Officials at medical-supplies manufacturer Arrow International Inc. said that compliance with Section 404 of the Sarbanes-Oxley Act played a big role in the company’s huge drop in earnings during the most recent quarter. Section 404 requires companies to document their internal controls.
Arrow reported that net income for the quarter ended August 31 decreased 65.3 percent, to $5 million, down from $14.4 million recorded in the same quarter last fiscal year. The drop was “primarily from the company’s ongoing evaluation of internal controls over financial reporting related to Section 404.”
The review required extensive efforts by Arrow’s accounting personnel and internal auditor, said the report. In fact, the manufacturer recorded $1.5 million more than it had previously forecast for Section 404 compliance, spending the extra cash on external and internal audit assistance.
Officials pointed out, however, that the adjustments have resulted in processes and procedural improvements that “will mitigate the need” for adjustments of this nature in the future.
Arrow detailed $24.4 million in adjustments, including a $12.5 million reserve for inventory components in excess of 36 months forecast usage. Changes to controls included switching from an order-point to a materials-requirement planning system. The new system gives Arrow the ability to compare in greater detail planned future usage to inventory quantities on hand. “As a result, the company adopted a new policy for accounting for excess inventory,” noted the report.