Material Weaknesses and Stock Price
Disclaimer: If you aren’t interested in the Sarbanes-Oxley Act of 2002, the accounting industry, or financial markets in general, this might not be interesting to you.
After working for nearly the last three years in the public accounting industry, I thought it would be interesting to find out how our work actually affected the stock price of a company. Specifically, I was interested in the peroid after the Sarbanes-Oxley Act of 2002 started being a factor in the SEC filings (generally, after 12/31/04).
After briefly thinking about how to go about doing this research, I wondered if anyone else had. Lo and behold, the wonderful people over at CFO.com had done a full length article on the subject. The article has several interesting findings:
- Companies that disclose a material weakness in controls generally suffer a decline in stock price over the two months subsequent to the disclosure.
- Material weaknesses disclosed in filings that are right on time or severely late tend to result in the greatest drop in stock price.
- Nearly all types of material weakness disclosures (documentation, personnel issues, tax accounting, etc.) resulted in a decline for the stock price, with lease accounting be the least “worrisome” to the general market.
Overall, the findings are what I’d hoped to see. I’m glad to see financial markets take the opinion of the public accounting firms seriously. It would be disheartening to find that all the work and effort spent on improving internal controls at public companies did not have a positive result for investors.
