January 21, 2005
Alan Beller Speaks on 404
In this speech that was just posted yesterday, Corp Fin Director Alan Beller weighs in on internal control disclosures. Here are is an excerpt from the speech:
“For their part, investors should remember that the internal control reporting provisions under Section 404 are disclosure provisions. Companies that complete their assessments and find material weaknesses and disclose them, and whose auditors complete the internal control audit and include the required report on internal controls, will be compliant with the reporting requirements of Section 404. Companies with internal control material weaknesses can also have financial statements and unqualified financial statement audit reports that meet our requirements, where the auditors are able to do substantive audit work that in effect overcomes those material weaknesses. Indeed, auditors have been doing that for a long time. Now investors will know and thus be better informed. And, importantly, material weaknesses in internal controls do not necessarily equate to deficient financial statements or financial statement audit reports.
Moreover, while we are and will be seeking appropriate disclosure through our rules and review and comment process, it is also incumbent on investors to demand from companies the disclosure they need to evaluate particular material weaknesses and to review and analyze that disclosure with particular care, in order to evaluate the implications of given material weaknesses for reliability of financial reporting and financial statements, and also to consider what remedial steps companies are taking. Any disclosure that a company has a material weakness is a serious matter for investors, but that disclosure should be the starting point rather than ending point for investors’ analysis. Further, understanding companies’ plans for remediation and their implications is particularly important in light of the fact that this is the first year that companies will be reporting under Section 404.
Also regarding remediation, where a company’s internal control report discloses that management identified a material weakness at the end of the company’s fiscal year (the time as of which the report must speak), but the company has remediated that material weakness by the time it files (or by the time of a subsequent filing), the report as of the end of the fiscal year must report the material weakness and the company must still include the necessary disclosures regarding the material weakness. The company may also further disclose (and may be required to disclose) that the material weakness subsequently was remediated. Indeed, some members of the advisory group established by the PCAOB have requested that the Board develop a standard for reviewing remediation, and the PCAOB staff has the matter under consideration.”
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Ann Yerger to Head CII
Last week, Ann Yerger was named Executive Director of the Council of Institutional Investors. Yerger joined CII in early 1996 as the Director of the Council’s Research Service and was named Deputy Director in 2002. Before joining CII, Yerger was deputy director of the Corporate Governance Service of the Investor Responsibility Research Center. Ann is a great choice and I wish her well!