According to a review of regulatory filings during the first month of 2004, 23 companies disclosed material weaknesses or significant deficiencies in internal controls.
That number is nearly double the 14 similar disclosures made during the prior month of December 2003. Eleven companies made such disclosures in November 2003. (See box at right for prior month's data)
Though the most frequent types of weaknesses disclosed seem to have remained the same — most were related to insufficient inventory controls, misapplication of GAAP, finance department understaffing, and revenue recognition issues — the disclosures are increasingly showing up in the "Risk Factors" section of public filings.
It is worth noting that many of the January disclosures were updates of prior disclosures, in which the companies have made improvements to or have "eliminated" weaknesses. One company's disclosure was precipated by a class action lawsuit, and two financial services firms provided updates of regulatory memorandums or consent orders.
Below are the disclosures from the month of January 2004.
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, and have highlighted in red key elements in each excerpt.
Research was conducted with the assistance of 10kwizard.com.
Company
Date
Description
Millennium Bankshares Corp.
Jan. 30
CONTROLS NOT YET COMPLIANT WITH MEMORANDUM OF UNDERSTANDING WITH COMPTROLLER OF THE CURRENCY
—
The Board of Directors and its committees have devoted much time and effort to bringing Millennium Bank into compliance with the memorandum of
understanding. We believe that those efforts have improved our operations, although we have not yet been advised that we are in full compliance with the
provisions of the memorandum that require improvements in our internal controls and loan reviews. In the case of internal controls, full compliance will require
us to continue the improvements we have made to date and, also, do a better job of making all employees aware of written policies and procedures for the functions they perform and be able todemonstrate that our policies and procedures adequately prevent errors in bank records and violations of laws and regulations ....
Hanmi Financial Corp.
Jan. 30
FDIC CONSENT ORDER REQUIRES INTERNAL CONTROL IMPROVEMENTS
—
The Consent Order requires the Bank to take specific actions necessary to correct certain Bank Secrecy Act compliance deficiencies including inadequate training, internal controls and ineffective independent testing of such controls. Even before the Consent Order became effective, the Bank began taking proactive steps in 2001 to improve its BSA compliance. For example, in late 2001, the Bank implemented an enterprise-wide risk management infrastructure, which includes a comprehensive compliance program and training...
NCI Building Systems Inc.
Jan. 30
MATERIAL WEAKNESS ALLEGED IN CLASS ACTION LAWSUITS
—
...In the consolidated complaint the plaintiffs allege, among other things, that during the financial periods that were restated we made materially false and misleading statements about the status and effectiveness of a management information and accounting system used by our components division and costs associated with that system, failed to assure that the system maintained books and records accurately reflecting inventory levels and costs of goods sold, failed to maintain internal controls on manual accounting entries made to certain inventory-related accounts in an effort to correct the data in the system, otherwise engaged in improper accounting practices that overstated earnings, and issued materially false and misleading financial statements...
Western United Holding Co.
Jan. 27
MATERIAL WEAKNESS IDENTIFIED; AUDITOR RESIGNS
—
In connection with its resignation, Ernst & Young informed the Registrant's audit committee that it believed there is a material weakness in the Registrant's internal controls. Specifically, Ernst & Young indicated that certain members of Registrant's senior management had misrepresented facts and failed to make known all relevant information concerning an identified transaction occurring in the fiscal year ended September 30, 2002, resulting in incorrect accounting treatment for that transaction. Further, Ernst & Young informed the Registrant's audit committee of its conclusion that the Registrant's control environment is insufficient to deter instances where senior management may misrepresent facts or withhold otherwise relevant information.
In connection with its resignation, Ernst & Young has indicated to the Registrant's audit committee that it is unwilling to rely on management's representations or to be associated with the Registrant's financial statements. Further, Ernst & Young has informed the Registrant's audit committee that the circumstances surrounding its decision to resign materially impact the ability to rely on its previously issued independent auditor reports and the fairness of the financial statements underlying those reports.
Hayes Lemmerz International Inc.
