Admissions of material weaknesses in internal controls have declined in the filings of large U.S. companies in the past two years, showing the positive effects of Sarbanes-Oxley compliance, according to a newly released analysis.
Compliance Week examined the annual reports of 426 of the S&P 500 companies that provided such disclosures and found that only 14 weaknesses were reported by 11 companies in 2008. In contrast, when the same publication looked at more than 400 randomly selected large companies in 2006, almost every company reported at least one material weakness in internal controls, and the group as a whole reported more than 800.
Section 404 of the Sarbanes-Oxley Act requires companies to test their internal controls over financial reporting annually and to correct any deficiencies or report them as material weaknesses. SOX is achieving its aims in other ways as well. Restatements of financial results, which soared shortly after SOX was passed, dropped in 2007 for the first time in five years.
Even though fewer companies are now disclosing material weaknesses, the ones that do disclose weaknesses seem to have multiple problems. Pall Corp., for example, which confessed to material weaknesses in its tax accounting last year, also announced in 2007 that it would restate several years' worth of financial results. Other companies disclosing material weaknesses last year - General Motors, American International Group and VeriSign, for example - have all recently endured restatements, management shakeups or similar governance troubles.
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