaried employees to volunteer in their communities. During the eighth annual Ford Global Week of Caring in 2013, approximately 10,000 members of the Ford Volunteer Corps worked on more than 200 projects on six continents.
Going Further to Deliver Profitable Growth for All
ford expect 2014 to be another solid year for Ford Motor Company and a critical building block as ford invest around the world for profitable growth beyond 2014. As a result of ford record number of new product launches, ford expect North American pre-tax profit to be lower in 2014 than in 2013. The payoff will be higher volume and revenue opportunities into 2015 and beyond.
c)
Internal controls are the programs, policies, and procedures established to ensure that:
d) If one has a material weakness in internal control over financial reporting and the other does not have any material weaknesses.the stock price would be different because Material Weakness – a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.
Mission and program objectives are efficiently and effectively accomplished
Program and resources are protected from waste, fraud, abuse, mismanagement, and misappropriation of funds
Laws and regulations are followed
Financial reporting is reliable
Reliable information is obtained and used for decision making