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Thursday, January 13, 2005

Call for auditors to give verdict

Auditors could be given the right to more quickly reassure investors that companies have fixed weaknesses in systems that ensure accurate financial reporting, regulators said on Wednesday.

Douglas Carmichael, chief auditor at the Public Company Accounting Oversight Board, told a conference that the regulator was considering whether auditors should have the ability to give snap verdicts on remedial action taken by companies on defective internal financial controls.

Companies were warned that investors and credit rating agencies could react badly to poor disclosures by companies about any weaknesses.

Disclosures by companies about the effectiveness of internal controls are mandated by the Sarbanes-Oxley Act, and auditors must give separate opinions.

The first batch of reports are due to be filed with the Securities and Exchange Commission in March and April.

A survey by Stanford Law School and Cornerstone Research, a consulting firm, found that companies suffered smaller falls in their stock prices if they gave details of the weaknesses in their internal controls.

The survey of 141 companies that made disclosures of "material weaknesses" in their internal controls between November 2003 and October 2004 found those that gave details suffered average falls of 1.5 per cent.

But companies that did not give details suffered average falls of more than 3 per cent.
Steve Galbraith, a principal at Maverick Capital, the hedge fund, said: "Make no mistake: most investors will shoot first and ask later if you have a bad Sarbanes-Oxley opinion."

However, he predicted a company's stock price would improve once the problems with internal controls had been resolved.

Greg Jonas, a managing director at Moody's Investors Service, said a company's credit rating could be downgraded if it admitted to "pervasive problems" with internal controls.

The New York conference, organised by Stanford Law School, heard that companies that revealed weaknesses in their internal controls could have positive opinions from auditors about the accuracy of their accounts.

But Mr Jonas said Moody's could raise doubts about such opinions if the companies revealed pervasive problems with internal controls.

Mr Carmichael said the PCAOB was considering whether auditors should be able to review the remedial action promptly and provide some form of public statement about it.

Alan Beller, director of the SEC corporation finance division, said the SEC and the PCAOB would review whether compliance with the act could be simplified, but stressed the regulators would not water down Sarbanes-Oxley.

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