Every month, Compliance Week staffers scour SEC filings for disclosures of material weaknesses or "significant deficiencies" in internal controls.
According to regulatory filings, 14 companies disclosed such weaknesses during the month of December, representing a 27 percent increase from the 11 firms who reported the same during November.
The previous November survey is available in the box at right, as are extensive details on the internal-control provisions of SOX, the subsequent SEC rulemaking, and the PCAOB's related new standard.
Below are the disclosures from the month of December, 2003.
As usual, 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 highlighted in red key elements in each excerpt.
Research was conducted with the assistance of 10kwizard.com.
Symbol Technologies
Industry: Computer Hardware
Description: One of the world's largest manufactures of bar code technologies
2002 Sales: $1.4 billion
Excerpt below: From 10-K filed on 12/30/2003
Symbol's internal investigations, conducted with oversight by our Audit Committee, identified material weaknesses in our internal controls and procedures, as well as instances in which certain members of former management engaged in, directed and/or created an environment that encouraged a variety of inappropriate activities that necessitated the restatement. Through our investigations, we discovered that a significant portion of the accounting errors and irregularities related to the timing and amount of product and service revenue recognized. Additionally, there were errors and irregularities associated with the establishment and utilization of certain reserves and restructurings, including certain end-of-quarter adjustments that were apparently made in order to achieve previously forecasted financial results.
There were also errors and/or irregularities associated with the administration of certain options programs, as well as several categories of revenue and operating expenses, including efforts to artificially reduce reported inventory. In the investigations, we also concluded that certain members of former management who were primarily responsible for maintaining proper internal controls and procedures failed to establish an appropriate control environment, which, among other things, resulted from inadequate hiring of qualified and experienced personnel, inadequate staffing, insufficient training and supervision of personnel, a decentralized accounting structure for operations in the United States and inadequate systems and systems interfaces.
Click Here To DownloadThe Complete SEC Filing
Female Health Company
Industry: Consumer Products
Description: Manufactures contraceptives for women.
2002 Sales: $9 million
Excerpt below: From 10KSB filed on 12/29/2003
The Company has identified two significant deficiencies within its internal control framework. The first relates to segregation of duties deficiencies within its manufacturing facility. The Company has limited personnel resources within certain areas, and as a result, there are instances where certain duties could be split to strengthen the overall internal control framework. The second relates to the timeliness of accounting for certain transactions. There have been non-cash transactions approved by senior management and not communicated timely to the Company's accounting/finance department for proper recording into the Company's accounts.
Click Here To DownloadThe Complete SEC Filing
Dynacq Healthcare
Industry: Health Care
Description: Runs specialty surgical hospitals and ambulatory surgery centers.
2003 Sales: $90 million
Excerpt below: From 8-K filed on 12/24/2003
On December 15, 2003, E&Y orally communicated to certain officers of the Company E&Y’s concerns relating to the Company’s disclosure controls,
accounting controls and controls over the safeguarding of assets regarding a significant transaction related to the sale of certain receivables. On December 17,
2003, E&Y informed the Company it lacked the internal controls necessary to develop reliable financial statements. Neither the Company’s Board of Directors
nor the Audit Committee of the Company’s Board of Directors has discussed the lack of internal controls with E&Y. The Company plans to authorize E&Y to
respond fully to the inquiries of the successor accountant regarding E&Y’s statement that the Company lacks the internal controls necessary to develop reliable
financial statements.
Click Here To DownloadThe Complete SEC Filing
Photon Dynamics
Industry: Electronics
Description: Manufactures testing and repair equipment for flat-panel display makers.
2003 Sales: $67.2 million
Excerpt below: From 10-K filed on 12/24/2003
Changes in Internal Control over Financial Reporting. In connection with the audit of our financial statements for the fiscal year ended September 30, 2003, the independent auditors informed us that they had discovered a number of issues that constituted a material weakness in our internal control over financial reporting. The material weaknesses consist of issues with:
customer purchase order fulfillment and the associated recognition of revenue,
customer purchase order requirements review controls,
no formal credit memo policy,
no formal procedure for non-standard employee compensation review and
no formal procedure regarding the accounting treatment of variances uncovered during standard account reconciliations and analysis.
Both prior to the independent auditors disclosure of their discovery and in response to their discovery of these issues, senior management and the Audit Committee determined to take steps to strengthen our control processes and procedures to correct these material weaknesses and provide reasonable assurance that the noted weaknesses in internal control over financial reporting did not result in a material misstatement of our consolidated financial statements.
