internal controls

Recent SEC Enforcement Actions and Public Commentary Demonstrate the Commission’s Continued Focus on Internal Control Failures

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We have previously written about how, over the past few years, the SEC and other regulatory agencies have devoted substantial resources to investigations regarding allegations that public companies have inadequate internal controls and/or a system for reporting those controls.  See here, here and here.  That effort shows no signs of waning.  As recently as March 23, 2016, the SEC announced a settlement with a multi-national company due in part to the internal controls failures at two foreign subsidiaries.  On March 10, 2016, the SEC announced a settlement of claims against Magnum Hunter Resources Corporation in connection with alleged internal control failures.  And, on February 17, 2016, the SEC announced a settlement of claims against a biopesticide company, Marrone Bio Innovations, based on the company having reported misstated financial results caused in part by internal control failures.[1]

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SEC Chair Warns Silicon Valley That Unicorns Need To Be Watched and Monitored

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Speaking last week at the SEC’s and Rock Center’s Silicon Valley Initiative at Stanford Law School, SEC Chair Mary Jo White cautioned Silicon Valley’s start-up companies regarding their potential lack of internal controls.  In particular, she warned that unicorns—nonpublic start-up companies valued north of one billion dollars—may warrant special scrutiny into whether their corporate governance and investor disclosures are keeping pace with their growing valuations.  Ms. White repeatedly warned that the prestige of obtaining “unicorn” status may drive companies to inflate their valuations.

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Chamber of Commerce Airs Grievances Related To Internal Controls Inspections

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In recent months, issues related to internal control systems and reporting have taken on an increased profile and significance.  For example, as previously noted by the authors here and here, the SEC has sought to prioritize compliance with internal controls by initiating a growing number of investigations into companies based on allegations of inadequate internal controls.

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FINRA Offers 11.7 Million Reasons To Maintain Adequate Supervisory Controls

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Stack of Money

As noted previously in this blog, the SEC and other regulatory agencies continue to display an increased interest in the issue of internal and supervisory controls.  The Financial Industry Regulatory Authority (“FINRA”) has continued this trend, recently bringing charges against a number of member firms related to allegedly inadequate supervisory controls.

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In re Polycom and the SEC’s Continued Focus on Internal Controls

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People at a Table

Over the past year, the SEC and other regulatory agencies have initiated an increasing number of investigations into companies based on allegations of inadequate internal controls and/or a system for reporting those controls. For more on internal controls and a discussion of recent regulatory activity in this area, see Jason M. Halper & Jonathan E. Lopez, et al., Assessing the Increased Regulatory Focus on Public Company Internal Control and Reporting, Bloomberg BNA: Securities Regulation & Law Report, Oct. 6, 2014.

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Out of Control: SEC Says Lack of Internal Controls Led to HP Paying More Than $108 Million to Settle FCPA Actions

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On April 9, 2014, the Securities and Exchange Commission announced that Hewlett-Packard had agreed to pay more than $108 million to settle Foreign Corrupt Practices Act actions brought by the SEC and the Department of Justice.  These actions were based on HP’s subsidiaries’ alleged payments of more than $3.6 million to Russian, Polish, and Mexican government officials to obtain or maintain lucrative public contracts.  The settlement is important because it highlights the SEC’s and DOJ’s continued focus on companies’ internal controls, particularly in the FCPA arena.  It also shows that the SEC may be able to use lesser, non-fraud offenses in which the underlying conduct involves a fairly de minimis amount of money to police behavior and subject companies to significant financial consequences. READ MORE →