According to a review of regulatory filings during the month of April, 39 companies disclosed material weaknesses or significant deficiencies in internal controls, or provided updates on the status of their control-improvement processes.
That number is up from 28 similar disclosures in March, 18 in February, and 23 in January. (See box at right for previous months' data).
Size Matters?
As was the case with prior months, most of the companies making such disclosures had 2003 revenues under $1 billion. Only 23 percent of the companies had revenues above $1 billion, including $1.8 billion petroleum refiner Giant Industries, and $1.1 billion electronic design automation firm Cadence Design Systems.
Not surprisingly, many of the other large companies making such disclosures have been the subject of headlines regarding financial misstatements, regulatory investigations or accounting improprieties, including Global Crossing, Symbol Technologies, Lucent, MCI and Mirant Corp.
Of the rest of the companies making such disclosures, over one-third had 2003 revenues under $100 million, and four were considered small business issuers.
Most Common Problems
The largest percentage of weakness disclosures, constituting 42.1 percent of all disclosures, was related to financial systems and procedures. That number is up slightly from last month's analysis, when systems and procedures accounted for 40 percent of all weaknesses and deficiencies.
Many of these disclosures, including one at $375.4 million Orthodontic Centers of America, related specifically to the financial statement close process. Others commonly cited problems with account reconciliations, inadequate review, and poor systems and records.
Surprisingly, weakness disclosures regarding revenue recognition only accounted for 7 percent of disclosures, a significant drop from prior months. "Revrec" issues were cited at Symbol Technologies, which noted "errors related to the timing and amount of revenue recognized," and at Vaxgen, a small developer of HIV preventive vaccines that noted "inappropriate revenue recognition for government contracts."
Runner-Up
The second most frequently cited weakness was related to personnel issues. Constituting 26.3 percent of all disclosures, these issues usually involved poor segregation of duties, lack of technical competence of accounting staff, and inadequate lines of communication.
$91.4 million wireless handset maker Intac International, for example, noted that the company "did not have personnel with adequate knowledge of the SEC's rules and regulations." And at $190.4 million aircraft maintenance firm Pemco Aviation, there were "personnel in certain areas of the company who did not have a full understanding of pertinent accounting and financial reporting principles ..."
MCI, formerly Worldcom, cited a related personnel problem: "lack of access to our prior management and senior personnel." Of course, some of those executives—including former CFO Scott Sullivan—have pleaded guilty to the massive fraud that overstated profits by billions of dollars and ultimately forced the company into bankruptcy.
Documentation, IT And M&A
The third most frequently cited weakness was related to documentation. Though this category, which accounted for 15.8 percent of all disclosures, often intersects with the "financial systems and procedures" category above, we tracked it separately this month as many of the disclosures were not related to financial systems.
For example, Intelligent Motor Cars Group noted that one of its weaknesses was related to "maintaining and managing legal documents, minutes of meetings of Board of Directors" and other non-financial documents. Similarly, Cadence Design cited an absence of documentation for non-revenue related transactions, as well as "the corresponding accounting entries originating from departments other than corporate accounting."
Other weakness disclosures were related to IT systems, like at Giant Industries, which had been advised to improve "general computer controls related to program changes and access security."
Weaknesses stemming from mergers and international operations were also noted at $101.5 million Skillsoft and
International Steel Group. Lucent cited "internal control deficiencies in foreign operations involving the Foreign Corrupt Practices Act."
Multiple Disclosures
As was the case with prior months' findings, it was very common for companies to disclose multiple "types" of weaknesses.
$90.0 million outpatient facilities operator Dynacq Healthcare, for example, cited problems with both personnel ("inadequate communication lines and internal controls") and financial systems ("accounting controls and controls over the safeguarding of its assets.").
The same was the case at tiny Vaxgen, which—in addition to the revenue recognition issues mentioned above—also cited inadequate segregation of duties and lack of adequate depth of accounting knowledge.
