Sarbanes-Oxley Section 404 — A Global Capital Market View

In the wake of Enron and other high profile corporate scandals, the increasing impact of corporate regulation and governance is being felt worldwide. MORI recently conducted a study on behalf of PwC (PricewaterhouseCoopers) which examined how negative Section 404* disclosures from the Sarbanes-Oxley act are likely to affect analysts' and investors' perceptions of SEC-listed companies.

In the wake of Enron and other high profile corporate scandals, the increasing impact of corporate regulation and governance is being felt worldwide. MORI recently conducted a study on behalf of PwC (PricewaterhouseCoopers) which examined how negative Section 404* disclosures from the Sarbanes-Oxley act are likely to affect analysts' and investors' perceptions of SEC-listed companies.

Detailed awareness of Section 404 remains fairly limited, with only one-fifth (20%) of analysts and investors claiming that they know "a fair amount" or "a great deal" about the code. However, awareness in the US is notably higher with around three-quarters (77%) saying that they "know at least a little" about 404.

When asked how a negative 404 disclosure would impact on a company's valuation, two-thirds (66%) said that it would have a negative impact, and this was higher among US analysts and investors (77%). The perceived attractiveness of SEC-registered companies which have negative disclosures is also seen to suffer, with three-quarters (75%) agreeing that they would consider them 'less attractive as investments'.

In terms of their own assessments of companies, four-fifths (79%) said that negative disclosures would play an 'important' role in those assessments and three-quarters (74%) said that they would be 'likely' to personally mark down or consider selling the shares of an SEC-listed company receiving a negative Section 404 disclosure.

In the light of these views, it is perhaps unsurprising that nine in 10 (90%) say that they would expect a company to undertake at least 'a fair amount' of due diligence before an acquisition to satisfy itself that the target met Section 404 control standards.

Notes

* Section 404 of Sarbanes-Oxley requires public companies to report on their internal controls over financial reporting. This assessment, contained in the company's annual report, will include:

  • a statement of management's responsibility for establishing and maintaining adequate internal controls over financial reporting
  • management's assessment of the state of internal controls at the year end
  • auditors' opinion of both the effectiveness of their internal controls over financial reporting and the management's report

Technical details

105 telephone interviews were conducted among investors, analysts and credit rating agencies. These were split regionally as follows:

  • Americas -- 41 (30 US, 4 Canada, 4 Mexico, 3 Brazil)
  • Europe -- 40 (21 UK, 6 France, 5 Germany, 5 Switzerland, 3 Netherlands)
  • Asia-Pac -- 24 (10 Japan, 5 Hong Kong, 5 Singapore, 4 Australia)

Fieldwork was conducted by MTS (MORI Telephone Surveys) from 24th January - 25th February 2005.

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