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The Sarbanes-Oxley Act is driving hundreds of companies to miss deadlines for filing their financial statements, slowed the pace of dealmaking and caused some public entities to consider going private. According to Glass Lewis & Co., a San Francisco investment adviser, within one week of a March 16 deadline to file their annual reports, 282 companies with market capitalizations of more than $100 million had informed the Securities and Exchange Commission that they would be late in submitting their annual reports. Most of the delays center on �404 of the act, which President Bush signed into law in 2002 to improve corporate reporting following the Enron Corp. and other business scandals. The provision requires companies to certify the adequacy of their internal financial controls and for their auditors to sign off on those controls. “Over half said they were still evaluating internal controls,” said Leah Townsend, an analyst with Glass Lewis. “This is the first year that companies have to be in compliance with section 404.” By comparison, by roughly the same time last year 59 companies had notified the SEC that they would be late in filing their annual reports, versus 51 during the period in 2003. The surge in the number of companies postponing their filings reflects lingering confusion over what the rules really mean and how to comply, sources said. “There is no real metric for a Sec. 404 investigation, and people are all over the road,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “One man’s material weakness may not be so to someone else,” The challenge of adapting to the regulations has dampened merger and acquisition activity and caused some companies to flee to the private sector, Elson and others said. “You have to do a lot more homework now to acquire a company than you did two years ago,” said Paul D. Lapides, director, corporate governance center, Kennesaw State University. “Anytime you raise questions about a company’s financial and controls structure, there is less certainty of what you’re acquiring and the number you are paying.” Veritas Software Corp., for example, a Mountain View, Calif., maker of data storage technology, said last week it would miss a second deadline to file its 2004 report, and it now expects to file it by April 11. Starting Tuesday, Veritas will trade under the symbol VRTSE, with the ‘E’ added to show the company has not filed its annual report for 2004, the company announced late Monday. The accounting hitch is not expected to derail Veritas’ pending $10.2 billion deal for Symantec Corp., but the delay presents another obstacle in closing what has already been a contentious transaction. In another disputed deal, McData Corp. was forced last week to reassure investors that its plan to acquire Computer Network Technology Corp. remained on track despite the Broomfield, Colo.-based storage networking firm having to delay filing its own report until after CNT filed its numbers. “In some cases it probably has slowed down the [deal] process,” said Chris Plath, associate director with the Global Corporate Governance Research Center. “At least in a couple of instances it would have put off some deals. You don’t want to buy a company with serious internal controls flaws.” Also in the technology world, Santa Clara, Calif.-based McAfee Inc., one of the world’s largest security software makers, said in a regulatory filing on March 31 that it had identified material weaknesses in its internal controls in accounting for income taxes, revenue, and its reporting process. The company said that in addition to new controls and procedures it would hire more workers to support its accounting control operations. Although blamed or credited for making the M&A process more burdensome, the �404 requirements have also resulted in fresh language being added to many merger agreements. “It is interesting to see that in a lot of these merger agreements, there are caveats giving companies an out if they find material weaknesses in internal controls,” said Townsend, who observed the developing trend during the past six months. Copyright �2005 TDD, LLC. All rights reserved.

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