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Public Companies Provide New Disclosures to Investors
Investors in the nation's publicly traded companies now have access to an unprecedented level of corporate information when companies issue their annual reports. For the first time ever, these reports include details about a company's internal control over financial reporting. When a company measures its internal control over financial reporting, it monitors the vital processes involved in recording transactions and preparing financial reports. A company now must make public its assessment of the effectiveness of its internal control over financial reporting, including an explicit statement as to whether that control is effective and whether management has identified any "material weakness." These new disclosures were put in place by the federal government following business failures and corporate scandals that began with Enron in 2001. The disclosures are important to investors because effective internal control over financial reporting helps improve the reliability of financial reports and can be a deterrent to corporate fraud.
Material weakness in internal control over financial reporting does not mean that a material financial misstatement has occurred or will occur, but that it could occur. It is a warning flag. It should 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: Was the weakness the result of a temporary breakdown or a more systemic problem? * Pervasiveness: Does the weakness relate to matters that may have a pervasive effect on financial reporting? * Relevance: Is the weakness related to a process that is key to the company? * Investigation: Is the weakness related to a current regulatory investigation or lawsuit? * History: Does the company have a history of restatements? * Management reaction: How has management reacted to the material weakness? * Tone at the top: Does the weakness represent a concern with the "tone at the top"? - NU.
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