Jan. 23
INSUFFICIENT INTERNAL CONTROLS ADDED TO COMPANY "RISK FACTORS"
—
...The effectiveness of our controls and procedures may be limited by a variety of risks including:
faulty human judgment and simple errors, omissions or mistakes;
collusion of two or more people or inappropriate management override of procedures;
imprecision in estimating and judging cost-benefit relationships in designing controls; and
reductions in the effectiveness of one deterring component (such as a strong cultural and governance environment) by a conflicting component (such as
may be found in certain management incentive plans).
If we fail to have effective internal controls and procedures for financial reporting in place, we could be unable to provide timely and reliable financial
information.
Alphasmart Inc.
Jan. 23
COMPANY GOING PUBLIC; IMPROVED INTERNAL CONTROLS ADDED TO RISK FACTORS
—
For example, partially in connection with becoming a public company we have added additional independent directors, created several board committees, must implement additional internal controls and disclosure controls and procedures, retained a transfer agent, a bank note company, and a financial printer, adopted an insider trading policy and will have all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws.
Petroleum Geo Services ASA
Jan. 23
MATERIAL WEAKNESS PREVIOUSLY IDENTIFIED; POTENTIALLY DELAYED FINANCIAL STATEMENTS
—
As previously disclosed on November 28, 2003, the Company continues to work on completing under US GAAP an audit of the Company's 2002 financial statements and a re-audit of the Company's 2001 financial statements and on addressing certain material weaknesses in its system of internal controls over financial reporting. The Company is also working on the audit of its financial statements for 2003.
Biolase Technology Inc.
Jan. 23
MORE RISK FACTORS; GROWTH WOULD REQUIRE INTERNAL CONTROL IMPROVEMENTS
—
...If this growth occurs, it will continue to place additional significant demands on our management and our financial and operational resources, and will require that we continue to develop and improve our operational, financial and other internal controls both in the United States and internationally. In particular, our growth has and, if it continues, will increase the challenges involved in implementing appropriate operational and financial systems, expanding manufacturing capacity and scaling up production, expanding our sales and marketing infrastructure and capabilities, providing adequate training and supervision to maintain high quality standards, and preserving our culture and values.
HydroFlo Inc.
Jan. 23
MATERIAL WEAKNESS IDENTIFIED
—
By letter to the Board of Directors of the Registrant dated November 14, 2003, Grant Thornton LLP notified the Registrant of certain significant continuing internal control deficiencies that Grant Thornton LLP concluded to be material weaknesses in the design and operation of internal control under standards established by the American Institute of Certified Public Accountants. As reported in our report filed on Form 10-QSB for the period ending September 30, 2003, management is confident that its financial statements for the three months ended September 30, 2003 fairly present, in all material respects, the financial condition and results of operations of the Company.
Dynacq Healthcare Inc.
Jan. 22
MATERIAL WEAKNESS IDENTIFIED BY FORMER ACCOUNTANT
—
Dynacq Healthcare, Inc. (the "Company") announced that on January 19, 2004, the Audit Committee of the Board of Directors of the Company engaged Killman, Murrell & Company, P.C. ("KMC") as the Company's new independent accountant for the fiscal year ended August 31, 2003. During the two most recent fiscal years ended August 31, 2002 and August 31, 2003 and the subsequent interim period prior to the Company's engagement of KMC, the Company did not consult with KMC regarding the application of accounting principles to a specific transaction, either completed or proposed, the type of audit opinion that might be rendered on the Company's consolidated financial statements, or the advice of the Company's former independent accountant that the Company lacks internal controls necessary to develop reliable financial statements.
Productivity Technologies Corp.
Jan. 22
PRIOR MATERIAL WEAKNESSES ELIMINATED
—
In its annual letter to management issued in November 2000, BDO identified two material weaknesses in the Company's internal controls related to the timing of the recordation of transactions and the need of the Company to take full physical inventories. In its annual letter to management issued in October 1999, BDO identified one material weakness in the Company's internal controls related to general ledger accounts receiving little critical review during the year. Management readily agreed with the recommendations of BDO and has eliminated these weaknesses by taking the steps recommended by BDO.
3D Systems Corp.
Jan. 21
MATERIAL WEAKNESS IDENTIFIED
—
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 were broad-based, and did not include specific procedures and controls by department or function.
