Companies that file clean internal control reports without an audit opinion logged restatements at a 46-percent greater clip than companies with auditors, according to a recent analysis in response to possible Congressional action.

Audit Analytics looked at the restatement history of companies that filed 2007 financial reports to look for differences between companies that filed internal control reports with audit opinions and those that filed reports without audit opinions. The analysis revealed not only a higher restatement rate, but also a slower response time when companies discover problems with past financials, said Don Whalen, director of research for Audit Analytics.

Sarbanes-Oxley Section 404 requires companies to report on the effectiveness of controls and have those reports audited, but the requirement was deferred by the Securities and Exchange Commission several times for smaller, non-accelerated filers. For the past two years, companies have been required to produce internally developed reports, but have not been required to submit the report to an audit. As part of the Investor Protection Act of 2009, Congress is now considering a permanent audit exemption for those smaller companies.

“When we focus on those that claimed to have effective internal control over financial reporting, we found that the management-only reports had a substantially higher restatement rate,” said Whalen. The study concluded when an auditor is involved and the internal control review leads to discoveries of mistakes, the market is more quickly notified that past financial statements are not reliable, said Whalen.

“This shows there is a benefit to the investing market to having the auditor attestation,” said Whalen. “The auditor attestation appears to both increase the quality of the SOX 404 filings by making them less ambiguous, and it also seems to hasten the disclosure of a problem. So there’s increased transparency in that respect.”

Cindy Fornelli, executive director of the Center for Audit Quality, made sure the Senate Banking Committee was aware of the research. In a letter to committee leaders, Fornelli said a permanent waiver for small companies would would mean “little independent scrutiny of financial reporting safeguards at an estimated 6,000 small companies.”