Senior Execs Failed to Properly Address Internal Control Weaknesses
A public company, its CFO and CAO, the engagement partner of the firm’s auditor, and the principal of its outside SOX consultant were all censured and fined for approving financial statements even though an over-burdened accounting department indicated a material weakness. The SEC asserts that the firm, its auditor, and the SOX consultant all identified that the accounting department was over-burdened and under-staffed because of company growth. Nevertheless, the respondents classified the problem as a “significant deficiency” rather than a “material weakness,” thereby avoiding public disclosure and allowing certification that the firm’s internal controls over financial reporting were effective. The SEC charges that the insufficient staffing was a “material weakness” because there was a “reasonable possibility” of a material misstatement rather than something that merely warranted management attention. The company restated financial statements to correct errors attributable to the insufficient staffing.
OUR TAKE: Under-resourcing internal control functions such as financial reporting, compliance, internal audit, and risk management can result in serious consequences for senior management. Senior leaders become too clever by half when they try to downplay identified deficiencies.