Compliance Week: Companies Now Disclosing Adverse Opinions On Sarbanes-Oxley Section 404.

BOSTON -- According to a review of internal control disclosures made during the month of January 2005, several companies disclosed that their internal control over financial reporting was not effective as of their fiscal year end, and that they expected their auditor would issue an adverse opinion on the effectiveness of those controls.

However, experts warn that the disclosures do not necessarily mean that a large number of companies will fail the internal control test of Sarbanes-Oxley Section 404. "It is still too early to tell," Protiviti managing director James DeLoach told Compliance Week. "We need more data points to get a reliable read as to where this trend line is going."

Estimates on the number of companies that might fail the SOX 404 test have varied widely, with most predicting that 10 percent may receive adverse opinions by auditors. In January, 9.7 percent of the 10-Ks (filed by companies with over $75 million in revenue) included a weakness or deficiency disclosure, and only 4.7 percent of the 10-Qs included such an announcement.

Richard M. Steinberg, who co-authored the COSO internal control framework while at PricewaterhouseCoopers in the early 1990s, told Compliance Week, "While many of us expect to see a significant number of small and mid-sized companies disclose one or more material weaknesses, it is somewhat surprising that some large, highly recognizable names are saying they won't measure up."

In addition to the adverse opinion disclosures, a total of 27 companies (with revenue of more than $75 million) disclosed material weaknesses or significant deficiencies in internal controls during the month of January 2005. During the same month in 2004, only seven similarly sized companies made such disclosures.

Problems with financial systems and procedures remain the most common types of weaknesses and deficiencies disclosed. In January, 70 percent of the disclosures were related to financial systems and procedures. Personnel issues were the second most common type of weakness and deficiency disclosures. In January, 21 percent of the disclosures were related to personnel problems, which typically involve poor segregation of duties, inadequate staffing, or related training or supervision problems. Other common types of disclosures regularly cited by companies include problems with documentation, revenue recognition, and IT systems and controls.

Details, excerpts, and the complete disclosures are available at www.complianceweek.com.

Also in the Tuesday, Feb. 8, 2005, edition of Compliance Week:

--Another SOX 404 delay for small companies and foreign issuers?;

--A look at some thought-provoking questions about 404-related "civil disobedience";

--A conversation with Larry Rittenberg, COSO's new chairman;

--An enterprise risk management veteran argues that companies creating financial statements under Sarbanes-Oxley regimes should be rewarded for their compliance efforts in comparison with financial statements created under non-SOX regimes;

--A look at the shifting landscape affecting generals counsel at public companies;

--Proxy firms differ on how shareholders should vote their proxies at Walt Disney;

--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, and filing delays.

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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.