Click Here To DownloadThe Complete SEC Filing
White Electronic Designs Corp.
Industry: Electronics
Description: Manufactures advanced "ruggedized" semiconductor packaging for military, others.
2002 Sales: $113.5 million
Excerpt below: From 10-K filed on 12/24/2003
During the fourth quarter of fiscal 2003, we determined the need to restate our consolidated financial statements for the first three quarters of fiscal 2003 as a result of a change in the way we do business with a reseller that began in the first quarter of fiscal 2003. The fact that we did not identify this matter until the fourth quarter represents a material weakness in internal control as defined under standards established by the American Institute of Certified Public Accountants. We believe that this material weakness is attributable to the Company's recent growth in terms of both size and complexity coupled with the fact that accounting and finance department resources had not been added to support that growth. We have recently reorganized responsibilities within that department and have added one, and expect to add two additional accounting and finance personnel in the near future.
As of the date of this Annual Report on Form 10-K, we believe we have a plan that, when completed, will eliminate the material weakness in internal control described above. There were no other changes during our fiscal fourth quarter ended September 27, 2003 that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures.
Click Here To DownloadThe Complete SEC Filing
Briazz
Industry: Leisure
Description: Operates approx. 50 cafes in major U.S. cities
2002 Sales: $30.6 million
Excerpt below: From 8-K filed on 12/24/2003
On May 13, 2003, PwC advised management and the Audit Committee that a reportable condition existed. This reportable condition was the result of a significant deficiency as defined in Statement on Auditing Standards No. 60, Communication of Internal Control Related Matters Noted in an Audit. Management and the Audit Committee have considered this communication and steps are being taken to address the points raised. These steps include increasing the amounts and frequencies of account reconciliations, the hiring of qualified external financial consultants to evaluate and recommend enhancements to the Company's internal control system and a closer monitoring of the Company's financial results by the Audit Committee of the Board of Directors. In addition, the Company has implemented a more formal budgeting process that allows for more effective monitoring of the Company's operations and financial results. PwC has informed the Company that the existence of the reportable condition means internal controls necessary to develop reliable financial statements did not exist at that time.
Click Here To DownloadThe Complete SEC Filing
Therma-Wave
Industry: Electronics
Description: Manufactures process-control metrology equipment.
2003 Sales: $49.2 million
Excerpt below: From 424B1 filed on 12/24/2003
In late January 2003, management became aware of a possible revenue recognition issue associated with the sale of one tool through one of our foreign
branches. Our Audit Committee launched an investigation and engaged outside legal counsel and independent forensic accountants to assist it. The investigation
was conducted to (i) identify additional potential revenue recognition issues, if any, and (ii) to review the business expense practices of certain of our employees
at that foreign branch. As a result of this matter, management conducted a detailed review of revenue recognition. Based upon the investigation and
management’s revenue recognition review, a material weakness has been identified relating to controls surrounding evaluating and reporting revenue
transactions, particularly in the Asia/Pacific region. Management has adopted additional controls as a result of the special investigation.
As a result, we implemented or are in the process of implementing the following changes or additions to our internal controls and procedures, among others:
Establishing procedures for the timely reconciliation of all accounts and manager’s review of account reconciliation;
Changing our internal reporting structure to require branch accounting personnel to report directly to our finance department in the United States;
Establishing audit and review procedures for each foreign branch consistent with each branch’s exposure, including, as appropriate, outside auditors;
Requiring managers of foreign operations to attest in writing that final acceptance documents for any given period are valid acceptances that justify
revenue recognition and that will result in customer payment;
Requiring corporate financial management personnel to investigate transactions where revenue has been recognized but the customer has not paid
according to terms;
Re-training employees and developing an ongoing training program with particular focus on company policies and procedures related to revenue
recognition, expense reimbursements and bank account reconciliations;
Establishing yearly or twice-yearly (for larger branches) reviews with both internal and external accounting personnel and local management, to be
coordinated with quarterly business reviews; and
Establishing controls to closely monitor the credit status of certain customers, with emphasis on distributors.
Also, in connection with PricewaterhouseCoopers LLP’s audit for the year ended March 31, 2003, PricewaterhouseCoopers identified a material weakness in
our processes relating to account analysis and reconciliations, including lack of timely management review. We have adopted additional controls and procedures
to strengthen our internal control system. However, we cannot assure you that our internal control structure is sufficient to timely alert us to all material
information that is required to be filed in our period reports with the SEC or to provide reasonable assurance that our financial statements are fairly presented in
conformity with accounting principles generally accepted in the United States of America.
