Item 4. Controls and Procedures
The company carried out an evaluation, under the supervision and with the
participation of the company's Disclosure Committee and the company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the company's disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
quarterly period covered by this report. The company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported on a timely basis. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, except as noted below, the company's disclosure controls and procedures
are effective in alerting them in a timely fashion to material information
relating to Baxter required to be included in the reports that the company files
under the Exchange Act.
The company has restated its previously issued financial results for the years
2001 through 2003, and for the first quarter of 2004. This restatement was
primarily the result of the inappropriate application of accounting principles
for revenue recognition and inadequate provisions for bad debts in Brazil during
this period. Senior management became aware of these issues in 2004 through the
reporting procedures established under Baxter's Global Business Practice
Standards. Upon becoming aware of the issues in Brazil, senior management, with
the assistance of the company's internal audit team, conducted a preliminary
investigation. This preliminary investigation was followed by a more
comprehensive investigation by the Audit Committee of Baxter's Board of
Directors, with the assistance of independent legal counsel and forensic and
other accountants. Refer to Note 1A to the consolidated financial statements for
further information regarding this restatement.
The investigations described above identified the following, which collectively
constitute a material weakness in the company's internal control over financial
reporting:
an ineffective control environment maintained by senior management in
Brazil, including intentional overrides by senior management in Brazil of
internal controls;
inadequate revenue recognition controls in Brazil;
inadequate controls in Brazil to ensure adherence to generally accepted
accounting principles for loss contingencies, including bad debts; and
ineffective financial review by management responsible for the
Intercontinental region, which includes Latin America.
As a result, two members of senior management in the company's Brazilian
operations have been terminated. In addition, the Vice President, Finance
responsible for the Intercontinental region has been replaced. In July 2004, the
company began monthly detailed internal audits of the company's Brazilian
operations, including on-site reviews of accounting policies and practices with
accounting personnel and management in Brazil. In addition, the company is in
the process of implementing the following actions to improve its internal
control over financial reporting:
a comprehensive review of internal control over financial reporting in
Brazil, including additional remediation as necessary;
implementation of new controls in Brazil relating to the recording of
revenues and loss contingencies, including improved documentation
requirements;
additional training for finance, accounting and sales personnel in Brazil
on appropriate accounting for revenue recognition;
additional training for finance and accounting personnel in Brazil on
accounting and reporting policies, including those relating to accounting
in accordance with Statement of Financial Accounting Standards No. 5
"Accounting for Contingencies" and SEC Staff Accounting Bulletin No. 99
"Materiality;"
enhanced training for employees in Brazil regarding Baxter's Global
Business Practice Standards, including obligations to maintain accurate
books and records and to report wrongdoing promptly;
enhanced financial review procedures at the Intercontinental region level; and
improved procedures and additional training for reporting legal
contingencies and establishing appropriate legal reserves.
The changes to internal control over financial reporting described above were
implemented in the third quarter of 2004 or are in the process of being
implemented. There has been no change in Baxter's internal control over
financial reporting that occurred during the fiscal quarter ended September 30,
2003 that has materially affected, or is reasonably likely to materially affect,
Baxter's internal control over financial reporting.
38
Review by Independent Registered Public Accounting Firm
Reviews of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q/A for the three and nine months ended
September 30, 2003 and 2002 have been performed by PricewaterhouseCoopers LLP,
the company's independent registered public accounting firm. Their report on the
interim condensed consolidated financial information follows. This report is not
considered a report within the meaning of Sections 7 and 11 of the Securities
Act of 1933 and therefore, the independent accountants' liability under Section
11 does not extend to it.
39
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Baxter International Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Baxter
International Inc. and its subsidiaries as of September 30, 2003, and the
related condensed consolidated statements of income for each of the three-month
and nine-month periods ended September 30, 2003 and 2002 and the condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 2003 and 2002. These interim financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2002 and the related consolidated statements of income, cash flows
and stockholders' equity for the year then ended (not presented herein), and in
our report dated February 14, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
As described in Note 1A, the Company has restated its previously issued
consolidated financial statements.
/s/PricewaterhouseCoopersLLP
PricewaterhouseCoopers LLP
Chicago, Illinois
October 31, 2003, except for Note 1A which is as of August 9, 2004
40