UTSI » Topics » Material weakness 5 identified as of September 30, 2006, resulting from the Companys review of its

This excerpt taken from the UTSI 10-Q filed Oct 10, 2007.
Material weakness 5 identified as of September 30, 2006, resulting from the Company’s review of its historical stock option practices, as described above under “Governance Committee Review of Historical Stock Option Accounting”

Remediation Initiatives. The Company’s planned remediation measures are intended to address material weaknesses in internal control over its accounting for and disclosure of stock-based compensation expense that have the potential of misstating these balances in the financial statements in future financial periods. These measures include the following:

1.             In November 2006, the Company migrated to a new vendor’s system for stock options and equity awards administration, selected in part for its improved processes, systems and controls.

2.             In April 2007, the Company’s compensation committee of the board of directors approved an equity award grant policy and procedures (“Awards Policy”). Under this Awards Policy, the Company has adopted the following equity awards grant processes:

a)              Equity awards will be made only on grant dates pre-determined in accordance with the Awards Policy.

b)             The awards committee (a committee as defined in the Awards Policy consisting of human resources, legal and finance personnel, duly formed and authorized by the compensation committee, with specific, limited authority to approve certain grants of equity awards) will ensure completeness and accuracy of the final equity awards grant list.

c)              All equity awards will be approved monthly, at a meeting of the awards committee, the compensation committee or the board of directors, as applicable.

d)             Internal audit will conduct periodic review of the accounting records and equity awards grant process.

3.             Relevant personnel at the Company will be provided training in the equity awards granting and accounting process.

4.             In April 2007, the Company created the position of and hired a new chief ethics officer, to provide focused executive leadership in the area of corporate ethics and integrity.

5.             During 2007, the Company will update its record retention policy to specify retention of equity award records.

Interim Measures.  Management has not yet implemented and/or tested the effectiveness of all the measures described above. Nevertheless, management believes those measures identified above as having been implemented, together with the other measures undertaken by the Company described below, all of which were undertaken during the first three quarters of 2006 or subsequent to September 30, 2006 in connection with the September 30, 2006 quarter-end reporting process, address material weakness 5, as described above under “Governance Committee Review of Historical Stock Option Accounting.” These other measures include, as part of the voluntary review of historical stock option practices, the Governance Committee retaining independent outside counsel and forensic accountants to review substantially all equity grant awards made in the Review Period for compliance with the various stock-based compensation accounting standards applicable during the Review Period and, as necessary to establish alternative measurement dates for those grants where the original measurement date was found to be in error. In addition, the accounting and reporting process for the consolidated financial statements for the quarter ended September 30, 2006 was extended significantly, thereby allowing the Company time to conduct additional procedures and analyses, to assess the adequacy and accuracy of reserves and actual expense results, and to make additional adjustments and disclosures as necessary to ensure the accuracy of financial reporting.

Material weakness 6 identified as of September 30, 2006, resulting from the Company’s review of historical sales in China, as described above under “Audit Committee Investigation of Historical Sales in China

Remediation Initiatives. The Company’s planned remediation measures are intended to address material weaknesses in internal control over its customer agreements and the related revenue recognition in China that have the potential of misstating its revenue, deferred revenue, cost of sales and deferred cost accounts, related income tax accounts, retained earnings and related financial disclosures in the financial statements in future financial periods. These measures include the following:

1.             In the period from January to May, 2007, the Company effected personnel changes in the sales force in China’s western sales region, as well as certain associated sales offices. The Company believes that these changes will enable effective management of the China western sales region’s sales operations and enhance compliance with the Company’s policies and procedures, including the Company’s Code of Business Conduct and Ethics.

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2.             The Company plans to revise its  policies and procedures related to entering into sales contracts, document retention, as well the Code of Business Conduct and Ethics to provide for details around the standards for entering into sales agreements and breaches to the Code of Business Conduct and Ethics.

3.             The Company plans to implement mandatory training to employees in China’s sales organization around control consciousness and ongoing training to Sales, Contract Management and Finance in China around the Company’s policies and procedures, including revenue recognition.

4.             The Company plans to review and make improvements to the sales databases to capture relevant contract information and current status information.

5.             The Company plans to establish a process around organizing visits by business operations and the regional sales managers to the various sales offices in China to enhance the awareness and compliance with the Company’s polices and procedures.

Interim Measures. Management has not yet implemented and/or tested the effectiveness of all the measures described above. Nevertheless, management believes those measures identified above as having been implemented, together with the other measures undertaken by the Company described below, all of which were undertaken during the first three quarters of 2006 or subsequent to September 30, 2006 in connection with the September 30, 2006 quarter-end reporting process, address material weakness 6, as described above under Audit Committee Investigation of Historical Sales in China. These other measures include, as part of the investigation of historical sales in China, the Audit Committee retaining independent outside counsel and forensic accountants to conduct an investigation of sales in China. The investigation was expanded to consider sales contracts entered into in the period 2000 to 2006 in China, beyond the western region in order to provide adequate coverage percentage of the value of sales contracts entered into during the period. The investigation encompassed different review procedures depending on the contract type, date and region in which the contracts were executed. In addition, the accounting and reporting process for the consolidated financial statements for the quarter ended September 30, 2006 was extended significantly, thereby allowing the Company time to conduct additional procedures and analyses, to assess the adequacy and accuracy of the related balances, and to make additional adjustments and disclosures as necessary to ensure the accuracy of financial reporting

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