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Friday, January 07, 2005

A.R.C. Morgan: More than 60 Percent of CFOs Resign or are Pushed when a Material Weakness is Disclosed

A.R.C. Morgan has produced its latest Sarbanes-Oxley research report, "Using Reported Weakness Disclosures to Benchmark Internal Controls." A comprehensive study that provides full disclosed weakness data reported by more than 350 SEC registered companies.

The results and conclusions of this study provide significant insight to all those involved with, or interested in understanding, an audit of internal control over financial reporting. The work effort required to document processes, identify significant risks and mitigating controls, evaluate control design and effectiveness, and report on such effectiveness of internal controls over financial reporting (on an annual basis) has already been extremely time-consuming and, by extension, costly. Yet despite the investments made, weaknesses are still being declared and the expectation is that many more companies will be in a similar position. The research was designed to gauge what weaknesses are being disclosed, remediation action taken, impact on the organization and help give other filers a benchmark tool to asses their own environments and what to look out for. The rigorous research that forms the basis of this report has unearthed some unexpected results:
  • Over 60 percent of chief financial officers from companies with weaknesses leave or are pushed either immediately before the disclosure or within three months of the disclosure.
    Over 50 percent is fraud related.
  • Auditors fees grow considerably when a weakness is found, typically by 150 percent, compared to between 30 and 50 percent for companies with no weaknesses reported.
  • Most filers disclosing a weakness have an SEC investigation.
  • Over 65 percent of filers with disclosed weaknesses restate earnings causing significant shareholder impact.
  • Other costs, people, training, consultants, technology are significant
  • Over 390 companies have disclosed weaknesses in 2004 (Section 302 reporting), note A.R.C. Morgan's initial research focused on 350 companies.
  • Over 86 percent of material weakness disclosures so far appear to have been discovered by the external auditors and not by management (or consultants) as part of their compliance projects.

posted by Brian Moran @ 9:49 AM   16 comments

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