TheCorporateCounsel.net

In our “Internal Controls Practice Area, I have posted an interesting Grant Thornton memo that was just released entitled “Section 404: Key Facts at a Glance.” Below is the executive summary from that memo:

1. Prior to SOX 404, quality of financial reporting processes in many companies was inadequate. For example, we now know that nearly 1 in 6 large companies had material weaknesses in internal controls over financial reporting.

2. Solid evidence suggests that smaller companies have even weaker financial reporting processes than larger companies. Historically:

– They have twice the risk of restating their financial statements
– They are more likely to have material weaknesses in internal controls
– They are more likely to be the subject of fraud

3. SOX 404, where applied, has helped to significantly improve the quality of financial reporting information

– By Year 2 (through early May 2006), only 1 in 15 large companies had material weaknesses in their internal controls
– Smaller companies will realize similar improvement

4. SOX 404 implementation costs have been high because the requirement was new; the application guidance has been continuously evolving; and because of a generally high level of deferred maintenance on corporate internal controls—but cost is coming down.

5. Exempting certain companies from SOX 404 (or allowing compliance to be voluntary) will result in four negative consequences:

– Non-compliant companies will continue to produce financial reporting information that is increasingly inferior to compliant companies;
– Over time (once investors experience the reality of the above disparity) the market will adjust the cost of capital to reflect this differential;
– In the meantime, investors in smaller companies will lose money, and litigation will increase for non-compliant companies, their management, boards and auditors;
– Insurance costs, litigation costs and audit costs will increase for the non compliant companies to offset the increased level of risk.

6. We can improve the efficiency of implementing SOX 404—and improve the quality of financial reporting—without eliminating the requirement to evaluate and audit internal controls.

A Little Summer Fun

This article wins in the “silly funny” category…

“Selective Waiver” Doctrine Developments

In this podcast, John Williamson of Morris, Manning & Martin analyzes issues raised by a recent 10th Circuit opinion – In re Qwest Communications International Inc. – where the court rejected the so-called “selective waiver” doctrine (i.e., the doctrine that companies may turn over privileged materials, such as interview memoranda and reports to the Board in internal investigations, to the SEC and the DOJ, but still withhold them from private litigants), including:

– What are the facts behind the Qwest Communications opinion?
– What is the significance of the Qwest Communications opinion?
– What do you recommend that in-house counsel do now?