Implementation of the section of Sarbanes-Oxley requiring issuers to report on the adequacy of internal controls will likely cause internal control problems to surface more frequently than in the past.

As a result, Fitch Ratings says, in a new report, that it expects material weaknesses will be reported for a number of companies during the next year or two.

The ratings agency, based in New York and London, says it does not expect implementation of SOX 404 to be straightforward. The costs and time involved in establishing easily accessible evidence that controls over all elements of financial reporting that exist can be immense. To expect that all but a few companies will meet these challenges immediately is unrealistic, and as such, Fitch anticipates material weaknesses to be reported by management and its auditors for a number of the companies it rates during the next year or two.

It cautions that the method and level of disclosure by a company reporting material weaknesses in its internal controls under SOX 404 may factor into credit actions by Fitch. The controversial section, effective for fiscal years ended after Nov. 15, 2004, requires management and its auditors to express an opinion on the adequacy of controls over financial reporting and disclosure. Should a weakness be disclosed or new weakness identified, negative rating actions may occur if the disclosure and/or further discussion with management reveals it to have a significant effect on a company’s future financial standing, or calls into question the data on which analysis has been based, Fitch says.

Negative rating actions, if any, will be case-specific, the firm notes. Fitch’s action will depend on whether the weaknesses in the company resulting in the statement have already been identified by Fitch, whether or not such weaknesses are already reflected in the ratings, and management’s plans to remedy the situation.