Kodak Restatement Looms

A report of material weakness in internal controls affecting tax filings could cause the photo giant to restate 2004 results.
Stephen TaubJanuary 27, 2005

In the fourth quarter of 2004, Eastman Kodak Co. reported that revenue for its digital business rose 40 percent, more than offsetting a 16 percent decline in traditional revenue. The good news was welcomed—considering that for the past two decades, Kodak has been trying to reinvent itself, often sputtering along the way.

But the celebration was subdued by the announcement that the long-struggling company lost $12 million as a result of restructuring costs. The company may need to restate results because during the year-end closing process, officials found errors related to its income taxes in 2004.

Company officials determined that an internal-control deficiency exists at the company that constitutes a “material weakness” as defined by the Public Company Accounting Oversight Board’s auditing standards. Consequently, management will be unable to confirm that the company’s internal controls over financial reporting were effective as of Dec. 31, 2004.

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The upshot is that Kodak’s independent auditor, PricewaterhouseCoopers (PwC), will issue an adverse opinion concerning the company’s internal controls. Kodak managers said they’re working with PwC to find out the magnitude of the errors. They also said that the errors have no bearing on the company’s revenue, cash flow, or earnings before taxes, but may affect its after-tax income.

“The errors are confined to income-tax accounting, and as such they do not affect the company’s business operations,” said Kodak CFO Robert Brust. “Nor do they in any way affect the company’s financial strength or business prospects, or our earnings outlook for 2005 and beyond.”

Brust emphasized that the situation arises from tax accounting errors, not misconduct. “It involves complex tax rules, in many cases relating to our restructuring actions overseas that vary by country,” he added. Brust expects to issue final results for the fourth quarter, and for the year, in about six weeks.