Silicon Graphics Reveals Controls Fault

Company attributes problem to headcount reductions among administrative staff.
Stephen TaubSeptember 13, 2004

Silicon Graphics said in its 2004 annual report that its independent auditors, Ernst & Young LLP, had identified a “material weakness” in the company’s internal controls.

E&Y found that the company needs to reassess the resource requirements of its finance organization and take another look at the design and effectiveness of certain controls involved in closing financial statements. This finding was based on adjustments made during an audit that the auditors felt should have been identified and resolved by the company, according to SG.

The adjustments involved accruals for accounts payable, calculation errors relating to interest and depreciation expense, “and the choice of accounting methods for a complex transaction involving hardware and services revenue.” The adjustments were made before the release of the company’s results for fiscal 2004 and do not affect previously announced results, SG assured.

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The matters identified by E&Y have been reviewed by management and the audit committee, according to the company. The company’s management believes that the material weakness identified by the auditor “is attributable in significant part to the substantial headcount reductions that we have implemented over the past several years, which have had a disproportionate impact on administrative functions,” SG added in its filing.

The revelation comes about two months before new rules that require companies to identify, document, and test their internal controls officially go into effect. In addition, under Section 404 of the Sarbanes-Oxley Act, their auditors will also be required to attest that their client’s internal controls are up to snuff. The company is in the process of identifying and testing its internal controls in order to comply with 404 and has made internal-controls changes as a result, according to the 10-K.

SG said immediate actions being taken include active recruiting to increase staffing levels in certain areas of finance, improving its training programs for finance professionals, and putting in place added procedures in the internal close process.