Subject: File No. 4-497
From: William A. Stimson, PhD
Affiliation: SCI Associates
March 16, 2005
Section 404 can be affected by the wording of Section 409, which uses the phrase, "material changes in the financial condition or operations of the issuer..."
This phrase may affect Section 404 in this sense. The word, "operations" being in the plural, whereas "condition" is in the singular, the former may have broader meaning and can apply to the financial materiality of business operations. If this is so, then Section 404 has applicability to IT controls because financial matters are recorded in the IT system. Section 404 may also have applicability to business process controls because these controls affect finance before and during the fact.
In particular, if the cost of quality is material or if the issuer is ISO 9000-certified and this certification is used to satisfy a requirement for bid, then noncompliance or nonconformance to the ISO Standard can lead to fraud. In either case, it is possible for business operations to adversely impact the market value of the issuer. For example, suppose an issuer produces thousands of valves to a customer and its quality system is not in compliance with ISO 9001, or its processes are not in conformance to established procedures. Suppose further that the customer is dissatisfied with the product. Because issuer production is not in control, the issuer stands liable for the entire volume, which would probably affect its market value.
Therefore, it would serve the public if Section 404 were interpreted to apply to all issuer process controls that have the potential to affect issuer market value. Applying Section 404 to business controls would be a preventive measure, whereas limiting its applicability to explicit financial controls is often a corrective measure.
William A. Stimson, PhD