Section 404 of the Sarbanes-Oxley Act requires companies to review internal control over financial reporting and report whether it’s effective. John recently wrote about how newly public companies have fared with ICFR and Audit Analytics recently issued its annual recap of negative auditor attestations and management-only assessments of ICFR. The report takes a look at how public companies have fared more broadly by looking back at the last 16 years since SOX 404 first applied to U.S. accelerated filers. The report shows differing trends for accelerated filers disclosing adverse auditor attestations versus adverse management-only attestations filed by non-accelerated filers.
After starting out at 15.9% for fiscal year 2004, adverse auditor attestations declined to 3.5% for fiscal year 2010 and now have been hovering between 5 – 7%, which is where they’ve been for the last several years. Conversely, adverse management-only assessments rose steadily for seven years from 2008 to 2014 and are much higher than accelerated filers, peaking at 40.9% before declining, although adverse management-only assessments have remained between 39 – 42% since. Here’s an excerpt for reasons behind 2019 adverse attestations and assessments:
– The most common internal control reason auditors indicated as leading to conclusions about ineffective ICFR were issues requiring year-end adjustments, followed by a need for more highly trained accounting personnel
– The most common accounting issue that triggered an adverse ICFR determination was revenue recognition issues, which was followed by accounts receivable and other cash issues
– For management-only assessments, the most common internal control reason given to support a conclusion about ineffective ICFR was that accounting personnel within the company were not adequately trained, followed by a lack of personnel necessary to implement proper segregation of duties
– The most common accounting issue that triggered a conclusion about ineffective ICFR was accounts receivable and cash issues, although it was only identified and disclosed 69 times – the report notes that non-accelerated filers tend to disclose deficiencies absent an identified accounting error
-Lynn Jokela, TheCorporateCounsel.net October 29, 2020
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