Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, 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 the policies or procedures may change over time.
Our management, under the supervision of our principal executive officer and principal financial and accounting officer, conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that material weaknesses which existed at December 31, 2017, related to our statement of cash flows, our intangible asset impairment testing, and calculation of our long-term incentive program (“LTIP”) compensation expense, were remediated at December 31, 2018. This was primarily the result of enhanced review procedures, and changes in the process for preparing the financial statement or calculation. However, the previously identified material weakness related to the financial reporting for the modification of our debt has not been remediated. Also, in 2018, management identified a material weakness in internal control over financial reporting, specifically dealing with the management review controls surrounding the calculation of the adjustment to retained earnings, and the financial reporting for reimbursement to licensees for advertising resulting from the implementation of the new revenue recognition standard, ASC 606. We have implemented new controls in 2018 which will be tested in 2019.
As a result of the material weakness, management concluded that our internal controls over financial reporting was not effective as of December 31, 2018. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Throughout 2018, management conducted a remediation plan to address the material weakness noted above. The plan included (i) a robust analysis on our current control environment in order to revamp our existing control processes and procedures, and identify and address any potential gaps, (ii) educating control owners concerning the principles and requirements of each control, and (iii) management conducting a more rigorous review process for the reporting on the statement of cash flows, conducting the intangible asset impairment testing, and the calculation of our LTIP compensation expense. Through effective implementation of the Company’s remediation plan, the Company has strengthened its internal control environment and has addressed the above noted material weaknesses that were identified at December 31, 2017.
In addition, during 2018, the Company made changes to its internal controls related to the accounting and financial reporting for the modification of debt, and financial reporting for the new revenue recognition standard, ASC 606, including more robust review procedures and seeking accounting consultation from third party advisors proactively, as well as changes in personnel.
The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting, herein referred to as internal control, to determine whether any changes in internal control occurred during the three months ended December 31, 2018 that may have materially affected or which are reasonably likely to materially affect internal control. Based on that evaluation, there have been no other changes in the Company’s internal control during the three months ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control, except for the matter relating to our financial reporting for debt and the new revenue recognition standard, ASC 606, discussed above.
The foregoing has been approved by our current management team, including our Chief Executive Officer and Chief Financial Officer, who have been involved with the reassessment and analysis of our internal control over financial reporting.
The Audit Committee, which consists of independent, non-executive directors, will continue to meet regularly with management, the Director of Internal Audit, and the independent accountants to review accounting, reporting, auditing and internal control matters. The Audit Committee has direct and private access to the Director of Internal Audit and the external auditors, and will meet with each, separately, in executive sessions. The Company reviewed the results of management’s assessment of its internal control over financial reporting with the Audit Committee of the Board of Directors and they agreed with the conclusions.
Item 9B. Other Information