Item 9A. Controls and Procedures: Evaluation of Disclosure Controls and Procedures
“Disclosure controls and procedures” are the controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in its Exchange Act reports is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
Under the direction of the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated its disclosure controls and procedures as of April 1, 2011. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of April 1, 2011.
Management’s Report on Internal Control over Financial Reporting
The management of Computer Sciences Corporation (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and receipts and expenditures are being made only in accordance with authorization of management and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements. All internal controls, no matter how well designed, have inherent limitations. Therefore, even where internal control over financial reporting is determined to be effective, it can provide only reasonable assurance. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
As of the end of the Company’s 2011 fiscal year, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting, as of April 1, 2011, was effective.
The Company’s internal control over financial reporting as of April 1, 2011, has been audited by the Company’s independent registered public accounting firm, as stated in their report on page 94
Date: June 15, 2011
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Changes in Internal Control Over Financial Reporting
In connection with the preparation and filing of its Quarterly Reports on Form 10-Q for the periods ended October 1, 2010 and December 31, 2010, the Company concluded that a material weakness existed as of October 1, 2010 and December 31, 2010 due to the aggregation of a significant deficiency in the Nordic business (initially identified as of April 2, 2010, which continued to exist through the third quarter of fiscal 2011) and a deficiency in account reconciliation procedures and controls identified at other MSS business units during fiscal 2011. The Company concluded as of the end of October 1, 2010 and December 31, 2010 that individually these deficiencies were not material weaknesses. However, when they were considered in the aggregate, the Company concluded that there was a reasonable possibility that the Company’s internal control over financial reporting could fail to prevent or detect a material misstatement of the Company’s financial statements, and therefore that a material weakness existed as of each of these dates. The material change in internal control over financial reporting during the fourth quarter relates to the remediation of the material weakness.
As a result of the significant deficiency in the Nordic business, the Company did not detect as of April 2, 2010, the out of period adjustments included in Note 2 of the Consolidated Financial Statements. The Company identified and corrected these out-of-period errors in fiscal 2011 and has attributed the majority of the errors in the Nordic business to accounting irregularities.
The significant deficiency in the Nordic business as of April 2, 2010 resulted from a combination of deficiencies primarily in the following areas:
Nordic business “Tone at the Top”
Oversight and monitoring controls
The Company began remediation activities related to the deficiencies in the Nordic business early in fiscal 2011. These remediation activities included the following:
Nordic Region “Tone at the Top”
– In order to instill a proper “Tone at the Top” within the Nordic business and strengthen the overall control environment, the Company undertook a number of remedial actions, including the following:
The Chief Operating Officer (the senior Nordic executive) and Finance Director for the Nordic business resigned in the first quarter of fiscal 2011. The Chief Operating Officer was replaced by a senior operating executive that was not previously involved in the financial reporting of the Nordic business. The Finance Director was initially replaced by an interim Finance Director from the U.K. business and in the second quarter an experienced Finance Director from our MSS U.S. business was appointed.
Management has finished its investigation of the Nordic business and believes the senior finance staff and other management that were involved in the suspected accounting irregularities have been replaced. The Audit Committee has commenced an independent forensic investigation (refer to Note 2 to the Company’s consolidated financial statements).
The Company’s CEO issued a communication to all senior management reinforcing the importance of adherence to CSC management principles, code of conduct and ethics policies and our CFO issued a letter to senior financial management, including the sector CFO’s, reinforcing the critical role of the financial organization in ensuring integrity in our business practices and financial reporting.
The Company’s Chief Ethics Officer and Chief Compliance Officer conducted meetings with MSS Nordic business management to review CSC’s policies regarding ethics and the Company’s code of conduct and behavior, again reinforcing the critical importance of adherence to CSC policies. In addition, they discussed communication protocols regarding improper conduct and ethical breaches, alternative channels of escalation and the process for anonymous communication of such matters using the CSC Open Line (hot-line) program administered by the Chief Ethics Officer and human resources. CSC’s Code of Ethics and Standards of Conduct was reinforced through ethics training attended by Nordic business staff. In addition, a communication was sent to all Nordic staff describing the CSC Open Line reporting process and related reporting protocols.
Nordic business financial management reviewed the competency of the Denmark finance staff. As a result of this review, roughly half of the senior finance staff was terminated, resigned or redeployed, and replacement staff was recruited with appropriate skills, experience and credentials. This review was substantially completed by the end of the second quarter of fiscal 2011 and a Controller for the Nordic business was appointed and began work on December 1, 2010.
