BOSTON--(BUSINESS WIRE)--America’s largest public companies reported only a handful of glaring weaknesses in their financial accounting last year, according to an exclusive Compliance Week analysis released today. The numbers are a dramatic plunge from the hundreds of weaknesses disclosed only a few years ago and are further proof that the Sarbanes-Oxley Act, as onerous as it may be, is accomplishing its goal of making corporate financial statements more reliable.

The Compliance Week study looks at “material weaknesses” in financial reporting that companies must disclose in their annual reports and examines such disclosures at 426 of the S&P 500 companies. A total of 14 weaknesses were reported by 11 companies.

By comparison, when Compliance Week examined material weaknesses at more than 400 randomly selected large companies in 2006, almost every single company reported at least one material weakness, and the group as a whole reported more than 800.

Matt Kelly, editor-in-chief of Compliance Week, says this year’s results show the gains Corporate America has made since SOX went into effect in 2004. “After four years of hard learning and experience, we’re seeing proof that Sarbanes-Oxley does deliver benefits,” Kelly says. “This is Corporate America’s equivalent of going to the gym: a painful experience at first, but eventually that pain fades and your health improves enormously over the long haul.”

Sarbanes-Oxley’s Section 404 requires companies to test the internal controls over financial reporting annually and to correct any deficiencies or face the unpleasantness of reporting them as material weaknesses. While widely regarded as boosting external audit costs but delivering little else, the Section 404 internal controls process has focused company officers on certifying that the results they state are sound.

Kelly also notes that the fact that there were fewer reported weaknesses fits with other evidence suggesting SOX is achieving its aims. Restatements of financial results, which soared shortly after SOX was passed, dropped in 2007 for the first time in five years. And last month, another Compliance Week analysis of audit fees at large companies showed a record-low increase of only 3.2 percent last year.

“This is all pointing to the same pattern,” Kelly says. “Companies took a hard look at their accounting systems immediately after SOX was passed, found all sorts of nasty problems, and spent a lot of money to fix them. Now we’re seeing fewer mistakes and less effort to comply with SOX because the systems to report financial results are working well.”

Another notable shift from two years ago: At that time, the same material weaknesses were disclosed by many companies, as they all struggled with the same basic issues. Now far fewer companies are disclosing material weaknesses, but the ones that do disclose weaknesses seem to have multiple woes.

Pall Corp., for example, which confessed to material weaknesses in its tax accounting for last year, also announced in 2007 that it would restate several years’ worth of financial results. Other companies disclosing material weaknesses last year—General Motors, American International Group and Verisign, for example—have all recently endured restatements, management shakeups, or similar governance troubles.

“We’re seeing a shift in what having a material weakness means,” Kelly says. “Four years ago, it simply meant that you hadn’t been diligent in your financial reporting—and that included a lot of companies. Today a material weakness is really a black eye, and correlates to having other governance problems investors and regulators would want you to resolve.”

About Compliance Week’s Material Weaknesses in Internal Controls Analysis

Compliance Week’s analysis, Material Weaknesses in Internal Control Over Financial Reporting, was compiled by Compliance Week’s Custom Research department in July 2008. The analysis is based on material weakness data as submitted in corporate 10-K and 10K/A filings provided to the SEC and publicly available revenue figures for 426 companies that were randomly selected from the S&P 500. Compliance Week first examined material weaknesses in annual reports published in 2006 using the same methodology. The publication did not examine weaknesses in 2007.

Results of the material weakness analysis will be made available to Compliance Week subscribers on Tuesday, August 4, and are available to members of the press on a limited basis. Details can be found at http://www.complianceweek.com or by contacting the publication, below.

About Compliance Week

Compliance Week is a magazine and newsletter on corporate governance, risk, and compliance that reaches over 20,000 financial and legal executives at public companies. Available in print and online, Compliance Week features the insights of numerous governance and securities experts, including former Securities and Exchange Chairman Harvey Pitt. For more information on Compliance Week, visit http://www.complianceweek.com.

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Mary Kae Marinac, 978-685-3136
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