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Analysts vague about the impact of SOX s404

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5th Apr 2005
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Global capital markets uncertain about the implications of the Sarbanes Oxley Act could over-react and punish companies that make negative disclosures under section 404 of the legislation, according to a PricewaterhouseCoopers survey.

Three-quarters of international analyts questioned said they would probably respond to negative disclosures under section 404 of the Sarbanes-Oxley Act by downgrading shares or advising a sale - effectively punishing companies for complying with the law.

Section 404 requires that all SEC-registered companies include in their annual report a statement by management and the external auditors on the effectiveness of the company's internal controls over financial reporting. According to PwC, the cost of complying with S 404 is roughly $4.4m per company affected.

But the PwC study highlighted ignorance of the law among the respondents. Six out of 10 questioned said they knew "at least a little" about s404, buton only one fifth said they knew "a fair amount". This level was lower in Europe and Asia than in the US.

According to PwC, the lack of knowledge could lead to potentially damaging reactions; two-thirds of investors and analysts believed that a negative disclosure would have an adverse impact on a company's valuation, with one fifth believing that the impact would be significant.

More knowledgeable investors and analysts were less likely to mark down or sell shares automatically in the event of a negative disclosure. In Asia Pacific, where awareness of s404 was lowest, nine out of ten analysts and investors said they would be very likely to sell or mark. Only seven out of ten investors and analysts surveyed in Europe and the US said they would take the same action in similar circumstances.

In a commentary on the study, PwC partner Ian Coleman noted: 'It is clear that with only a little knowledge about S404, investors and analysts could take an unfavourable view of companies that receive a negative assessment. Until global markets adjust to the new rules and become more sophisticated in their understanding of the implications of these assessments, there is a possibility for SEC listed companies that investors and analysts will over-react to negative disclosure.'

Although a third of respondents believe that s404 would result in the delivery of better information, increase their ability to rely on audited accounts and improve transparency, only one in ten believe that s404 has achieved its principal objective: reducing investors' overall risk.

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