The new Nordic business Finance Director conducted or facilitated training in the third and fourth quarter for all finance staff on financial reporting matters relevant to the Nordic business. The training included reinforcement of Company policies, procedures and code of ethics and technical accounting areas which were significantly impacted by the out-of-period adjustments (revenue recognition — percentage of completion accounting and software revenue recognition, software capitalization, lease accounting, deferred expenses, account reconciliations, and journal entry review and approval).
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Oversight and Monitoring Controls –
Principal remediation actions with regard to oversight and monitoring controls consisted of the following:
The Company appointed a new President of MSS EMEA to fill a position that had been vacant for over a year.
The Company created a new controller position with responsibility for oversight and monitoring of MSS EMEA. This position was filled in January 2011 with an experienced finance individual with relevant industry experience.
The Nordic business implemented more rigorous procedures and controls in the financial closing and reporting process (FCRP) over the following areas: review and approval of journal entries, account reconciliations (addressed more fully in the following section) and analysis of operating results, balance sheet and cash flow variances.
The Company’s Corporate Controller’s Office issued a revised financial statement review template to facilitate the enhanced review of operating results, balance sheet variances and cash flows. The Nordic business implemented this template beginning in the third quarter of fiscal 2011.
The Nordic business management review of the operating performance of the business was expanded to incorporate a more comprehensive financial perspective, including more detailed information regarding the financial condition of the business. This expanded review by operational leadership was implemented in January 2011 by integrating the Corporate Controller’s financial statement review template into the operations review materials. This approach was also adopted by the other business units and regions of the MSS segment during the fourth quarter of fiscal 2011.
The Company’s Corporate Controller’s Office instituted periodic business unit balance sheet reviews beginning in the second quarter of fiscal 2011 to strengthen controls over management override. The scope of these reviews encompassed significant account balances and associated account reconciliations, accounting practices, financial policies, internal controls, competency of financial management and personnel, and other financial matters pertinent to the respective business unit. During the second, third and fourth quarters balance sheet reviews were performed for the majority of significant business units, including those located in the United States, United Kingdom, Germany, France and Australia.
The Company’s Corporate Controller also strengthened and clarified financial policies in a number of areas based on deficiencies identified in Denmark and other locations across the Company which were identified as a part of the Corporate Controller’s balance sheet reviews.
– As a result of additional out-of-period charges identified in early October 2010, the Denmark finance organization, with support from the U.K. finance team and Internal Audit, conducted a review of the significant components of its balance sheet, prioritizing the higher risk and significant account balances. Substantial remediation of existing reconciliation procedures was necessary with respect to timeliness, completeness, form and content (generally requiring a reconciliation of the components of the balance, rather than a summary of transaction activity), timely investigation of significant reconciling items and adequate documentation. The remediation of the design of the account reconciliation procedures and controls took several months but was substantially completed by the end of the third quarter of fiscal 2011. The remediated account reconciliation procedures were tested by Internal Audit in the fourth quarter of fiscal 2011 and determined to be operating effectively.
In addition to the three principal elements of the material weakness, the Company also remediated process level controls relating to the financial areas which were most significantly affected by the Nordic business out-of-period charges. These areas included the following:
Deferral of transition costs on outsourcing contracts, and
Contract claims and disputes recognition and accounting.
In each case, the design of these process level controls were remediated not later than the end of the third quarter and the remediated controls operated effectively for at least the last three months of the fiscal year.
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Account Reconciliations in Other MSS Locations
As of the end of the second quarter, the Company concluded the account reconciliation procedures in other locations had deteriorated since the end of fiscal 2010 and a deficiency existed in other MSS locations outside of the Nordic region. The Company implemented remediation activities consistent with the Nordic region with respect to timeliness, completeness, form and content (generally requiring a reconciliation of the components of the balance, rather than a summary of transaction activity), timely investigation of significant reconciling items and adequate documentation. The remediation of the design of the account reconciliation procedures was completed as of the end of the third quarter of fiscal 2011.
The remediated account reconciliation procedures were tested by Internal Audit in the fourth quarter of fiscal 2011 and determined to be operating effectively. In fact, remediated account reconciliation and monitoring controls were primarily responsible for the identification of the fourth quarter MSS segment out-of-period adjustments.
The Company believes it addressed the deficiencies relating to the design of its internal controls and implemented new controls or modified existing controls, as necessary, by the end of the third quarter of fiscal 2011. These remediated controls have operated effectively throughout the fourth quarter of fiscal 2011. Accordingly, the Company concluded that the material weakness has been remediated as of April 1, 2011.