Risk & Compliance

Nearly 600 Reports of Control Weaknesses

Last month alone, 56 companies disclosed material weaknesses or significant deficiencies in internal controls, compared with just 14 companies a ye...
Stephen TaubJanuary 17, 2005

On the eve of the oft-delayed starting date for compliance with Section 404 of Sarbanes-Oxley, it appears as if Corporate America has a lot of work to do to meet the requirements of this daunting rule.

Last month alone, 56 companies disclosed material weaknesses or significant deficiencies in internal controls, according to the Compliance Week newsletter, compared with just 14 companies that made such disclosures in December 2003. For all of 2004, a total of 582 companies made these kinds of disclosures.

December’s 56 disclosures were way down from November’s 199, although the newsletter pointed out that for many companies, November 10-Qs were the final periodic filing before Section 404 assessments were due as part of their next annual report.

Roughly half of last year’s disclosures were related to financial systems and procedures, according to Compliance Week; typical problems in this category are related to the financial close process, account reconciliation, or inventory processes. About 30 percent of the disclosures concerned personnel issues. Other common types of disclosures included problems with documentation, revenue recognition, and IT systems and controls.

The newsletter also noted that companies frequently disclose multiple types of weaknesses. It cited contract electronics manufacturer Sanmina-SCI Corp., which disclosed a material weakness in its December annual report related to several issues, including financial systems and procedures (inadequate preparation of certain financial statement account reconciliations) and personnel issues (lack of sufficient personnel with appropriate accounting qualifications).

Bankrupt and disgraced cable television operator Adelphia disclosed more than 700 deficiencies, many of which were related to financial systems, governance procedures, and personnel oversight issues, Compliance Week noted.

When companies do disclose material weaknesses, they would do well to give the details, according to a new survey by Stanford Law School and consultancy Cornerstone Research reported by the Financial Times. Among 141 companies that made such disclosures between November 2003 and October 2004, companies that spelled out the details suffered an average decline of 1.5 percent in their share price; companies that failed to give details saw their share prices fall an average of 3 percent.