As public company executives surely know by now, Sections 302 and 404 of SOX require public companies to establish, implement and evaluate their internal controls for purposes of financial statement reporting and operational integrity.
Outside auditors must attest to management's assessment.
In doing so, both parties would be — in theory — demonstrating to shareholders that the firm's transactions are properly authorized and recorded, and their assets are safeguarded against unauthorized or improper use.
This week, we are reprinting disclosures of internal control weaknesses and deficiencies made in the month of November, as well as notices of improvements made to prior weakness disclosures. We conducted a similar review of IC disclosures on March 27, 2003.
As was the case in March, our goal is to help companies understand how their peers are disclosing information in the post-SOX era, where few "comps" exist, and where many of the disclosures are new and uncharted.
We've included links to the actual filings so you can review wording, context and details. We've also provided basic company information and last-reported sales numbers for context on company size, and have highlighed in red key elements in each excerpt.
Research was conducted with the assistance of 10kwizard.com.
Metris Companies
Industry: Financial Services
Description: Credit card issuer and provider of other financial products
2002 Sales: $1.39 billion
Excerpt below: From NT 10-Q filed on 11/17/2003
Metris Companies Inc. (the "Company") could not file its quarterly report on Form 10-Q for the quarter ended September 30, 2003, within the prescribed time period because of an outstanding valuation issue relating to the retained interests in loans securitized by the Company. The Company's outside auditors,
KPMG LLP, issued a letter to the Audit Committee noting a material weakness involving internal control relating to the Company's policies and procedures for valuing its retained interests. The Company is analyzing its policies and procedures and will convey the results of that analysis to KPMG. The Company
will complete its analysis for this and prior periods and file its report for the quarter ended September 30, 2003, as soon as possible.
Click Here To DownloadThe Complete Metris Filing
Pride International
Industry: Energy and Utilities
Description: One of the world's largest drilling contractors
2002 Sales: $1.3 billion
Excerpt below: From 10-Q on 11/14/2003
As disclosed in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2003, in connection with the completion of their review of our financial statements for the three-month and six-month periods ended June 30, 2003 included in that report and, in particular, their analysis of our loss provision related to our rig construction contracts, our independent auditors, PricewaterhouseCoopers LLP, issued a letter to our audit committee dated August 13, 2003 noting certain matters in our technical services division that it considered to be a material weakness in internal control. The matters listed in the letter were the misapplication of generally accepted accounting principles and the lack of procedures and policies to properly process change orders with customers on a timely basis. The evaluation of internal controls is subjective and involves judgment, and although we believe there were areas in our internal controls with respect to the processing of change orders that could have been improved, we do not believe these matters constituted a material weakness in our internal control over financial reporting. We have, however, made changes in policies and procedures to improve and enhance internal controls with regard to the processing of change orders and in the technical services division generally and believe these improvements and enhancements have appropriately addressed the matters referred to in the letter...
Click Here To DownloadThe Complete Pride Int'l Filing
California Micro Devices
Industry: Electronics
Description: Makes integrated circuits, analog chips and "integrated passive devices"
2002 Sales: $42.2 million
Excerpt below: From 10-Q on 11/14/2003
In connection with their audit of our financial statements for the fiscal year ended March 31, 2003, our independent auditors informed us that they had noted a combination of factors which taken together constituted a material weakness in our internal controls. The material weakness included issues with our inventory costing systems and procedures, accounts payable cutoff, information systems user administration, and finance organization. Subsequent to March 31, 2003, we have instituted additional processes and procedures to improve our internal control over financial reporting including those identified by our independent auditors. As a result, we believe that we no longer have a material weakness in our internal control over financial reporting, although some key controls are manual and are consequently inefficient. We are continuing our efforts to improve and automate our financial processes and procedures.
Click Here To DownloadThe Complete California Micro Devices Filing
US Concrete
Industry: Construction
Description: Produces ready-mix concrete.
2002 Sales: $503.3 million
Excerpt below: From 10-Q on 11/14/2003
During the period covered by this report, we identified an inventory overstatement at one of our subsidiaries in our Atlantic Region, and took appropriate action to address the weakness in our disclosure controls and procedures and internal control over financial reporting at that subsidiary which led to this overstatement, and to ensure the future effectiveness of those controls and procedures. In particular, we have increased our inventory controls and oversight of the accounting function at this subsidiary and taken appropriate personnel actions. There have been no other changes in our internal control over financial reporting that occurred during the three months ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Click Here To DownloadThe Complete US Concrete Filing
DHB Industries
Industry: Security Products and Services
Description: Makes bullet-resistant vests, flak jackets, and other body armor.
