Internal Controls And Acuisitions

It is widely known that a large percentage of acquisitions fail to deliver pre-aqcuisition promises, but new research indicates that there may be an indication of trouble ahead. When a company acquires another company, it can exclude the acquired company from Section 404 of Sarbanes-Oxley. Section 404 requires external auditors to assess the the internal controls are adequate. Although inadequate controls result from a myriad of reasons, they are noted in 30 percent of cases where fraud is ultimately determined. One explanation of an acquiring company not being willing to comply with Section 404 is that new, unfavorable information, was found after the acquisition.