March 27, 2006
"Serial Restaters" and the Importance of Internal Controls over Financial Reporting
According to a recent study by Glass Lewis & Co., a financial advisory firm, approximately 15%, or 300, of the nearly 2,000 U.S. public companies that restated past financials were repeat restaters. These restatements occurred during the period from 2003 and 2005. A few of these companies restated their financials up to four times.
Oh, and if you think it is just the smaller companies that are internally control challenged, then think again. Nortel, AIG and Fannie Mae are among the bigger names. Investors must be scratching their heads as to what is going on inside these companies.
What is driving the volume of restatements? Simple. The Sarbanes-Oxley Act of 2002 (SOX).
What the volume of restatements is also revealing is that management fraud and collusion are the exception. Generally the restatements have highlighted internal control weaknesses in financial and procedural "hygiene"; interpretation of GAAP; and, ineffective systems with sloppy closeout execution.
So, are investors better off because of SOX? Maybe another way of asking the question would be to ask investors if they like companies with strong business models and strong internal controls, or is a good business model sufficient?
To learn more about how to strengthen internal controls over financial reporting please go to www.issuescentral.com to learn about the Compliance Playbook(TM). If you are a Canadian-based public issuer, please go to www.compliancepartner.ca to learn more about Compliance Partner(TM).
Oh, and if you think it is just the smaller companies that are internally control challenged, then think again. Nortel, AIG and Fannie Mae are among the bigger names. Investors must be scratching their heads as to what is going on inside these companies.
What is driving the volume of restatements? Simple. The Sarbanes-Oxley Act of 2002 (SOX).
What the volume of restatements is also revealing is that management fraud and collusion are the exception. Generally the restatements have highlighted internal control weaknesses in financial and procedural "hygiene"; interpretation of GAAP; and, ineffective systems with sloppy closeout execution.
So, are investors better off because of SOX? Maybe another way of asking the question would be to ask investors if they like companies with strong business models and strong internal controls, or is a good business model sufficient?
To learn more about how to strengthen internal controls over financial reporting please go to www.issuescentral.com to learn about the Compliance Playbook(TM). If you are a Canadian-based public issuer, please go to www.compliancepartner.ca to learn more about Compliance Partner(TM).
