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Monday, July 18, 2005

Material-Weakness Reports Skyrocket

A total of 586 companies reported material weaknesses through early May of this year, compared with 313 for all of 2004, according to shareholder-advisory firm Glass, Lewis & Co.

The new analysis by the independent research firm is another confirmation that audit firms have increased their scrutiny of clients to ensure compliance with Section 404 of the Sarbanes-Oxley Act. Section 404, which requires an independent auditor to attest to a company's internal controls, became effective for many public companies beginning with their first fiscal year ending after November 15, 2004.

Glass, Lewis also found that clients of Big Four firms PricewaterhouseCoopers, Ernst & Young, KPMG, and Deloitte & Touche, as well as Grant Thornton and BDO Seidman, all have disclosed material weaknesses more frequently this year than last. Deloitte & Touche had the largest yearly difference; last year, only 2 percent of its clients made such a disclosure, compared with 6.5 percent through early May of this year.

Those results prompted Glass, Lewis to question how vigorously accounting firms required clients to disclose weaknesses in the past. "We think it's fair to say that most of the weaknesses disclosed in 2005 did not develop overnight, especially those related to a company's overall control environment," the report noted. Before Section 404 became effective, companies were required to disclose deficiencies only in the case of an auditor's termination, Glass, Lewis added.

posted by Brian Moran @ 9:38 AM   0 comments


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