Also citing multiple issues was Google, the search engine that recently filed its S-1 registration to go public. As we reported in last week's edition, Google's S-1 cited a need to improve controls related to the manual processing of financial data, as well as issues with employee access.
Symbol Technologies was the one company that disclosed weaknesses in virtually every category, citing revenue recognition problems, training and supervision issues, inadequate systems and policies, and more.
The List
The complete list of companies disclosing or updating weaknesses or deficiencies in their internal controls during the month of March, including excerpts highlighted in red, is below. Please keep in mind that—due to limited space—we have not included the complete text. To those ends, we have provided the actual filing (courtesy 10K Wizard) so you can review complete wording if interested.
Also, please note that we have again included disclosures that were prompted by litigation alleging internal control weaknesses (e.g., MicroTune). Based on similar litigation last month at Levis, Sonus Networks and others, as well as recent interviews with litigation experts, it's clear that the potential for controls-related litigation is high, and we wanted to make sure subscribers were aware of the most recent cases.
We also included some companies that provided updates on IC-weakness disclosures already published in Compliance Week. Mirant, for example, was covered in our December list after the company disclosed a weakness in its 10-Q filed on Dec. 22. However, the company provides an interesting update on the "manual procedures to mitigate" the previously identified weaknesses.
As usual, our goal is to help companies understand how their peers are disclosing information in the post-SOX era, where few comparables exist, and where many of the disclosures are new and uncharted:
Company
Date
Description
American Utilicraft Corp.Small business filer
Auditor: Changed from Halt, Thrasher & Buzas,LLP to J.H. Cohn, LLP
Apr. 30
WEAKNESS IDENTIFIED IN 1999 AND 2000
—
During the Company's two most recently completed fiscal years and the subsequent interim period preceding the decision to change principal accountants, there have been no reportable events as defined in Regulation S-K Item 304 (a)(1)(v), except that in connection with the audits of the December 31, 2000 and December 31, 1999 financial statements a reportable condition in the Registrant's internal control environment was noted and brought to management's attention; namely, the Registrant's accounting staff lacked the qualifications necessary to prepare accurate financial statements that comply with Generally Accepted Accounting Principles and accounting and reporting requirements as promulgated by the Securities and Exchange Commission.
MicroTuneRadio frequency solutions ('03 Sales: $46.2m)
Auditor: Ernst & Young
Apr. 29
INTERNAL CONTROLS NAMES IN CLASS-ACTION LAWSUITS
—
The plaintiffs' specific allegations include that the defendants misrepresented material facts and omitted to state material facts necessary to make other statements made not misleading, and that these misrepresentations or omissions had the effect of artificially inflating the Microtune's stock price. At this time, the alleged misrepresentations and omissions include allegations that ... Microtune lacked adequate internal controls and was therefore unable to ascertain its own true financial condition ...
MCITelecom ('03 Sales: $27.3b)
Auditor: KPMG
Apr. 29
MATERIAL WEAKNESS IDENTIFIED
—
Our previous financial management employees, including the previous chief financial officer and corporate controller, as well as many other financial and accounting personnel, were terminated in connection with the discovery and announcement of accounting irregularities discussed above. Virtually all of our present senior management, including our chief executive officer, our chief financial officer and our corporate controller, were not employed by us during the period from January 1, 2000 through the date of our bankruptcy filing and most of the senior accounting personnel that prepared restatements of our consolidated financial statements were not employed by us in their current capacity during such period. During the restatement process, we identified a substantial number of material weaknesses in our internal controls, including poor accounting records. Due to the lack of systematic and reliable internal controls and the lack of access to our prior management and senior personnel, the restatement process required an extensive effort by hundreds of financial and accounting professionals, including external consultants, to locate, verify and/or reconstruct supporting records for financial statement accounts.
