Apple 2006 Annual Report Download - page 121

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Special Committee Review into Stock Option Grant Practices and Restatement
As discussed in the Explanatory Note preceding Part I and in Note 2 in Notes to Consolidated Financial Statements of this Form 10-K, the
Company on June 29, 2006, announced that an internal review had discovered irregularities related to the issuance of certain past stock option
grants, including a grant to its CEO Steve Jobs. The Company also announced that a Special Committee of outside directors (“Special
Committee”) had been formed and had hired independent counsel to conduct a full investigation of the Company’s past stock option granting
practices. As a result of the internal review and the independent investigation, management has concluded, and the Audit and Finance
Committee of the Board of Directors agrees, that incorrect measurement dates were used for financial accounting purposes for certain stock
option grants made in prior periods. Therefore, the Company has recorded additional non-cash stock-based compensation expense and related
tax effects with regard to past stock option grants, and the Company is restating previously filed financial statements in this Form 10-K.
The internal review and the Special Committee’s independent investigation identified a number of occasions between October 1996 and
January 2003 (the “relevant period”) when the Company used incorrect measurement dates for stock option grants. The independent
investigation also found that during the relevant period:
•
Procedures for granting, accounting, and reporting of stock option grants did not include sufficient safeguards to prevent manipulation
•
The grant dates for a number of grants were intentionally selected in order to obtain favorable exercise prices
•
Two former officers of the Corporation engaged in conduct that raises serious concerns in connection with the granting, accounting,
recording, and reporting of stock options
•
CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, but he did not receive or financially benefit
from these grants or appreciate the accounting implications
From 2003 through 2005, the Company implemented improvements to procedures, processes, and systems to provide additional safeguards and
greater internal control over the stock option granting and administration function in compliance with the Sarbanes-Oxley Act (“SOX”) and
evolving accounting guidance. These improvements included:
•
Documenting and assessing the design and operation of internal controls
•
Segregating responsibilities, adding reviews and reconciliations, and redefining roles and responsibilities
•
Upgrading systems and system controls that support the processes
•
Obtaining training in the stock administration function
•
Implementing before the adoption of SFAS No. 123R the practice of using the receipt of the final Board or Compensation Committee
approval as the grant and measurement date for stock option grants
•
Identifying key controls, developing test plans, and testing controls in the stock granting and administration function
120