The Securities and Exchange Commission last week warned that there will not be 100 percent compliance with the new internal controls requirements, with many firms possibly failing to comply, Dow Jones Newswires reported.
Public companies are required by the Sarbanes-Oxley Act of 2002 to assure investors that internal controls are adequate. Assertions must be backed up by outside auditors.
In coming months, "a number of companies will announce that they have material weaknesses in their controls," SEC Chief Accountant Donald Nicolaisen cautioned in a speech in Chicago on Thursday.
Do not expect the SEC to delay the upcoming Nov. 15 deadline for larger firms. "We do not have any intent to introduce another delay into the system," Nicolaisen said in an interview Friday with Dow Jones Newswires. Smaller firms must comply after July 15, 2005.
Results of the reviews will appear in company annual reports, due out in the first quarter of next year. Nicolaisen told Dow Jones Newswires that he expects firms that don't complete the reviews in time to take preemptive strikes by issuing press releases or filing an 8K report with the SEC to explain the delay. Some believe the number of companies falling into this category could range from less than 5 percent to more than 20 percent.
"I personally think it's too early to predict," Nicolaisen said in his prepared remarks. He told companies it's not too late to make a final push to test and fix controls before their 2004 assessment, Dow Jones reported.
The internal controls reviews are costly. The Financial Executives Institute conducted a survey earlier this year of 224 public companies with average revenue of $2.5 billion, finding that each company could spend more than $3 million to satisfy the internal controls requirement, Dow Jones reported.
"These are significant numbers and it may very well be that to date the amount of work required to prepare management and auditor reports has been largely underestimated, not overestimated," Nicolaisen said in his speech.
The SEC is also concerned about helping smaller companies to comply with the internal controls rule, since many have to wait in line behind larger clients vying for audit firm time and attention, among other challenges. The SEC has asked the Committee of Sponsoring Organizations to develop guidance by early spring on how smaller companies might comply with the rule, Dow Jones reported.