Intelligent Motor Cars GroupSmall business filer
Auditor: Changed from Malone & Bailey to Rachlin Cohen & Holtz LLP
Apr. 29
MATERIAL WEAKNESS IDENTIFIED
—
In a Report on Reportable Conditions and Other Matters dated June 10, 2003, Rachlin advised the Registrant that the internal controls necessary for the Registrant to develop reliable financial statements did not exist. These conditions included (a) Material Weaknesses relating to maintaining and managing legal documents, minutes of meetings of Board of Directors, source documents, inventories (including perpetual records and cut-offs), related party transactions, management communications, and private offerings - notes payable; and (b) Reportable Conditions relating to segregation of duties, audit committee, insider loans, Form 1099's, numerical sequence of checks used, reconciliation of bank accounts, accounting manager, accounting procedures manual, and year-end closing procedures.
BroadvisionPortal software ('03 Sales: $88.1m)
Auditor: BDO Seidman
Apr. 29
WEAKNESS IDENTIFIED BY FORMER AUDITOR
—
In a letter dated March 30, 2001, Arthur Andersen LLP informed the Company that it noted certain matters involving the Company's internal controls that it considered to be reportable conditions under standards established by the American Institute of Certified Public Accountants. The reportable conditions related to the Company's purchase requisition processes and invoice processing procedures. Members of the Audit Committee discussed this matter with Arthur Andersen LLP. The Company has implemented procedures to address the reportable conditions and has authorized Arthur Andersen LLP to respond fully to the inquiries of the successor independent auditors.
GoogleSearch engine ('03 Sales: $961.9m)
Auditor: Ernst & Young
Apr. 29
INTERNAL CONTROLS LISTED AS RISK FACTOR
—
We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. For example, during our 2002 audit, our external auditors brought to our attention a need to increase restrictions on employee access to our advertising system and automate more of our financial processes. The auditors identified these issues together as a "reportable condition," which means that these were matters that in the auditors' judgment could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In 2003, we devoted significant resources to remediate and improve our internal controls. Although we believe that these efforts have strengthened our internal controls and addressed the concerns that gave rise to the " reportable condition" in 2002, we are continuing to work to improve our internal controls, including in the areas of access and security.
Intac InternationalWireless handset maker ('03 Sales: $91.4m)
Auditor: KBA Group
Apr. 29
WEAKNESS IDENTIFIED BY FORMER AUDITOR
—
[T]here were no disagreements with KPMG ... except as follows: Certain matters involving internal control that KPMG considered to be reportable conditions under standards established by the American Institute of Certified Public Accountants were communicated by KPMG in writing to our Board of Directors on Apr. 11, 2002. This communication indicated that, in the opinion of KPMG, we did not have personnel with adequate knowledge of the SEC's rules and regulations regarding the application of accounting principles generally accepted in the United States of America and that KPMG recommended that we continue to expand our finance department to include such personnel.
Onyx Acceptance Corp.Auto financing ('03 Sales: $119.4m)
Auditor: Changed from PwC to Grant Thornton
Apr. 29
MATERIAL WEAKNESS IDENTIFIED
—
During the second quarter of 2003, PwC advised the Company of a reportable condition relating to its internal control structure as it relates to the use of cash flow models. The cash flow estimates provided by these models support the Company's income recognition and impairment calculations. The models are complex and require manual intervention, both of which are factors that increase the propensity for human error. During the second quarter of 2003, the Company identified instances where errors were made in the estimated cash flows and therefore in the residual interest in securitized assets valuation computations for the third and fourth quarters of 2002. In addition, the Company revised the method for amortizing loan premium amortization on contracts acquired in connection with clean-up calls exercised on the Company's securitization pools. In response to the above, management now prepares a detailed analysis of loan premium amortization and factors underlying any significant changes in estimated cash flows for each trust during the current reporting period versus the previous period's estimated cash flows to further double-check the evaluation process.