Solomon Technologies Inc.
Jan. 21
MATERIAL WEAKNESS IDENTIFIED IN "RISK FACTORS"
—
Because of our limited cash and small number of officers and employees, we believe we need to correct significant deficiencies in our internal controls and procedures for financial reporting. We currently have a part-time chief financial officer. However, we will need to hire additional accounting staff. Failure to address this in a timely manner might increase the risk of future financial reporting misstatements and may prevent us from being able to meet our filing deadlines. Because our operations to date have been very limited and the number of accounting transactions has been relatively small, we believe that these deficiencies have not affected our financial statements which are part of this prospectus. However, we will need to correct such deficiencies as we expand our operations. Furthermore, we plan to remedy such deficiencies during 2004; however, achieving such goals depends on our ability to raise additional capital.
In addition, we must establish a process to facilitate management's assessment of the design and operating effectiveness of our internal controls and procedures for financial reporting to enable us to comply with Section 404 of the Sarbanes-Oxley Act of 2002, which will be in effect for our fiscal year ending December 31, 2005.
QuadraMed Corp.
Jan. 21
MATERIAL WEAKNESS IDENTIFIED
—
PwC did, however, inform both management and our Audit Committee of its concerns regarding material weaknesses in the company's system of internal controls, policies and procedures, including the adequacy and reliability of certain financial information, and certain financial personnel. Specifically, PwC reported material weaknesses in 1) the accounting for software revenue and related expense recognition, 2) the reporting of discontinued operations, 3) the accounting for the company's investment in certain non-consolidated subsidiaries, 4) the accounting for certain life insurance contracts and the Supplemental Executive Retirement Plan ("SERP"), 5) the accounting and reporting of non-recurring charges, 6) the accounting for stock-based compensation, 7) the accounting and reporting of capitalized software development costs, 8) the accounting for income taxes, 9) the documentation supporting the accounting for certain business combinations, and 10) timely analysis and reconciliation of general ledger accounts.
PriceSmart Inc.
Jan. 14
STEPS TAKEN TO IMPROVE MATERIAL WEAKNESSES
—
During the fiscal quarter, the Company implemented remedial measures to address material weaknesses in internal controls previously identified by Ernst &
Young LLP in connection with its audit of fiscal year 2003. Management believes these measures materially improved its internal controls over financial
reporting during the quarter. Actions taken included the replacement of management, including senior management, with responsibility for functions where
control issues were noted, hiring a new controller in the Philippines, the appointment of an interim Chief Financial Officer to oversee the accounting activities in
the quarter, the engagement of a financial consultant to support the interim Chief Financial Officer, and generally heightened scrutiny by the Company’s
management and finance and accounting departments related to revenue recognition issues and financial reporting in all of the Company’s geographic segments.
The Company believes the measures it has taken and additional measures it continues to implement are reasonable likely to have a material, positive impact on
its internal controls over financial reporting in future periods.
Interland Inc.
Jan. 14
MATERIAL WEAKNESS "ELIMINATED"
—
The Company's internal and disclosure controls and procedures are necessarily interdependent. During the course of the fiscal 2002 year-end close and subsequent audit, the Company's management and its auditors identified several matters related to internal controls that needed to be addressed. Several of these matters were classified by the auditors as material weaknesses or reportable conditions in accordance with the standards of the American Institute of Certified Public Accountants then in effect. During fiscal 2003 management addressed the identified issues with emphasis on the Company's revenue cycle, including associated revenue recognition policies and receivables valuation. As a result of these efforts the Company has eliminated the material weaknesses previously identified, and the current state of internal and disclosure controls are sufficient to give reasonable assurance that the financial statements are correct in all material respects. Nonetheless, the Company recognizes that its current processes continue to rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.
HEI Inc.
Jan. 13
MATERIAL WEAKNESS IDENTIFIED, STEPS TAKEN
—
During the course of their audit of our Consolidated Financial Statements for our fiscal year ended August 31, 2003, our independent auditors, KPMG LLP, advised management and the Audit Committee of our Board of Directors that they had identified a deficiency in internal controls. Such deficiency was considered to be a "material weakness" as defined under standards established by the American Institute of Certified Public Accountants. The material weakness related 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. We have taken a number of steps to establish a proper control environment, including:
the replacement of the Chief Executive Officer, Chief Financial Officer and Controller,
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;
the establishment by our current Chief Executive Officer of a tone at the top that overriding of internal controls will not be tolerated; and
the establishment of a whistle blower hotline.
