Companies complying with Section 404 of the Sarbanes Oxley Act are sometimes faced with an adverse report. An adverse report on the internal control structure over financial reporting requires quick resolution on part of the audit committee and senior management. From a perspective of the audit committee and Board of Directors the steps taken to address a adverse report on internal controls should ensure that:

1. The adverse findings in corrected as soon as possible.

2. The market is assured that the corrective action is taken.

Before deciding on the steps to taken to remediate the material weakness, which have resulted in an adverse opinion, the management team, together with the internal auditors, and independent auditors should try an first understand the deficiency. This is important to make a fully informed decision on the future course of action. Here are a few guiding principles or questions, which management should be asking to help tackle an adverse report on internal controls.

- Who identified the weakness?

1) Is it the management as part of its assessment of internal control over financial reporting or otherwise?
2) The internal audit as part of a routine audit, or in connection with the review of internal control?
3) Independent auditors – As part of its review of internal control over financial reporting?

- What is the nature of the weakness?

- How long has the weakness be there?

- What are the implications of the weakness? Is there a possibility that fraud might have resulted from this weakness?

- What other controls are operating in the weakness area that could have acted as compensating controls.

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