2002 Sales: $103.3 million
Excerpt below: From 10-Q on 11/14/2003
As disclosed in the Company's Form 8-K filed on August 27, 2003, Grant Thornton LLP ("Grant Thornton"), the Company's former independent accountants, informed the Company that they considered there to be certain deficiencies in the Company's internal control procedures that would be deemed to be a material weakness under standards established by the American Institute of Certified Public Accountants. Grant Thornton made this determination in connection with the preparation of the Company's consolidated financial statements as of and for the year ended December 31, 2002 for inclusion in the Company's Form 10-K/A, which was filed on July 24, 2003 to supplement the Company's Form 10-K filed on March 31, 2003. The opinion of Grant Thornton in the Form 10-K/A did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
The former independent accountants informed the Company and the Audit Committee of these deficiencies in a letter delivered on August 20, 2003. These deficiencies included the failure to disclose certain related party transactions in the Company's Form 10-K for the fiscal year ended December 31, 2002, the
Company's reliance on substantial outside assistance from outside professionals in preparing the Company's financial statements, and understaffing in the Company's accounting and finance department. The Form 10-K/A filed by the Company on July 24, 2003 fully disclosed the related party transactions.
In response to these issues, senior management and the Audit Committee directed the Company to dedicate resources and take additional steps to strengthen its control processes and procedures to ensure that these internal control deficiencies do not result in a material misstatement in the Company's consolidated financial statements...
Click Here To DownloadThe Complete DHB Filing
Transkaryotic Therapies
Industry: Pharmaceuticals
Description: Develops products for the treatment of rare diseases
2002 Sales: $36.5 million
Excerpt below: From 10-Q on 11/14/2003
In 2002, sales of the Company's Replagal product became material to the Company's consolidated financial statements. Sales totaled approximately $35 million for 2002 and approximately $41.8 million for the nine months ended September 30, 2003. The sales are transacted through and recorded by the Company's 80% owned subsidiary, TKT Europe. During 2002, with respect to TKT Europe, the Company did not have a timely flow of critical accounting and related financial information and experienced difficulties and delays in verifying that product sales were being properly recognized as revenue in accordance with United States generally accepted accounting principles. The Company's independent auditors, in connection with their audit of the Company's consolidated financial statements for the year ended December 31, 2002, informed management and the Company's audit committee that, in their judgment, a material weakness in the Company's internal control system existed as a result of these issues. Members of the Company's United States accounting and finance group have been discussing implementing procedures to address these issues with the accounting personnel of TKT Europe.
Click Here To DownloadThe Complete Transkaryotic Therapies Filing
Vail Resorts
Industry: Leisure
Description: Number two ski resort operator in North America.
2003 Sales: $710.4 million
Excerpt below: From 10-K on 11/13/2003
Changes in internal controls. Taking into account the restatement contained in this filing, the CEO and CFO, in conjunction with the Company's outside auditors, evaluated the Company's processes and procedures and have identified a material weakness and certain significant deficiencies in the Company's internal control over financial reporting. The material weakness identified is that the Company has insufficient and inadequate personnel necessary to oversee its accounting and financial reporting functions. The significant deficiencies, which are less serious findings than a material weakness, identified were: the inadequacy of controls and procedures over the accounting for and reporting of equity investments of the Company; the need for tighter controls and procedures over executive compensation arrangements and the proper accounting therefore; and the need to improve controls related to the timely transfers of fixed assets from construction in process as well as the proper capitalization of interest on self-constructed fixed assets. As a result of these findings, the Company intends to authorize and implement certain actions, in a timely manner, to address this weakness and these deficiencies and to enhance the reliability and effectiveness of the Company's control procedures. These actions will include adding and reallocating finance and accounting staff and support personnel who are dedicated to the objectives of timely and accurate disclosure of required information.
Based upon the foregoing, the Company's CEO and CFO have concluded that the Company's disclosure controls and procedures will be effective in meeting the above-stated objectives after giving effect to the aforementioned actions.
Click Here To DownloadThe Complete Vail Resorts Filing
Ingersoll Rand
Industry: Industial Manufacturing
Description: Makes everything from construction and mining equipment to golf cars and locks.
2002 Sales: $8.95 billion
Excerpt below: From 10-Q on 11/13/2003
During the third quarter of 2003, a management review identified issues relating to work-in-process inventory at two locations within Dresser-Rand Company (DR). Management immediately began an extensive, in-depth review of accounts and records associated with DR during the time periods since the Company acquired full ownership in February 2000. This review revealed that there were internal control deficiencies related to the inadequate relief of work-in-process inventory, lack of timely and complete reconciliations of intercompany accounts and work in process inventory, application of improper depreciation schedules for the lives of fixed assets, and failure to properly charge expenses against reserves established for that purpose. The adjustments that resulted from this investigation were not material to the Company's results for the third quarter of 2003 or any amounts reported in previous periods.
These internal control deficiencies relating to DR collectively constitute a material weakness as defined in Statement of Auditing Standards No. 60. Management has taken various corrective actions and implemented procedures to address the identified conditions, including: provided additional training and made appropriate personnel changes; instituted a semi-monthly independent review process of inventory work order reference numbers; developed an enhanced account reconciliation process and improved monitoring procedures; limited access to the inventory system to reduce the number of individuals with authorization to open work orders; and implemented revised accounting policies and procedures.
