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Signed, Disgruntled

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Posted by: Jack Ciesielski	3/31/2005 10:14 AM
A friend forwarded this excerpt from Monarch Casino & Resort's 10-K. The registrant is a "non-accelerated" filer, meaning they've got until the end of 2006 to get their internal controls in order for being reported upon. But they sure don't sound happy about it: [I underlined the best parts.] "There has been no change in our internal controls over financial reporting during the year ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reports. We are in the process of our compliance efforts mandated by Section 404 of the Sarbanes-Oxley Act of 2002. As we have done our due diligence in trying to understand the requirements and corresponding work necessary to successfully document our system of internal controls to the standards and satisfaction of third parties, we have encountered egregious estimates of time, dollars, outside consultant fees, and volumes of paperwork. As our implementation has progressed, we have yet to realize any control, operations or governance improvements or benefits. Additionally, and most importantly, the estimated potential cost to our shareholders in relation to the benefits, or even potential benefits, is unconscionable. We believe that these additional costs and expenses will merely confirm the existence of an already effective and functioning control system that already conforms with a recognized system of internal controls. Although we intend to diligently pursue implementation and compliance with the Section 404 requirements, we do not believe it is in our shareholders' best interests to incur unnecessary outsized costs in this effort. As we are a single location company with an extremely involved, hands-on senior management group in a highly regulated industry with significant insider ownership, the potential benefits to be derived from the Section 404 requirements are believed to be minimal. Consequently, we will make every effort internally to comply with the Section 404 requirements but will minimize what we believe to be the unreasonable and unnecessary expense of retaining outside third parties to assist in this effort. As a result of this cautioned approach and the complexity of compliance, there is a risk that, notwithstanding the best efforts of our management group, we may fail to adopt sufficient internal controls over financial reporting that are in compliance with the Section 404 requirements." Right now, they're a $180 million market cap firm, but it's doubtful that they want to stay a small-cap outfit. Let's see where they are in two years when they actually have to report under Section 404. Maybe their perspective will change as they grow. In the meantime, you've got to wonder: if their controls are so effective and wonderful, why is it so hard to be in compliance with Section 404? That's a question for all the small firms protesting 404 but claim to have sufficient controls, anyway.

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