Public Companies to Provide New Disclosures to Investors
Windowofworld.com – Investors in the country’s public companies will immediately have access to previous levels of company information when companies issue their annual reports, which, for the first time, will include details about their internal control over financial reporting and provide a greater level of transparency.
To help investors understand new reporting, Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers have developed two user-friendly resource guides.
When a company measures its internal control over financial reporting, it monitors the vital processes involved in recording transactions and preparing financial statements. A company must now make an assessment of the effectiveness of internal control over financial reporting, including explicit statements about whether control is effective and whether management has identified “material weaknesses”.
The company’s independent auditor will evaluate management’s assessment and express an opinion on that assessment. This information will appear in the company’s annual report starting February 2005.
This new disclosure was made by the federal government in response to a series of business failures and corporate scandals that began with Enron in 2001. This disclosure is important for investors because effective internal control over financial reporting helps improve the reliability of financial statements and can be a deterrent to corporate fraud.
To use this information effectively, investors must consider that material weaknesses in internal control over financial reporting do not mean that material misstatement has occurred or will occur, but it can happen. That is a warning flag.
Material weaknesses must be evaluated in the context of the company’s specific situation, including consideration of the following areas.
* Fraud: Does the weakness involve corporate fraud by senior management?
* Duration: Are weaknesses due to temporary damage or more systemic problems?
* Pervasive: Are weaknesses related to things that might have a broad effect on financial reporting?
* Relevance: Are weaknesses related to the process that are key to the company?
* Investigation: Are the weaknesses related to the current investigation or law suit?
* History: Does the company have a history of restatement?
* Management reaction: How does management react to material weaknesses?
* The tone above: Does his weakness represent concern with the “tone above”?
Material weaknesses can occur in any part of the financial reporting process, and can vary according to the characteristics of the company, industry, and business environment.