Giant IndustriesRefiner of petroleum products ('03 Sales: $1.8b)
Auditor: Deloitte & Touche
Apr. 29
REPORTABLE CONDITIONS IDENTIFIED
—
We have been made aware of certain matters involving our internal control and its operation that are deemed to be reportable conditions ... One such matter relates to our corporate accounting review process. Certain analyses are prepared outside of our corporate accounting department, and are provided to our corporate accounting department as the basis for significant accounting adjustments or account balances. Certain audit adjustments were necessary during our 2003 audit to correctly state accounts related to vacation pay and loan fee amortization. Other analyses required extensive review of amounts recorded. The second such matter relates to our information systems. We have been advised to improve our general computer controls related to program changes and access security. In addition, we have been advised to prepare and implement a plan to replace our VAX processing platform, which processes invoicing, crude lease accounting, drivers' payroll and tank inventory because it is no longer supported by the vendor and poses processing continuity risks.
Interpool Container leasing ('02 Sales: $327.1m)
Auditor: KPMG
Apr. 28
MATERIAL WEAKNESS ADDRESSED
—
As reported in our 2002 Form 10-K, we have taken many measures to improve the effectiveness of our internal controls. Among other things, we have taken and are taking the following remedial measures:
We have implemented new procedures relating to the communication of information between management and all levels of our company ...
Our former general counsel, Arthur Burns rejoined us in October 2003 as full time Executive Vice President and General Counse ...
We selected an experienced financial and leasing executive ... who became our Chief Financial Officer in February 2004 ...
We have hired eight additional accountants ...
We are improving the quality of our file maintenance and record retention for completed transactions.
Cadence Design Systems Electronic design automation solutions ('03 Sales: $1.1b)
Auditor: KPMG
Apr. 28
WEAKNESS IDENTIFIED; LISTED IN RISK FACTORS
—
As described in our Annual Report on Form 10-K for fiscal 2003, our independent auditors identified certain matters involving our internal controls and operations that they considered to be "reportable conditions", as defined by the American Institute of Certified Public Accountants, including the absence of appropriate (i) controls relating to investments in non-marketable securities and (ii) documentation, review and approval of significant non-revenue related transactions, and the corresponding accounting entries originating from departments other than corporate accounting. As a result of these findings, we have implemented, and continue to implement, actions to address these deficiencies and to enhance the reliability and effectiveness of our control procedures.
Orthodontic Centers of America Dental practice firm ('03 Sales: $375.4m)
Auditor: Changed from Ernst & Young to PwC
Apr. 27
MATERIAL WEAKNESS IDENTIFIED
—
During the fiscal years ended December 31, 2003 and 2002, and the subsequent interim period through the date of Ernst & Young's dismissal, there were no "reportable events" (as such term is defined in Item 304(a)(1)(v) of Regulation S-K), except that Ernst & Young provided OCA's Audit Committee with a letter discussing a material weakness in internal controls over OCA's financial statement close process for the year ended December 31, 2003. This matter has been discussed with the Audit Committee, and OCA has authorized Ernst & Young to respond fully to the inquiries of PricewaterhouseCoopers regarding this matter. OCA is taking steps to address the issues raised in Ernst & Young's letter.
Ultrastrip Systems Small business filer
Auditor: Tedder, James, Worden & Associates
Apr. 27
WEAKNESS IDENTIFIED; AUDITOR RESIGNS
—
During the period of BDO's engagement and through November 14, 2003, BDO issued two management letters to the Registrant advising the Registrant that it noted several matters involving internal control that it considered to be material weaknesses, including the lack of a member in the Registrant's accounting department with professional certification in accounting experience and background, the need for a staff person who is capable of maintaining internal accounting controls and preparing the Registrant's financial statements, and the lack of written policies to set forth accounting policies, internal controls and safeguarding of corporate assets.
