F012262444 - How Markets Punish Material Weaknesses A new...

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How Markets Punish Material Weaknesses A new report examines shortcomings that lead to losses in share price; Sarbanes-Oxley requirements are understood poorly by investors, say some observers. Marie Leone - CFO.com | US http://www.cfo.com/article.cfm/4197475?f=search July 21, 2005 Section 404 of the Sarbanes-Oxley Act requires companies to disclose internal-control deficiencies in their annual reports. The effects on share prices are examined in "Control Deficiencies: Finding Financial Impurities," a new analysis of 2004 and early 2005 disclosures by shareholder-advisory firm Glass, Lewis & Co. Glass Lewis examined companies with a market capitalization in excess of $75 million. About 11 percent of these companies disclosed a control deficiency between January 1, 2004, and May 2, 2005. The number of companies that disclosed a material weakness — the most severe control problem — totaled 586 for the first four months of 2005, compared with 313 for all of 2004, according to the report. On average, the day after a company disclosed a material weakness in its financial controls, its share price dropped 0.67 percent relative to market movement, Glass Lewis found. After 7 days, the share price dropped 0.90 percent; after 30 days, 1.96 percent; and after 60 days, 4.06 percent. "The mere announcement of a material weakness, independent of the auditor opinion, appears to solicit a negative reaction from investors," according to the study. Average Share Price Movement, Relative to Market, vs. Seven Days before Announcement 1 day after 7 days after 30 days after 60 days after All Deficiencies -0.72% -0.81% -1.50% -3.02% Material Weaknesses -0.67% -0.90% -1.96% -4.06% Qualified Opinions -0.23% -0.66% -2.30% -3.56% Qualified -0.04% -0.16% -2.49% -3.94%
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Opinions, No Warning Sources: Glass Lewis, FactSet. Revelations of material weaknesses related to personnel issues seemed to raise the
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F012262444 - How Markets Punish Material Weaknesses A new...

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