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Internal Controls(accounts for 5% of the final score)
Internal Control over Financial Reporting (100/100)
The Sarbanes-Oxley Act (SOX 404) requires management and the external auditor to report on the adequacy of the company's internal control over financial reporting. Management is required to add an "internal control report" to each annual report with the SEC, which must "contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting." (U.S. Code, Title 15, §7262)
In this report, management will give details on identified control deficiencies, and if any or all of those constitute material weaknesses, as defined in the standards established by the PCAOB, it will conclude that internal controls are not effective. The cost of complying with Sarbanes-Oxley 404 impacts smaller companies disproportionately, as there is a significant fixed cost involved in completing the assessment. To address this issue, the SEC granted an extension for the outside auditor assessment, currently (with the latest extension of October 2, 2009) until fiscal years ending after June 15, 2010. This temporary rule permits most U.S.-listed Chinese companies to provide only a management report, and the auditor is not required to express an opinion on the effectiveness of the Company's internal control over financial reporting. The PCAOB filed a 62-page document about audits of internal controls, with special guidance for auditors of smaller public companies. It's an interesting read.
- 100/100 - Effective
- 0/100 - Not Effective