[April 11, 2005] Compliance Week: 7.7 Percent Of 10-Ks Receive SOX 404 Adverse Opinions Tweet BOSTON --(Business Wire)-- April 11, 2005 -- In its Tuesday, April 12, 2005, edition, Compliance Week will report that 7.7 percent of the internal control assessments filed this proxy season have been given "failing grades" by the companies' external auditor. Section 404 of the Sarbanes-Oxley Act requires that management of a public company assess the effectiveness of its internal control over financial reporting. The company's independent auditor must then sign off on management's assessment. To track the number of "failing grades" provided by auditors, Compliance Week teamed up with Raisch Financial Information Services of Newton, Mass., to create an Internal Control Report Scorecard. The scorecard utilizes data from the 10-Ks of the Russell 3000, which is derived from the section titled "Report of Independent Registered Public Accounting Firm." According to the latest scorecard, the industries with the highest number of "adverse opinions" provided by auditors are computer hardware and software (18.20 percent); metals and mining (17.2 percent), and consumer services (16.7 percent). The Big 4 accounting firm that has issued the largest number of adverse opinions is PricewaterhouseCoopers, which failed 9.3 percent of its 398 internal control audits. KPMG appears to be the easiest "grader," failing only 5.5 percent of its 348 SOX 404 audits. "The 'failure rate' is basically in line with predictions made by several industry groups last year," notes Compliance Week editor Scott S. Cohen. "We heard predictions that somewhere between 5 percent and 10 percent of companies might 'fail' the SOX 404 test." However, Cohen notes that the numbers will likely change in the coming weeks. "This is still ongoing, so the failure rate may rise or fall based on myriad factors," he says. "Most importantly, our list doesn't include the many companies that filed for an extension, and have not yet filed their annual reports. Many of those companies may have weaknesses at year-end, which could increase the overall percent of 'failing' companies." In addition, Compliance Week and RFIS have discovered that vagaries in the disclosures of public companies and their auditors make extracting the information difficult, which increases the Scorecard's margin of error. "We've altered our systems to catch--how can I say this delicately--unique anomalies in the creative disclosure practices of public companies," said RFIS principal Robert Raisch. "The problem with extracting these data from public filings is that a word out of place or an unexpected way of writing something--which should be pretty standard across the industry--can cause critical inconsistencies within the data." The Internal Control Report Scorecard features a spreadsheet including source data and failure rates by auditor and industry. The report, which debuted earlier this month, is updated weekly. Internal Control Weaknesses Also in Compliance Week's April 12 edition is an analysis of internal control disclosures made during the month of March 2005. According to a review of regulatory filings, 116 companies disclosed material weaknesses in their internal controls during the month of March. The number of weakness disclosures was up significantly from the 23 that were made in February 2005; however, the increase was largely due to the high volume of companies filing their annual reports in March. For year-over-year comparison, only 28 companies made similar disclosures in March 2004. However, 2005 is the first year that companies must provide internal control assessments as per Section 404 of The Sarbanes-Oxley Act, which would account for the large increase in weakness disclosures. Problems with financial systems and procedures dominated the list, comprising 70 percent of all weakness disclosures. Those problems typically involved the financial close process, account reconciliation, or inventory processes. That's up significantly from the 2004 average, when approximately half of the disclosures were related to financial systems and procedures. Among the problems seeing the greatest increases were tax issues. In 2004, a very small percentage of the disclosures noted problems with tax issues--approximately 3 percent. But in March 2005, more than 22 percent of the disclosures mentioned problems with tax accounting. In some instances, the problems were personnel-related (i.e., understaffed accounting departments, or employees that lacked appropriate expertise), but most of the tax problems were tied to financial systems and procedures (i.e., lack of appropriate controls related to income tax accounting). Accounting for leases and loans was also a commonly cited weakness in March, accounting for approximately 14 percent of the problems with financial systems and procedures. Usually, the lease/loan problems were related to lease accounting practices or errors, loan loss allowances, or depreciation assumptions. The complete internal control report and scorecard are available at www.complianceweek.com. Also in the Tuesday, April 12, 2005, edition of Compliance Week: -- A look at how Sarbanes-Oxley has impacted all aspects of M&A, from the buy decision to post-deal integration; -- A review of what appears to be the first SEC investigation specifically targeting internal controls under The Sarbanes-Oxley Act of 2002; -- In its latest Q&A with public company governance executives, Compliance Week talks to the director of internal audit and compliance at $1 billion Altera; -- The nation's largest banking association asks the SEC to re-examine the role of external auditors in internal control testing required by Sarbanes-Oxley; -- Details on an SEC proposal that would extend the tenets of the 2003 "global settlement" to all registered brokerage firms; -- Ford Motor Co. announces that it will issue a report on climate change by the end of the year; -- In its latest case study on compliance technology implementation, Compliance Week talks to VistaCare about how it upgraded its data storage system. And as usual, Compliance Week makes available updated lists and spreadsheets of the latest auditor changes, class action filings, D&O announcements, governance policy changes, SEC investigations, financial restatements, filing delays, and more. Members of the media can request a copy of all articles by sending an email to [email protected], or by calling Compliance Week at (888) 519-9200. ABOUT COMPLIANCE WEEK Compliance Week is a newsletter on corporate governance and compliance that reaches over 40,000 financial and legal executives at U.S. public companies. Anchored by the columns and insights of numerous governance experts, including former SEC Chairman Harvey Pitt, the newsletter is complemented by a special print edition delivered monthly to all subscribers. [ Back To TMCnet.com's Homepage ]