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The 411 on 404

Reporting a material weakness in controls can cost shareholders millions and some CFOs their jobs.
Don Durfee, CFO Magazine
September 1, 2005

What is the cost of uncovering gaps in your company's controls? To judge from 899 cases in which companies reported material weaknesses in 2004 and during the first four months of 2005, the cost is significant. A new report from proxy adviser Glass, Lewis & Co. shows that investors sold stock in companies that made such announcements, driving their average share price 4 percent lower relative to the market. Share price also dropped when 404-compliance efforts led companies to delay their 10-K filings.

The most costly control issues were in the area of tax accounting, which contributed to a stock-price loss of almost 6 percent. Documentation controls and personnel issues in the finance department proved nearly as expensive. The most commonly reported errors were in financial systems and procedures, which accounted for 36 percent of all control weaknesses.

Not surprisingly, patchy controls also appear to be costing some CFOs their jobs. A review late last year by the Dutch consulting firm ARC Morgan showed that in more than 60 percent of cases where a company disclosed a material weakness, its CFO was replaced within three months.


Costly Errors
CFOs appear to be paying the price for weak controls.

11/18/04
Mark Falcone, CFO
Bearing Point
Resigned same day company revealed $92.9 million accounting error.

3/7/05
Alan Dawes, CFO
Delphi
Stepped down after discovery of accounting errors dating back to 1999.

3/25/05
Timothy Chang, CFO
Nara Bancorp.
Reassigned within company shortly before an 8-K announcing restatement of earnings due to a control weakness.

3/29/05
Eric Wong, CFO
RedEnvelope
Resigned after company reduced its Q4 outlook due to a budgeting error.

5/11/05
Joseph W. Hansen, CFO
National RV Holdings
Resigned after announcement of several material weaknesses.

Sources: Press releases, company filings





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