Advanced Materials Group Specialty foams, foils & films ('03 Sales: $14.5m)
Auditor: BDO Seidman
Apr. 26
MATERIAL WEAKNESS IDENTIFIED
—
In connection with BDO Seidman, LLP's audit for the year ended November 30, 2003, BDO Seidman identified material weaknesses in the Company's internal controls as of fiscal year end. The deficiencies noted were (a) the lack of technical competence of the accounting staff, (b) the lack of segregation of duties, (c) the lack of adequate account analysis and reconciliations, which resulted in inaccuracies in the Company's records, (d) insufficient supervision and oversight of the Company's accounting personnel, (e) inability to timely and accurately close the books, (f) operating without a full-time CFO and (g) the improper or lack of accounting for and/or failure to identify transactions. The Company believes such deficiencies were primarily attributable to changes in personnel within the accounting department combined with a lack of management oversight...
World Information Technology Travel related services ('03 Sales: NA)
Auditor: Changed from Beckstead and Watts to Rosenberg Rich Baker Berman &
Company; then to L.L. Bradford & Co.
Apr. 22
MATERIAL WEAKNESS IDENTIFIED
—
During the course of certain 'discovery' procedures which we have performed subsequent to the issuance of our audit report dated March 14, 2003, on the financial statements [of the Company's Taiwanese predecessor] for the year ended December 31, 2002, we have become aware of certain deficiencies in the internal control environment of World Information Technology, Inc. (the "Company") which have developed subsequent to our audit of the Company. The deficiencies identified are as follows ... The Company has transferred certain accounts receivables to unknown third parties for "collection" purposes. We have not been able to identify a
contractual basis for the transfer. ... The Company has a perceived loss of inherent management override of control of Company assets by transferring the accounts receivable out of the Company's
control ...
Pemco Aviation Group Aircraft maintenance, repair ('03 Sales: $190.4m)
Auditor: Ernst & Young
Apr. 21
MATERIAL WEAKNESS IDENTIFIED
—
In addition, Ernst & Young LLP has advised the company of reportable conditions that together constitute a material weakness in internal control over financial reporting involving incorrect applications of generally accepted accounting principles as a result of personnel in certain areas of the company who did not have a full understanding of pertinent accounting and financial reporting principles and as a result of the untimely resolution of errors. The incorrect applications of accounting principles involve revenue recognition, estimates to complete certain contracts made in connection with projecting losses on contracts for recognition in a current period, the untimely resolution of errors involved inventory accounting and the reconciliation of intercompany transactions ...
NetMeasure Technology Small business issuer
Auditor: Changed from Grant Thornton to Amisano Hanson
Apr. 20
SIGNIFICANT DEFICIENCIES IDENTIFIED
—
During our two most recent fiscal years ended December 31, 2002, and during the subsequent interim period preceding the date of resignation there were no reportable events as such term is defined by paragraph (a)(1)(iv) of Item 304 of Regulation S-B promulgated by the Securities and Exchange Commission ("Regulation S-B") except that Grant Thornton notified the Company that, in connection with its audit of the Company's consolidated financial statements for the year ended December 31, 2002, it identified certain deficiencies involving internal control it considered to be significant deficiencies.
I Sector Corp.IT holding company ('03 Sales: $62.2m)
Auditor: Deloitte & Touche
Apr. 19
SIGNIFICANT DEFICIENCIES IDENTIFIED
—
Grant Thornton LLP ("Grant Thornton"), our independent accountants, has identified and reported to the audit committee of our board of directors certain internal control deficiencies that Grant Thornton considers to be significant deficiencies under the standards established by the American Institute of Certified Public Accountants and the SEC. The identified internal control deficiencies relate to ...a material weakness involving contemporaneous documentation of all terms related to revenue transactions and conclusions regarding customer creditworthiness; and ... a significant deficiency with respect to the review of significant agreements by our accounting personnel in order to monitor compliance with their terms.
Lattice Semiconductor Programmable chips ('03 Sales: $209.7m)
Auditor: PwC
Apr. 19
MATERIAL WEAKNESS IDENTIFIED
—
We received notice from our independent auditor that, in connection with the 2003 year-end audit, the auditor has identified a material weakness relating to our internal controls and procedures. Certain of these internal control deficiencies may also constitute deficiencies in our disclosure controls. While we are in the process of implementing a more effective system of controls and procedures, we have instituted controls, procedures and other changes to ensure that information required to be disclosed in this annual report on Form 10-Q/A has been recorded, processed, summarized and reported accurately...