Click Here To DownloadThe Complete SEC Filing
Far East Energy Corp.
Industry: Energy & Utilities
Description: Involved in methane gas exploration and production.
2002 Sales: $0.0 million
Excerpt below: From 10QSB/A filed on 12/24/2003
However, the Company's newly elected chief executive officer and newly appointed interim chief
accounting officer reviewed the effectiveness of the company's disclosure controls and internal controls and procedures as of September 30, 2003. These officers identified a weakness related
to disclosure controls and procedures. These officers plan to correct these controls and
procedures to assure compliance with the certification required by Exhibit 31 of this report.
This weakness includes the absence, at present, of a disclosure controls checklist. The
certifying officers, working with the Company's auditors, have determined that the Company
currently lacks the properly designed internal controls over financial disclosure reporting and
is working with the auditors to correct identified weaknesses in the fourth quarter.
Click Here To DownloadThe Complete SEC Filing
Nortel Networks
Industry: Telecommunications Equipment
Description: One of the top global telecom equipment manufacturers
2002 Sales: $10.6 billion
Excerpt below: From 10-Q/A filed on 12/23/2003
Our auditors have informed our Audit Committee of the existence of material weaknesses in internal control.
As part of the communications by our independent auditors Deloitte & Touche LLP, or D&T, to our Audit Committee with respect to D&T's interim audit procedures for the year ending December 31, 2003, D&T informed the Audit Committee that they had identified the following "reportable conditions" each of which constituted a "material weakness" (as each such term is defined under standards established by the American Institute of Certified Public Accountants, or the AICPA) in our internal control:
lack of compliance with our established procedures for monitoring and adjusting balances relating to certain accruals and provisions, including restructuring charges; and
lack of compliance with our established procedures for appropriately applying generally accepted accounting principles to the initial recording of certain liabilities including those described in Financial Accounting Standards Board Statement ("SFAS") No. 5, "Accounting for Contingencies", and to foreign currency translation as described in SFAS No. 52, "Foreign Currency Translation."
Click Here To DownloadThe Complete SEC Filing
Transaction System Architects
Industry: Software
Description: Develops ecommerce software that facilitates "e-payments."
2003 Sales: $277.3 million
Excerpt below: From 10-K filed on 12/23/2003
As reported in the Company's fiscal 2002 annual report on Form 10-K, management and KPMG LLP ("KPMG"), the Company's independent public accountants, advised the Company's Audit Committee that during the course of the fiscal 2002 audit, deficiencies in internal controls were noted relating to:
revenue recognition procedures;
formal policies and procedures for significant transactions;
centralized oversight for international operations;
timely reconciliation of general ledger accounts; and
staffing and training of personnel.
During fiscal 2003, the Company implemented substantial corrective actions to address many of these issues including, but not limited to, the following ...
... As a result of the above actions, considerable improvements in the Company's internal controls have been implemented. However, management and KPMG have advised the Company's Audit Committee that during the course of the fiscal 2003 audit of the Company's financial statements, they noted remaining deficiencies in internal controls related to timely reconciliation of intercompany accounts and revenue recognition procedures pertaining to documentation of software delivery, as well as evaluation and documentation of customer creditworthiness. Deficiencies were also noted related to revenue recognition on a percentage-of-completion basis at one of the Company's subsidiaries.
Click Here To DownloadThe Complete SEC Filing
Mirant
Industry: Energy & Utilities
Description: One of the largest energy traders in the U.S.
2002 Sales: $6.44 billion
Excerpt below: From 10-Q filed on 12/22/2003
During 2002, the Company's independent auditors identified significant internal control deficiencies which collectively constituted a material internal control weakness, the most significant of which related to the Company's North American commodity trading and risk management operations.
In addition to a material internal control weakness, we identified certain internal control deficiencies which, if left uncorrected, could result in a material internal control weakness. Our internal control deficiencies relate to the account reconciliation process and procedures, proper supporting transaction detail relating to journal entries and the controls over certain complex areas of accounting for derivatives and income taxation. These control and procedural deficiencies stem from the historical system of accounting control that resulted in several financial statement adjustments as disclosed in our 2002 Annual Report on Form 10-K. Furthermore, our operating report process, the procedure of reviewing plan variances to actual and prior year comparable periods, has not functioned consistently in 2003. Although the operating report process as described does not directly relate to controls that ensure that financial statement accounts are properly stated, this procedure does provide a framework and context for which financial controls are reviewed and assessed.
