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UNH » Topics » Evaluation of Disclosure Controls and Procedures as of June 30, 2006 and Changes in Internal Control Over Financial Reporting During the Quarter Ended June 30, 2006

This excerpt taken from the UNH 10-Q filed Mar 6, 2007.

Evaluation of Disclosure Controls and Procedures as of June 30, 2006 and Changes in Internal Control Over Financial Reporting During the Quarter Ended June 30, 2006

In connection with the filing of the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2006, management evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2006. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, although the Company had taken significant remedial actions during the first and second quarters of 2006, the Company continued to have a material weakness in internal control over financial reporting solely relating to stock option plan administration and accounting for and disclosure of stock option grants as of June 30, 2006 and that, solely for this reason, its disclosure controls and procedures were not effective as of June 30, 2006.

 

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As discussed in the Form 10-Q for the quarter ended June 30, 2006, the Company took the following actions during the second quarter of 2006 to remediate the material weakness in its internal control over financial reporting relating to stock option plan administration and accounting for and disclosure of stock option grants:

 

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The Board of Directors took the followings actions related to the Company’s historic stock option granting practices:

 

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Formed an Independent Committee to perform an independent investigation of the Company’s historic option granting practices from 1994 to 2005. The Independent Committee retained independent counsel, WilmerHale, which was assisted by accounting advisors and was given full access to Company documents and personnel. The full WilmerHale Report was posted immediately on the Company’s website and copies were provided to the SEC and U.S. Attorney’s office. The restatement of the Company’s financial statements reflects the Company’s analysis of the accounting adjustments necessary to address WilmerHale’s findings, as well as other accounting adjustments described in this Form 10-Q that were not related to the findings in the WilmerHale Reports.

 

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Formed an independent Special Litigation Committee, consisting of two former Minnesota Supreme Court Justices, to investigate the claims raised in the shareholder derivative actions and demands related to the Company’s historic stock option granting practices. The Special Litigation Committee retained independent legal counsel, which is assisted by accounting advisors, and was given full access to Company documents and personnel.

 

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The Board of Directors took the followings actions related to the Company’s policy governing the grant of equity awards:

 

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Required that all grants of equity awards to employees are to be made in the sole discretion of the Compensation Committee and no authority to grant equity awards is delegated to management.

 

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Required that all grants of equity awards in connection with commencement of employment or the promotion or retention of existing employees are to be made at regularly scheduled quarterly meetings of the Compensation Committee.

 

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Provides that all broad-based grants of equity awards to employees are only to be considered by the Compensation Committee on an annual basis at the meeting of the Compensation Committee held in connection with the Company’s Annual Meeting of Shareholders.

 

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The Company recommended, and the Compensation Committee approved, a policy regarding equity awards that:

 

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Documents the actions taken by the Board of Directors referred to above.

 

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Permits that, in the event that the Compensation Committee determines not to make equity awards on the dates set forth above because the Company is in possession of material nonpublic information on that date, then the Compensation Committee may grant such equity awards on a later date, which need not be a regularly scheduled Committee meeting, when the Company is no longer in possession of material nonpublic information.

 

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Requires that the date of grant of an equity award shall only be the date on which the Compensation Committee acts to authorize the equity award.

 

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Addresses equity award approval requirements, award levels, award date requirements, awards to individuals with significant stock ownership, modifications to existing awards, and review of and amendments to equity award policies.

 

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The Company took the following actions to strengthen its internal control processes relating to equity awards:

 

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Engaged an outside professional services firm to review and advise the Company on improving the design of the control environment around the Company’s equity award initiation and modification, equity award approval, equity award administration and equity exercise administration processes.

 

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Evaluated and enhanced the design and documentation of the end-to-end process for equity compensation, including grant initiation, grant approval, grant administration, exercise administration and grant modification.

 

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Evaluated, strengthened and implemented processes and controls throughout the end-to-end process, including controls to ensure cross-functional communication, controls around the oversight and approval for all equity grant activity and controls around the preparation and review of stock based compensation information in the Company’s financial reports; and

 

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Established an Equity Award Working and Oversight Group, comprised of senior tax, legal, human capital and accounting/finance personnel, to review all recommended equity awards to employees prior to consideration by the Compensation Committee and, following each Compensation Committee action, to review the equity awards granted by the Compensation Committee.

 

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Engaged an outside professional services firm to conduct regular testing of controls relating to equity award initiation and modification, equity award approval, equity award administration and equity exercise administration processes and report the results of its review to the Compensation Committee on a quarterly basis.

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