Mirant Wholesale energy marketer ('03 Sales: $5.2b)
Auditor: KPMG
Apr. 19
MATERIAL WEAKNESS IDENTIFIED
—
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 America trading and marketing activities ...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 ...
Green Machine Development Small business issuer
Auditor: Changed from Baum & Company to Daszkal Bolton
Apr. 16
REPORTABLE EVENT; AUDITOR RESIGNS
—
During the Registrant's two most recently completed fiscal years and the subsequent interim period preceding the resignation of Baum & Company, P.A., there was a reportable event as defined in Regulation S-K Item 304(a)(1)(v). In connection with the review of the Registrant's interim financial statements for the nine months ended December 31, 2003, Baum & Company, P.A. advised the Registrant that it has not been able to obtain sufficient documentation to perform its review and that Registrant lacks the internal controls necessary for the development of reliable financial statements...
Ultimate Electronics Electronics retailer ('04 Sales: $712.9m)
Auditor: Ernst & Young
Apr. 16
MATERIAL WEAKNESS IDENTIFIED
—
In connection with the audit of our financial statements for the year ended January 31, 2004, our independent auditors advised our management and our audit committee that it had identified a deficiency in internal controls that rose to the level of a reportable condition under standards established by the American Institute of Certified Public Accountants ... The reportable condition identified by our auditors relates to our internal controls over our inventory ...
SkillSoft Web-based learning systems ('03 Sales: $101.5m)
Auditor: Ernst & Young
Apr. 15
CONTROL DEFICIENCIES IDENTIFIED IN MERGER
—
During the process of integrating the business processes, human resources, disclosure controls and procedures and internal controls of SmartForce PLC and SkillSoft Corporation following the Merger, significant deficiencies in disclosure controls and procedures and internal controls were identified predominantly with respect to financial and regulatory compliance reporting at non-U.S. subsidiaries of the former SmartForce PLC and our ability to process the consolidated financial closing cycle. Our independent auditors have informed us that they believe we have these two reportable conditions in internal controls in certain of these areas...
Digital Recorders Automatic voice systems ('03 Sales: $44.0m)
Auditor: McGladrey & Pullen
Apr. 15
MATERIAL WEAKNESS IDENTIFIED
—
...We have been taking steps to improve our financial infrastructure to account for complex transactions on a consolidated basis. Our auditors identified a material weakness in internal control over financial reporting and certain reportable conditions-including the lack of organized documentation for capitalized software, formal procedures to reconcile inter-company accounts and transactions and a lack of segregation of duties in certain foreign subsidiaries in connection with the audit of our financial statements for the year end December 31, 2003 ...
Middlesex Water Co.Water and wastewater services ('03 Sales: $64.1m)
Auditor: Deloitte & Touche
Apr. 14
MATERIAL WEAKNESS IDENTIFIED
—
Management has identified a significant deficiency in the operation of internal controls over financial reporting relating to the classification of cash restricted for construction projects on the Consolidated Balance Sheet and the change in cash restricted for construction projects on the Consolidated Statements of Cash Flows. As a result thereof, management has expanded its periodic review process of asset classification and the appropriate presentation of changes in such assets to enhance the reliability and effectiveness of the financial reporting process.
DVI Inc.Medical equipment financing ('03 Sales: 139.7m)
Auditor: BDO Seidman
Apr. 12
MATERIAL WEAKNESS IDENTIFIED
—
The issue appears to have been made known to the entire Board at its September 24, 2002 meeting. Draft minutes from that meeting (Exhibit 75) (DVI04-00002047-8) indicate that Neas, in giving a status report on DVI's audit, noted that "the largest challenge has been obtaining adequate documentation". Again, in its Report to the Audit Committee dated December 4, 2002 (Exhibit 76) (DVI04-00002690-2735), with respect to the allowance for losses on receivables, Deloitte noted as follows: ... "We obtained an understanding of the internal controls surrounding the monitoring and evaluation of the allowance for losses on receivables. We did not test the related internal controls because we preliminarily assessed internal controls as ineffective. Based on the procedures performed, we issued a material weakness letter and various recommendations ..."