Bioanalytical Systems
Jan. 13
MATERIAL WEAKNESS FOUND; MEASURES TAKEN
—
The Company's independent auditors have informed the audit committee that a material weakness has been identified in the Company's internal control for the year ended September 30, 2003. Specifically, the independent auditors noted that the Company's internal control failed to timely alert management of potential loan covenant noncompliance. The Company did not have procedures in place to monitor near-term future financial position and results of operations to enable it to take operational action in the event of potential loan covenant noncompliance. The Company has taken measures to correct this material weakness in the form of enhancing its planning process and creating procedures to more timely identify credit agreement compliance issues.
Aerosonic Corp.
Jan. 13
MATERIAL WEAKNESS IDENTIFIED
—
There were no reportable events as defined in Item 304(a)(1)(v) of Regulation S- K, that occurred within the fiscal years ended January 31, 2002 and 2003 or the period from February 1, 2003 through December 17, 2003, except that prior to the filing of the Company's January 31, 2003 Form 10-K on October 31, 2003, PwC and the Audit Committee agreed that material weaknesses in the following internal controls had been identified: (1) management override of internal controls, (2) design of internal controls, (3) document retention (both system and manual), and (4) information systems design and operation.
Warnaco Group
Jan. 12
NO MATERIAL WEAKNESSES FOUND, BUT AUDITOR RECOMMENDED MINOR CHANGES
—
In connection with the audit of our consolidated financial statements for Fiscal 2002, Deloitte did not advise our management or the audit committee of any material weaknesses or reportable conditions related to our internal controls or our operations.
In connection with its audit of our financial statements for Fiscal 2002, Deloitte recommended that we make certain operational and efficiency improvements. The recommendations related to the continued integration of corporate information systems by our operating divisions, improvements to our documentation of accounting policies and procedures and enhancements to security over our information systems. Deloitte also recommended that we upgrade our disaster recovery and business continuity plans. We have taken action during Fiscal 2003 to address Deloitte's recommendations.
Adecco SA
Jan. 12
COMPANY DELAYS FINANCIAL STATEMENTS, DUE IN PART TO INTERNAL CONTROL DEFICIENCIES
—
Adecco S.A. announced that it does not expect the audit of its consolidated financial statements for the 2003 fiscal year, ended on December 28, 2003, to be completed by Adecco's auditors, by the previously announced release date of February 4, 2004.
The reasons for the delay in completion of the audit include:
The identification of material weaknesses in internal controls in the Company's North American operations of Adecco Staffing;
The resolution of possible accounting, control and compliance issues in the Company's operations in certain countries;
The completion of the Company's efforts to address these matters and determine their effect on the Company's consolidated financial statements;
In this regard an independent Counsel has been appointed by the Audit & Finance Committee of the Company's Board of Directors to conduct an investigation; and The Company is not yet able to predict when the 2003 audit of its consolidated financial statements will be completed.
Comprehensive Care Corp.
Jan. 9
NO MATERIAL WEAKNESSES FOUND, BUT AUDITOR RECOMMENDED MINOR CHANGES
—
...Following the completion of the audit of the Company's financial statements, the Company's external auditors issued their management letter to the Board of Directors, which did not identify any significant deficiency or material weakness in the Company's internal controls but did recommend certain improvements in the Company's existing internal controls.
Sight Resource Corp.
Jan. 8
MATERIAL WEAKNESS FOUND
—
The Company's internal controls over financial reporting appear to be inadequate and should be strengthened. In connection with KPMG's uncompleted audit of the Company's 2002 consolidated financial statements, KPMG informed the Company that certain material weaknesses exist in the Company's internal controls over financial reporting, including lack of timely performance and supervisory review of account reconciliations; lack of adequate documentation for various journal entries; and lack of sufficient management knowledge of the accounting systems.
No comments yet