Implementation of Section 404 of Sarbanes-Oxley (SOX 404) will likely cause internal control problems to surface more frequently than in the past, according to a report issued by Fitch Ratings. Fitch expects that material weaknesses will be reported for a number of companies during the next year or two. The method and level of disclosure by a company reporting material weaknesses in their internal controls under SOX 404 may factor into credit actions by Fitch.
SOX 404, effective for fiscal years ended after November 15th 2004, requires management and its auditors to express an opinion on the adequacy of controls over financial reporting and disclosure. Should a weakness be disclosed or new weakness identified, negative rating actions may occur if the disclosure and/or further discussion with management reveals it to have a significant effect on a company's future financial standing, or calls into question the data on which analysis has been based. Though significant deficiencies are not required to be reported on a Form 10-K, such control weaknesses may have analytical implications.
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