Repeated Material Weakness 1333

  • I have a question. We all know that companies would remediate any MWs they have - otherwise this may have an impact on their share price, if MWs are entity level it may result in an unqualified audit etc.
    However, does the SEC have any power to address companies that decide not to do anything year after year?

  • I haven’t see anythiong official on this, but I think that the continuing/un-remediated Material Weakness(es) would ber a clear indication of a Tone at the Top material weakness, at best, since it demonstrates management’s willfull neglect to maintain an effective control environment.
    If, at this point, fraud was discovered and led to shareholder losses, then not only would management be liable in a shareholder suit, but criminal penalties under SOx. As far as a shareholder suit goes, would it be enough to show that the continued MWs led to share price decline to prove (and quantify) damages? Also, since the audit committee/BoD knows of the MWs, are they liable then, too, for breach of their fiduciary responsibility?
    If nothing else, I would think that the SEC could open an inquiry (either an informal review or a formal investigation) to see if management’s lack of interest in remediating is indicative of an iceberg lurking under the surface.
    These are just a couple of scenarios that I can imagine. Any way you slice it, I doubt that it would be pretty.
    Any SEC lawyers/litigators in the crowd? Please chime in.

  • The SEC has various enforcement actions available regarding alleged violations of SOX.
    The following SEC enforcement actions against a company might provide some insight:
    Symbol Technologies Agrees to Settle SEC Enforcement Action Charging the Company with Accounting Fraud
    Some relevant excerpts:
    ‘The scope and magnitude of the fraud at Symbol Technologies warrant the imposition of significant penalties not just against individual wrongdoers, but also against the company responsible for having created and fostered the environment in which the wrongdoing took place,’ said Stephen M. Cutler, Director of the Commission’s Division of Enforcement. ‘And while the company ultimately did cooperate with the government – and received credit for having done so its initial response to our investigation further harmed investors by delaying exposure of the fraud and allowing it to continue longer than it otherwise might have.’
    Clearly, the SEC considers the Tone at the Top to be an integral component of internal control and failture to address repeated MWs cited by the auditors can have negative consequence to management and the Company stewards.
    Another relevant excerpt:
    Symbol has agreed to the following relief:
    * a permanent injunction against future violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws.

    * a civil penalty of USD37 million and nominal disgorgement of USD1, all of which will be distributed to injured investors.
    * various remedial measures, including the appointment of an independent examiner to review Symbol's accounting practices and internal control systems and assess the status of remedial actions undertaken or planned by the company in those and other areas, such as corporate governance.

  • John and Milan - Thanks for your response. It’s very helpful. I suspect there isnt anything official at the SEC at the moment. Perhaps we would see something in the next 18 - 24 months, once the accelerated filers have gone through 2-3 SOX 404 audit cycles.

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