Internal control weaknesses in April highlight leases.
In its ongoing review of internal control disclosures, Compliance Week (May 10, 2005 edition) noted that in April, 58 companies disclosed dis·close
tr.v. dis·closed, dis·clos·ing, dis·clos·es
1. To expose to view, as by removing a cover; uncover.
2. To make known (something heretofore kept secret). material weaknesses in their internal control over financial reporting. The number was down significantly from the 116 that were disclosed in March; however, the publication opines Opines are low molecular weight compounds found in plant crown gall tumors produced by the parasitic bacterium Agrobacterium. Opine biosynthesis is catalyzed by specific enzymes encoded by genes contained in a small segment of DNA (known as the T-DNA, for 'transfer DNA') , the decrease was "largely due to the high volume of companies filing their annual reports in March."
For year-over-year comparison, only 30 companies made similar disclosures in April 2004, which was prior to the effective date of Sarbanes-Oxley Section 404.
As the chart below indicates, the largest number of disclosure weaknesses--22.6 percent--cited lease accounting. By way of comparison, in the previous month (March), leases and loans accounted for less than 10 percent of disclosures.
The lease-related disclosures, Compliance Week noted, "were being made in wake of a letter written by the Securities and Exchange Commission's chief accountant A person who has the requisite skill and experience in establishing and maintaining accurate financial records for an individual or a business. The duties of an accountant may include designing and controlling systems of records, auditing books, and preparing financial statements. to a professional accounting group. The letter, written itself after a wave of restatements to correct lease-related accounting errors, reiterated the rules."
Also significant 10.75 percent of the disclosures noted staff issues. This is a growing problem (see accounting education article on page 40).
Most Common Internal Control Disclosures in April 2005 Type Percentage Lease Accounting 22.58% Accounting Policies, Practices 18.28% Staff (Inexperienced, Lack of) 10.75% Taxes 8.60% GAAP Calculations, Policies 7.53% Revenue Recognition 5.38% Account Reconciliation 4.30% Segregation of Duties 3.23% IT Environment 3.23% Financial Close Process 2.15% Inventory Issues 2.15% Control Environment 2.15% Documentation 2.15% Monitoring 2.15% Anti-Fraud Controls 1.08% SAS 70 Issues 1.08% Timing (Not Enough Time) 1.08% Uncategorized 1.08% These numbers are based on 93 material weaknesses disclosed in April 2005; some companies disclosed more than one weakness. Source: Compliance Week, May 10, 2005 (reprinted with permission).