Goodrich Petroleum Corp.Gas and oil exploration ('03 Sales: $32.7m)
Auditor: KPMG
Apr. 12
MATERIAL WEAKNESS IDENTIFIED
—
In the course of preparing its 2003 year-end financial statements, the Company discovered a systematic error in the calculations of its non-cash depletion, depreciation and amortization expense since 1997 ... Accordingly, the Company has restated its previously reported depletion, depreciation and amortization expense in its audited financial statements for the years ended December 31, 2001 and 2002 and in its unaudited quarterly income information for the four quarters of 2002 and the first three quarters of 2003. The Company's independent accountants, KPMG LLP, have provided a letter to the Company's Audit Committee indicating the Company did not have internal controls in place that would have detected this systematic error. The error has been corrected through restatement of the prior period financial statements. Because the system of internal controls failed to detect the error, which had a material effect on the financial statements and resulted in the restatement of the prior period financial statements, the Company's lack of internal controls in this area is deemed to be a material weakness. In conjunction with its Audit Committee, the Company has taken steps to address the internal control deficiency.
Vaxgen Develops HIV preventive vaccine ('03 Sales: $14.3m)
Auditor: Changed from KPMG to PwC
Apr. 9
MATERIAL WEAKNESS IDENTIFIED
—
In connection with the completion of its audit of, and the issuance of an unqualified report on, the Company's consolidated financial statements for the fiscal years ended December 31, 2003 and 2002, KPMG identified deficiencies that existed in the design or operation of the Company's internal controls that it considered to be material weaknesses in the effectiveness of the Company's internal controls pursuant to standards established by the American Institute of Certified Public Accountants ... KPMG advised the Audit Committee of the Company's Board of Directors of the following material weaknesses:Inappropriate revenue recognition for government contracts;Account reconciliations not performed on a timely basis or at all;
Inadequate segregation of duties;Insufficient controls over recording of journal entries; andLack of adequate depth of accounting knowledge.
Health Express USARestaurant operator ('03 Sales: $0.7m)
Auditor: Changed from Ahearn, Jasco + Company to Salberg & Company
Apr. 8
MATERIAL WEAKNESS IDENTIFIED
—
As part of the audit for the year ended December 28, 2003, Ahearn, Jasco + Company, P.A. reported to management certain material weaknesses in the Company's internal control systems relating to the Company's controls over (1) non-accounting documents to the extent this information is communicated to the Chief Financial Officer, and (2) the internal accounting controls regarding segregation of duties. The Company believes that its overall internal controls are, in fact, effective, and the Company strives to continue to make improvements in its internal controls.
Ardent Health ServicesPrivate ('03 Sales: $1.3b)
Auditor: Changed from KPMG to Ernst & Young
Apr. 7
REPORTABLE EVENTS IDENTIFIED, BUT NO MATERIAL WEAKNESS?
—
... In addition, the Company believes there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. However, during the course of KPMG's audit, KPMG and the Company discussed period-end closing processes and the lack of timely and accurate review and reconciliation of account balances related to the Company's internal controls. KPMG believes these internal control matters are reportable events under Item 304(a)(1)(v) of Regulation S-K. These items had previously been noted by the Company's internal audit personnel, reported to our Audit and Compliance Committee, and action plans put in place to remediate these noted conditions. The Company has determined that none of these matters constitute a material weakness in the Company's internal controls, and KPMG has concurred with that conclusion.
