After two years of compliance with the internal control provisions of the Sarbanes-Oxley Act, proxy researcher Glass Lewis & Co. says that public companies are reporting fewer material weaknesses in their internal controls.
According to a new report from the firm, last year 1,118 U.S. companies disclosed material weaknesses, down 13 percent from a year earlier. And among those firms making disclosures, the number of 404-compliant companies declined 35 percent, while non-compliant companies rose 20 percent.
In addition to the material-weakness disclosures, 97 U.S. companies voluntarily disclosed in 2006 that they had identified significant deficiencies, rather than more severe material weaknesses, in their internal controls. That total was down from 116 companies in 2005.
Companies cited a number of internal-control issues in particular areas, the most common being the 1,862 material weaknesses related to a company’s financial systems and procedures, down 19 percent from 2005, and about 70 percent of all material weaknesses. Those weaknesses included improper applications of accounting standards, inadequate general-ledger systems, failures to perform account reconciliations and failures to perform review procedures.
After systems and procedures, the next most common material weaknesses centered on personnel issues, which were related to inadequate staffing levels, incompetent staff, or inadequate segregation of duties. Companies disclosed 535 personnel-related material weaknesses in 2006, slightly more than the 517 reported in 2005.
The largest decline in material weaknesses last year were those related to information technology -- including deficiencies related to accounting-information systems, software used to keep companies’ books and enterprise resource planning systems. In 2006, IT-related weaknesses fell 47 percent, to 102. Documentation weaknesses, written internal-control policies and procedures, also saw a significant drop, falling by 26 percent in 2006.
Among the five categories used by Glass Lewis, personnel issues were the only type of material weakness to grow in 2006 -- a lack of competent accounting staff, or other issues, were behind one of every five reported material weaknesses.
The report also noted that Big Four-audited companies that disclosed weaknesses were down 33 percent, while companies audited by other firms that disclosed weaknesses were up 24 percent.
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