Auditor Changes Accompany Controls Woes

Big Four firms had a net loss of 59 clients among firms revealing internal controls shortfalls, while smaller audit firms picked up 49 customers, a...
Stephen TaubMay 24, 2005

Companies reporting internal-controls glitches in their financial reporting under the Sarbanes-Oxley Act are likely to be changing auditors, a study by Financial Executives International suggests. And the change is likely to be from one of the Big Four to a smaller audit firm.

About 44 percent of 329 companies disclosing controls weaknesses and remedial actions experienced a change of auditors, according to the study by Financial Executives International. What’s more, a net shift occurred from Big Four firms to non-Big Four firms: The Big Four firms had a net loss of 59 clients while the smaller audit firms had a net gain of 49 clients.

The report’s findings also suggest that the larger a company’s market cap, the more financial internal-control deficiencies it’s likely to report.

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Large-cap companies disclosed an average of 3.71 control deficiencies under the Sarbanes-Oxley Act, with mid caps and small caps revealing 2.71 and 2.51, respectively, the analysis published by FEI found.

More than half of the disclosed control deficiencies studied by FEI were classified as material weaknesses, according to the report, which is based on 968 internal control deficiencies and 1,000 remediation actions disclosed by 329 companies in their various SEC filings between November 1, 2003 and October 31, 2004.

The trend in company size in disclosed remediation actions resembled that of disclosed deficiencies, with large caps averaging 4.76 actions; mid caps 3.02; and small caps 2.5.

Sales revenue, accounts receivable, inventory and accounts payable were the most common areas experiencing control shortfalls, according to the association of finance professionals. Less than 4 percent of the total reported control deficiencies, however, were in the area of information technology controls.

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