Batson International, S.A. (C)

Prior to filing the companys first-quarter financial results with capital markets regulatory authorities, Peter Pike, the companys in-house legal counsel, forwarded copies of the Managements Report on Internal Control over Financial Reporting certifications to David Morris and Bill Lawrence for their signatures. (See Exhibit 1.) These annual reports were due to be filed with capital markets regulators, along with the companys prior years annual financial statements, about 40 days after the companys first-quarter earnings press release.

The certification requirement was a recent addition to the local Companies Act. The managements assessment of internal control over financial reporting information report was required for all listed companies.1 The rules aim was to improve the credibility of financial reports by requiring corporate managements to conduct self-inspection of their companys management systems in order to prevent accounting fraud and mistakes. All listed companies were required to check whether their company had sufficient internal management structure to produce credible financial statements. The assessment of internal control had to be conducted and reported every fiscal year and submitted to the capital market regulating authorities together with annual financial statements.

The internal control certification requirement was often referred to as the local version of the USAs SOX.2 However, there were some differences from the U.S. regulation, such as a narrower scope of business to be assessed:

A management may narrow down the scope of business operations for assessment to three major accounts (sales, account receivables, inventories) at the business locations that generate up to two-thirds of revenue.

A management may exclude insignificant business operations from those to be assessed. (It is decided on a case-by-case basis; for example, business operations that make up less than 5% of the total operations.)

The local stock exchange has stated that companies will not be delisted if they report that there is a deficiency in their internal control. Also, if a company finds any deficiency in its internal control system and the deficiency is corrected by the fiscal year-end, the company does not have to report it in its annual internal control certification.

The Companies Act also required a companys independent auditors to express an opinion on managements annual internal control certification.

If a company fails to report a material defect, or there is any false representation, the person signing the certification is liable to five years or less imprisonment and/or a fine equivalent to US $50,000. In a case where a corporate body is held responsible for an infraction, the corporation is liable to a fine equivalent to US $5 million or less.

Question

1. If you were Batson Internationals chief financial officer, how comfortable would you be signing the Management Report on Internal Control over Financial Reporting certification? Explain your reasoning.

Exhibit 1

Managements Report on Internal Control over Financial Reporting

Batson International, S.A. management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 14-15(f) of the Securities Exchange Act of 2004, as amended. Batson International internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Batson International; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards and that receipts and expenditures of Batson International are being made only in accordance with authorizations of management and directors of Batson International; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Batson Internationals assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with internal control policies or procedures may deteriorate.

Batson International management has assessed the effectiveness of Batson Internationals internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).3 Managements assessment included evaluating the design of Batson Internationals internal control over financial reporting and testing of the operational effectiveness of Batson Internationals internal control over financial reporting.

Based on such assessment, management concluded that Batson Internationals internal control over financial reporting was effective based on the criteria issued by COSO.

Batson Internationals independent registered chartered accounting firm, Sato International, has issued an audit report on the effectiveness of Batson Internationals internal control over financial reporting.

Chief Executive Officer

Chief Financial Officer

(date)