Click Here To DownloadThe Complete Ingersoll Rand Filing
Candela
Industry: Health Care
Description: Makes laser systems for hair and tattoo removal, treatment of skin abnormalities, more.
2003 Sales: $80.8 million
Excerpt below: From 10-Q on 11/12/2003
An evaluation was performed under the supervision and with the participation of members of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of September 27, 2003 (the "Evaluation Date"). Based on that evaluation, members of our management, including our Chief Executive Officer and our Chief Financial Officer, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in enabling us to record, process, summarize and report the information required to be included in this quarterly report within the required time period.
Management has taken notice, however, of certain complications we encountered in the process of entering data while implementing a new accounting software system during calendar year 2003 and transitioning from the Company's prior accounting system. Management has discussed the implementation complications with both the Audit Committee of the Board of Directors of the Company as well as the Company's independent auditors. The Company's independent auditors have concluded that the complications encountered with the implementation indicate the existence of a material weakness in internal control. Nevertheless, management believes that despite these implementation issues and the related weakness in internal control, our financial statements and related disclosures, as filed to date, present fairly, in all material respects, our financial condition and results of operations for the respective periods. We also believe that this weakness has not adversely affected our ability to report, in a timely manner, material information required to be included in our periodic filings with the Securities and Exchange Commission. We believe as well that we have taken the steps necessary to prevent such data entry issues from occurring in the future.
Click Here To DownloadThe Complete Candela Filing
3D Systems
Industry: Electronics
Description: Systems for developing 3D prototypes from CAD/CAM systems.
2002 Sales: $116 million
Excerpt below: From 10-Q on 11/10/2003
In connection with the investigation conducted by the Audit Committee of our Board of Directors as part of the fiscal 2002 audit, which we discuss in detail in
our Annual Report on Form 10-K filed on June 30, 2003, deficiencies in our internal controls were identified relating to:
accounting policies and procedures;
personnel and their roles and responsibilities.
Specifically, our revenue recognition policies and procedures were poorly documented and not readily accessible to most of our employees. Our documentation
for machine sales transactions was inconsistent and not adequately defined. Furthermore, the then existing policies and procedures was broad-based, and did not
include specific procedures and controls by department or function. Moreover, our accounting and finance staff were inadequate to meet the needs of an
international public company.
Deloitte & Touche LLP advised the Audit Committee and management that these internal control deficiencies constitute reportable conditions and a material weakness as defined in Statement of Auditing Standards No. 60, which we discuss in our Current Report on Form 8-K filed on July 23, 2003. At the direction of the Audit Committee, we are implementing changes to our financial organization and enhancing our internal controls...
Click Here To DownloadThe Complete 3D Systems Filing
Nicor
Industry: Energy and Utilities
Description: Distributes natural gas to over 2 million customers; shipping and storage
2002 Sales: $1.89 billion
Excerpt below: From 10-Q on 11/04/2003
Note: The SEC has filed charges against former Nicor execs.
To assist management in assessing the control environment and related issues associated with
Nicor's natural gas supply, transport, storage and marketing activities, including Nicor Gas Hub
administration and Nicor Enerchange trading ("gas supply activities"), Nicor retained a
consulting firm in the fourth quarter of 2002 with experience in internal controls and the
energy industry that is not and has not been the company's external auditor.
Through this review of gas supply activities ("gas supply review"), it was
observed that:
Although key controls have been designed to facilitate the complete and
accurate capture and processing of gas supply activities, many control
activities are not standardized. As such, the reliability and effectiveness
of these control processes are dependent on interpretation and execution by
business unit personnel.
Existing processes provide limited oversight and monitoring to ensure that
transaction activities and control procedures are performed reliably and
consistent with management expectations.
As a result, gas supply activities are not adequately documented, are overly
dependent on people, and are not supported by formal training or
communication of controls...
...In May 2002, the company engaged new accountants, Deloitte & Touche LLP ("D&T"), who were asked
in October 2002 to audit the company's 1999, 2000 and 2001 restated financial statements in
addition to its audit of the company's 2002 financial statements. In connection with the
completion of its audit of, and the issuance of an unqualified report on Nicor's and Nicor Gas'
restated financial statements for the years ended December 31, 1999, 2000 and 2001, D&T issued a
letter dated February 28, 2003 (the "D&T Letter"), in which it identified to management and the
Audit Committee of the Board of Directors certain deficiencies that existed in the design or
operation of Nicor Gas' internal accounting controls which, considered collectively,
constituted a material weakness in Nicor Gas' internal controls pursuant to standards
established by the American Institute of Certified Public Accountants. Such deficiencies at
Nicor Gas' regulated gas purchasing operations included significant weaknesses in the design of
controls surrounding execution, monitoring and accounting for gas commodity, transportation,
storage and related contracts due, in part, to the lack of a centralized independent back
office for these activities. D&T also concluded that these weaknesses had resulted in errors
that affected gas purchase costs, inventory, regulatory assets and liabilities, and results of
the performance-based rate plan, and led to a restatement of Nicor's and Nicor Gas' financial
statements...
Click Here To DownloadThe Complete Nicor Filing
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