We continue to use a number of manual procedures to correct the earlier identified internal control weakness and identified internal control deficiencies. The current internal control solution is not an optimal correction because of the manual nature and the time required to complete the manual procedures and corrective actions. Our longer term plans to address these internal control deficiencies include system and process corrections that will automate some of the procedures we perform manually today. As a result of our recent bankruptcy filing and its resultant increase in data requests, as well as other priority projects, these system enhancements have been delayed resulting in continued reliance on our manual procedures.
We believe the identified internal control weakness and deficiencies were mitigated in preparing this quarterly report. Continued reliance on manual procedures, however, increases the risk that previously identified internal control weakness and deficiencies may not continue to be mitigated.
Click Here To DownloadThe Complete SEC Filing
OM Group
Industry: Chemicals
Description: Produces specialty chemicals
2002 Sales: $30.6 million
Excerpt below: From 10-Q filed on 12/19/2003
The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2003. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company and its consolidated subsidiaries that is required to be included in the Company's SEC filings.
However, in connection with the preparation of the condensed consolidated financial statements included in this Form 10-Q, which contain adjustments from the results reported in the Company's press release of October 30, 2003 (as described in Note A), the Company has received a material weakness letter from its independent auditors with respect to certain internal control over financial reporting matters that, in the independent auditors' judgment, could adversely affect the Company's ability to record, process, summarize and report interim financial information. The Company intends to correct any identified material weaknesses in its internal control over financial reporting in the current reporting period.
Click Here To DownloadThe Complete SEC Filing
Mirenco
Industry: Automotive
Description: Manufactures products to reduce diesel emissions.
2002 Sales: $.1 million
Excerpt below: From 8-K/A filed on 12/18/2003
During the Company's two most recent fiscal years (ended December 31, 2001 and 2002) and from January 1, 2003 to the date of this report, there were no disagreements with Grant Thornton on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure. For the most recent year Grant Thornton issued a material weakness in internal control report advising the registrant that the controls necessary to develop reliable financial statements do not exist. The Company's Board of Directors discussed this reportable event with Grant Thornton and has authorized Grant Thornton to fully respond to inquiries of the successor accountant regarding this matter.
Click Here To DownloadThe Complete SEC Filing
HEI Inc.
Industry: Electronics
Description: Manufacturer of components, medical software and medical devices.
2002 Sales: $38.4 million
Excerpt below: From 10-K filed on 12/16/2003
During the course of their audit of our Consolidated Financial Statements for the fiscal year ended August 31, 2003, our independent auditors, KPMG LLP, advised management and Audit Committee of our Board of Directors that they had identified a deficiency in internal control. The deficiency is considered to be a "material weakness" as defined under standards established by the American Institute of Certified Public Accountants. The material weakness relates to the overriding, by our former Chief Executive Officer and Chief Financial Officer, of internal controls relating to the payment of certain expenses not supported by proper documentation.
Prior to the identification of such deficiency, we had already undertaken, or began to undertake, a number of steps to establish a proper control environment, including:
the replacement of the chief executive officer and chief financial officer,
the establishment of a special committee of independent directors to address all issues relating to the former chief executive officer;
the completion of an accounting review by an independent accounting firm relating to the payment of certain expenses not supported by proper documentation;
the elimination of opportunities to override appropriate controls over expense reporting by elimination of substantially all corporate credits cards and the requirement of approved expense reports for any travel reimbursement; and
the establishment by our current Chief Executive Officer of a tone at the top that overriding of internal controls will not be tolerated.
In addition, we are in the process of establishing a whistle blower policy and process. We will continue to evaluate the effectiveness of our internal controls and procedures on an ongoing basis, we will implement actions to enhance our resources and training in the area of financial reporting and disclosure responsibilities and we will review such actions with our Audit Committee and KPMG LLP.
We have discussed our corrective actions and plans with the Audit Committee and KPMG LLP and, as of the date of this report, we believe the actions outlined have corrected the deficiencies in internal controls that are considered to be a material weakness. Further, our management, including the Chief Executive Officer and President and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and President and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Click Here To DownloadThe Complete SEC Filing
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