Research shows 404 non-compliance costs companies

Companies forced to reveal shortcomings in their IT systems due to section 404 will underperform the market, according to new research.

Bruce Weber of the London Business School found that company share prices dropped significantly once they had reported system failings related to their internal controls.

Weber said: ‘If there are weaknesses in your financial systems, it will be punished.’

He analysed 47 companies that disclosed ineffective financial reporting due to inadequate computer systems in 2005 and found that they underperformed the market by 1.5%.

He added that companies that failed to address the problem suffered a further market share drop of some 2.1%.

‘When you disclose your IT weaknesses, shareholder prices drop,’ said Weber. ‘Not only are you going to lose money when you disclose but you are going to consistently lose money.’

The research suggests that shareholder trust in the company can outweigh data accuracy.