Companies continue to delay quarterly filings at an increasing pace, and a growing number of these postponements appear related to issues raised by Section 404 of the Sarbanes-Oxley Act, according to a recent study of third-quarter results by proxy research firm Glass Lewis.

At least 61 companies with market caps exceeding $100 million sought more time to file their September quarterly results. This compares with 30 in the second quarter and 36 in the first quarter, according to the analysis.

At the end of last year, 59 companies filed for extensions, but the research firm says year-end delays are generally more common.

“The inability to file timely may be an indication of a weakness in internal controls and reporting capabilities,” Glass Lewis points out in its report. “Delays may signal companies that might receive an adverse opinion on the effectiveness of their internal controls at year-end.”

The proxy research firm believes the increase in filing delays is either surfacing as auditors more intensely scrutinize their clients’ reports, mindful that the Public Company Accounting Oversight Board is now reviewing the largest auditors on an annual basis, or issues are emerging from an independent examination of a company’s controls, Glass Lewis adds.

“We believe companies who are not able to file timely quarterly financial statements may have other problems such as inadequate internal controls, inadequate accounting staff or poor oversight from the audit committee,” the report notes. In fact, the firm points out in its analysis that three late filers have already disclosed material weaknesses in their internal controls related to inadequate accounting personnel (Silicon Graphics), lack of technical training (SunTrust Banks) and manual procedures without sufficient review (Vital Images).

Four Types

In general, Glass Lewis breaks down the third-quarter late filers into four categories.

There are 13 companies that have accounting issues with possible restatements. They include companies that have grabbed their share of headlines of late, including Symbol Technologies, King Pharmaceuticals and Electronic Data Systems.

Another 19 companies sought more time due to what Glass Lewis deemed to be “other events and transactions.” They include problems with a systems implementation or allegations of improper conduct, such as Asyst Technologies, which makes integrated hardware and software automation systems for the semiconductor and flat panel display manufacturing industries. “While we believe it likely that these companies have material or significant weaknesses in their controls, the descriptions included in the non-timely filing do not fit into our other categories,” Glass Lewis points out.

The third category includes 25 companies that announced a restatement in the late filing and who are still finishing work on previously announced restatements. They include DPL, Dynegy, Flowserve, General Motors and Hercules.

And finally, there are the four companies that in Glass Lewis’ opinion have not provided adequate explanations for their delays and which don’t meet the SEC’s requirements for a detailed description of the events causing the delay. They include First BanCorp, 99 Cents Only Stores, Allscripts Healthcare Solutions and Modtech Holding.

“We are especially concerned that First BanCorp did not provide additional clarification of the issues causing its delayed filing,” the report notes. “In our experiences, banks typically close their books within days after a quarter-end and usually have good controls due to regulatory supervision. First Bancorp’s late filing may indicate a breakdown in these controls and what may be poor audit committee oversight, in our view.”

A Big Deal

Interestingly, PricewaterhouseCoopers audited nearly half of the late filers in each of this year’s first three quarters. On the other hand, Ernst & Young only audited 7 of the 127 companies that filed late in the first three quarters combined, or about 5.5 percent of the total, according to Glass Lewis.

It is considered a “big deal” for a company to not file on time. For one thing, if a company doesn’t meet its five-day extension, it is deemed to no longer be in compliance with SEC regulations and could be delisted or be deemed to be defaulting on its loans, for example.

Not adequately disclosing why it is filing late is an even bigger issue for companies. Glass Lewis points out companies must provide in narrative form the reasons for the delay on form 12b-25. It stressed that at a conference in early 2004, the SEC director of the Division of Corporate Finance pointed out that 12b-25 is a full disclosure form.

In other words, companies must be quote descriptive in this form, and not resort to boiler-plate type explanations. Glass Lewis adds, “Not providing more information may be both a major disservice to investors and a violation of the SEC rules.”