Global Crossing Telecom carrier ('03 Sales: $2.9b)
Auditor: Changed from Grant Thornton to Ernst & Young
Apr. 7
MATERIAL WEAKNESS IDENTIFIED; AUDITOR ASKED TO RESIGN
—
As previously disclosed in Item 14 of the Company's predecessor's 2002 annual report on Form 10-K and in Item 9A of the Company's 2003 annual report on Form 10-K, GT identified to the Company's audit committee and management certain internal control deficiencies that GT considered to be "significant deficiencies" that, in the aggregate, constituted "material weaknesses" under standards established by the American Institute of Certified Public Accountants. In each case, GT further advised the audit committee that these internal control deficiencies did not affect GT's unqualified report on the Audited Financial Statements.
Nematron Corp.Shell company (now "Sandston"; '03 Sales: $13.5m)
Auditor: Grant Thornton resigned; no auditor named in 8-K
Apr. 7
WEAKNESS IDENTIFIED BY OUTGOING AUDITOR
—
In connection with its audit of the Registrant's consolidated financial statements for the year ended December 31, 2003, Grant Thornton, the Registrant's independent accountants, advised the Audit Committee and management of a deficiency involving internal control that Grant Thornton considered to be a reportable condition under standards established by the American Institute of Certified Public Accountants. Grant Thornton reported that during 2003 an error was made in the application of Emerging Issues Task Force Consensus 00-27, "Application of Issue No. 98-5 to certain Convertible Instruments" ("EITF 00-27") in the determination of the value of the beneficial conversion features connected with the issuance of convertible securities with detachable warrants, which resulted in an audit adjustment increasing interest expense and common stock by $286,498. This is a complex area of accounting involving the computation of intrinsic values inherent in relative values of the instruments.
Lucent Technologies Telecom equipment ('03 Sales: $8.5b)
Auditor: PwC
Apr. 6
MATERIAL WEAKNESS IDENTIFIED
—
Lucent Technologies Inc. previously reported in its Annual Report on Form 10-K for the year ended September 30, 2003, that the company became aware of internal control deficiencies in foreign operations involving the Foreign Corrupt Practices Act ("FCPA"), in addition to those previously reported in Saudi Arabia for which a government investigation is ongoing. The company's ensuing FCPA compliance audits and an outside counsel investigation has found incidents and internal control deficiencies in its operations in China that potentially involve FCPA violations. The company has reported these findings to the Department of Justice and the Securities and Exchange Commission and is cooperating with those agencies.
Dynacq Healthcare Operates outpatient facilities ('03 Sales: $90.0m)
Auditor: Ernst & Young resigned; no auditor named in 8-K
Apr. 6
MATERIAL WEAKNESS IDENTIFIED
—
On December 17, 2003, E&Y orally informed the Company that the Company lacked the internal controls necessary to develop reliable financial statements. By letter dated December 23, 2003, E&Y advised the Board of Directors of its conclusion that material weaknesses in internal control had come to its attention during the course of performing its audit of the Company's financial statements for the year ended August 31, 2003, specifically noting (a) "inadequate communication lines and internal controls relating to the authorization, recognition, capture and review of transactions, facts, circumstances and events that may have a material impact on the Company's financial reporting process and (b) a lack of supervision, review and quality control related to the accounting for income taxes, including the preparation of the federal income tax provision in accordance with SFAS No. 109, Accounting for Income Taxes." ...
In connection with (a) above, E&Y stated "Specifically in November 2003, the Company's Chief Executive Officer negotiated a significant transaction to sell certain accounts receivable to another entity. This transaction was not disclosed to the Company's Chief Financial Officer, the Company's independent auditors nor the Company's Board of Directors prior to its execution and represents significant deficiencies in the Company's disclosure controls, accounting controls and controls over the safeguarding of its assets."
O.I. Corp.Products to detect, monitor chemicals ('03 Sales: $25.2m)
Auditor: Grant Thornton
Apr. 5
MATERIAL WEAKNESS IDENTIFIED
—
In February 2002, PricewaterhouseCoopers LLP repor
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