Question regarding unintentional errors 1501



  • I know that there are increased penalties under SOX when there’s an intentional or willing misstatement. I’m having trouble finding a definite answer in situations where there is no intent.
    SOX requires management to take responsibility for their financials. So, if management signs off indicating that they have reviewed the financial statements and they are presented fairly, but later find that there is an honest mistake, is there a penalty? I mean in terms of a government imposed penalty.



  • Hi,
    On page #120, of Protiviti’s document, Guide to the Sarbanes-Oxley Act: Internal Control Reporting Requirements, Frequently Asked Questions Regarding Section 4040, you can find some guidance about unintentional erros versus acts of fraud.
    In short, the PCAOB was clear that in Audit Standard No. 2 that risks and controls must be addressed with respect to BOTH inadvertent and intentional errors.
    The definition of fraud: fraud, fraudulence, dupery, hoax, humbug, put-on something intended to deceive; deliberate trickery intended to gain an advantage.
    The key word above is INTENT. Thus, to prove the existence of fraud, it is necessary to provide evidence that the misstatement occurred, was WILLFUL, and with intent to mislead. I believe that ‘scienter’ must exist though I’m not an attorney.
    Sarbanes-Oxley Act
    Title IX: White Collar Crime Penalty Enhancements
    Financial Statements filed with the SEC must be certified by the CEO and CFO. The certification must state that the financial statements and disclosures fully comply with provisions of the Securities Exchange Act and that they fairly present, in all material respects, the operations and financial condition of the issuer. Maximum penalties for willful and knowing violations of this section are a fine of not more than USD500,000 and/or imprisonment of up to 5 years.
    Hope this helps,
    Milan



  • I think that you are making the distinction between ‘errors’ and ‘irregularities’.
    An error is un-intentional, whereas and irregularity denotes fraud (intent to mislead).
    While SOx requires antifraud controls to be included in the financial control environment, a material weakness in the control environment covers any lack of control to prevent a material misstatement, regardless of intent (or lack).
    Having said that, an error (leading to a material misstatement of the financial statements) would require the company to re-state its financial statements, but does not normally lead to monetary penalties. In addition to re-stating the financial statements, an irregularity may lead to criminal (SEC) and civil penalties (SEC and shareholder suits).
    Hope this helps.
    John



  • Thanks for the followup guys.
    I didn’t think that there were any financial penalties or jail time associated with unintentional errors, but I haven’t found anything specifically indicating any position.
    Looking at SOX, Sec 105©(5), I found that they only levy punishment against auditors in cases of intentional/knowing conduct or repeated negligent conduct. I would like to think that the same would apply to management, but I haven’t been able to find anything official.
    Thanks again for the help.



  • …Looking at SOX, Sec 105©(5), I found that they only levy punishment against auditors in cases of intentional/knowing conduct or repeated negligent conduct. I would like to think that the same would apply to management, but I haven’t been able to find anything official.
    Sarbanes-Oxley Act of 2002
    Title IX: White Collar Crime Penalty Enhancements
    Financial Statements filed with the SEC must be certified by the CEO and CFO. The certification must state that the financial statements and disclosures fully comply with provisions of the Securities Exchange Act and that they fairly present, in all material respects, the operations and financial condition of the issuer.
    Maximum penalties for willful and knowing violations of this section are a fine of not more than USD500,000 and/or imprisonment of up to 5 years.



  • This was a very interesting question and the responses were educational.
    I’d also conjecture that if more than the normal amount of unintentional errors were made, the SEC regulatory board would most likely conduct special audits or mandate the company ramp their control and QA process. I’m thinking in terms of what the IRS might do in cases of taxpayers constantly making errors year-after-year 😉



  • Any ‘penalties’ would come from the capital market, probably in the form of higher credit risk or lower PE multiple. No government-imposed penalties for errors.


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