Companies Expected to Increase “Material Weakness” Reports in 2005

Moody’s expects more “material weakness” reports to be announced by companies in 2005 as they straighten out the kinks in their Section 404 Reporting under Sarbanes-Oxley. The ratings agency said that the strict requirements under Section 404 of the Sarbanes-Oxley Act may result in many companies reporting early next year that they have ineffective internal controls because of the existence of one or more material weaknesses. Moody’s added that most of these reports are not expected to rise to a serious level and lead to rating actions. But Moody’s said that material weaknesses in “company-level” controls could lead to rating actions if the reports as calling into question the quality of a company’s management. The agency said that many of the problems would not be new, but would only be coming to light because of the closer scrutiny that Section 404 requires. And the agency warned that it would be important for investors not to overreact to the new reports, during the initial period of implementation of Sarbanes-Oxley.

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