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SEC Crackdown on Internal Controls: Violations Bringing Enforcement Actions

March 21, 2024 Uncategorized

SEC Crackdown on Internal Controls Violations: Enforcement Actions on the Rise

The Securities and Exchange Commission (SEC) has been ramping up enforcement actions against companies for inadequate internal controls. Failure to maintain proper internal controls has long been a focus of the SEC, but recent years have seen increased scrutiny and record-breaking fines. Companies of all sizes and across all industries have faced consequences for deficient internal controls and procedures related to financial reporting, cybersecurity, and more.

Internal controls are processes and procedures that companies implement to ensure operational efficiency, reliable financial reporting, and legal and regulatory compliance. They serve as a critical line of defense against errors, fraud, and misconduct. But when internal controls are weak or non-existent, major problems can arise.

Record SEC Fines for Internal Control Failures

In the last few years, the SEC has brought some massive enforcement actions related to inadequate internal controls, including:

  • A $200 million penalty against Herbalife in 2020 for failing to properly document and test internal controls.
  • A $125 million settlement with Wells Fargo in 2020 over internal control issues that led to unlawful sales practices.
  • A $100 million fine against Monsanto in 2016 for lack of internal accounting controls.

These record-setting fines indicate the SEC’s zero tolerance for internal control deficiencies that contribute to other securities law violations or reporting failures.

Financial Reporting and Disclosure Controls

One major area of SEC enforcement is the failure to implement adequate internal controls over financial reporting and disclosures as required by the Sarbanes-Oxley Act (SOX). Companies must have sufficient controls in place to ensure the accuracy and completeness of financial statements, disclosures, and other reporting.

In September 2020, the SEC charged biotech company MiMedx Group and two former executives with accounting fraud based on manipulating internal controls. The SEC said the executives “exploited gaps in internal controls to engage in a pervasive and long-running accounting fraud.” [1]

Other companies charged in recent years for deficient financial reporting controls include General Electric, Kraft Heinz, and Aeon Global Health. The SEC found these companies lacked adequate procedures and documentation to prevent or detect reporting errors and irregularities.

Christine Twomey
Christine Twomey
2024-03-21
Just had my Divorce case settled 2 months ago after having a horrible experience with another firm. I couldn’t be happier with Claire Banks and Elizabeth Garvey with their outstanding professionalism in doing so with Spodek Law Group. Any time I needed questions answered they were always prompt in doing so with all my uncertainties after 30 yrs of marriage.I feel from the bottom of my heart you will NOT be disappointed with either one. Thanks a million.
Brendan huisman
Brendan huisman
2024-03-18
Alex Zhik contacted me almost immediately when I reached out to Spodek for a consultation and was able to effectively communicate the path forward/consequences of my legal issue. I immediately agreed to hire Alex for his services and did not regret my choice. He was able to cover my case in court (with 1 day notice) and not only was he able to push my case down, he carefully negotiated a dismissal of the charge altogether. I highly recommend Spodek, and more specifically, Alex Zhik for all of your legal issues. Thanks guys!
Guerline Menard
Guerline Menard
2024-03-18
Thanks again Spodek law firm, particularly Esq Claire Banks who stood right there with us up to the finish line. Attached photos taken right outside of the court building and the smile on our faces represented victory, a breath of fresh air and satisfaction. We are very happy that this is over and we can move on with our lives. Thanks Spodek law 🙏🏼🙏🏼🙏🏼🙏🏼🙌🏼❤️
Keisha Parris
Keisha Parris
2024-03-15
Believe every single review here about Alex Z!! From our initial consultation, it was evident that Alex possessed a profound understanding of criminal law and a fierce dedication to his clients rights. Throughout the entirety of my case, Alex exhibited unparalleled professionalism and unwavering commitment. What sets Alex apart is not only his legal expertise but also his genuine compassion for his clients. He took the time to thoroughly explain my case, alleviating any concerns I had along the way. His exact words were “I’m not worried about it”. His unwavering support and guidance were invaluable throughout the entire process. I am immensely grateful for Alex's exceptional legal representation and wholeheartedly recommend his services to anyone in need of a skilled criminal defense attorney. Alex Z is not just a lawyer; he is a beacon of hope for those navigating the complexities of the legal system. If you find yourself in need of a dedicated and competent legal advocate, look no further than Alex Z.
Taïko Beauty
Taïko Beauty
2024-03-15
I don’t know where to start, I can write a novel about this firm, but one thing I will say is that having my best interest was their main priority since the beginning of my case which was back in Winter 2019. Miss Claire Banks, one of the best Attorneys in the firm represented me very well and was very professional, respectful, and truthful. Not once did she leave me in the dark, in fact she presented all options and routes that could possibly be considered for my case and she reinsured me that no matter what I decided to do, her and the team will have my back and that’s exactly what happened. Not only will I be liberated from this case, also, I will enjoy my freedom and continue to be a mother to my first born son and will have no restrictions with accomplishing my goals in life. Now that’s what I call victory!! I thank the Lord, My mother, Claire, and the Spodek team for standing by me and fighting with me. Words can’t describe how grateful I am to have the opportunity to work with this team. I’m very satisfied, very pleased with their performance, their hard work, and their diligence. Thank you team!
Anthony Williams
Anthony Williams
2024-03-12
Hey, how you guys doing? Good afternoon my name is Anthony Williams I just want to give a great shout out to the team of. Spodek law group. It is such a honor to use them and to use their assistance through this whole case from start to finish. They did everything that they said they was gonna do and if it ever comes down to it, if I ever have to use them again, hands-down they will be the first law office at the top of my list, thank you guys so much. It was a pleasure having you guys by my side so if you guys ever need them, do not hesitate to pick up the phone and give them a call.
Loveth Okpedo
Loveth Okpedo
2024-03-12
Very professional, very transparent, over all a great experience
Bee L
Bee L
2024-02-28
Amazing experience with Spodek! Very professional lawyers who take your case seriously. They treated me with respect, were always available, and answered any and all questions. They were able to help me very successfully and removed a huge stress. Highly recommend.
divesh patel
divesh patel
2024-02-24
I can't recommend Alex Zhik and Spodek Law Firm highly enough for their exceptional legal representation and personal mentorship. From the moment I engaged their services in October 2022, Alex took the time to understand my case thoroughly and provided guidance every step of the way. Alex's dedication to my case went above and beyond my expectations. His expertise, attention to detail, and commitment to achieving the best possible outcome were evident throughout the entire process. He took the time to mentor me, ensuring I understood the legal complexities involved to make informed decisions. Alex is the kind of guy you would want to have a beer with and has made a meaningful impact on me. I also want to acknowledge Todd Spodek, the leader of the firm, who played a crucial role in my case. His leadership and support bolstered the efforts of Alex, and his involvement highlighted the firm's commitment to excellence. Thanks to Alex Zhik and Todd Spodek, I achieved the outcome I desired, and I am incredibly grateful for their professionalism, expertise, and genuine care. If you're in need of legal representation, look no further than this outstanding team.

Safeguarding Customer Information

The SEC has also prioritized enforcement actions when internal controls fail to adequately safeguard customer data and prevent cybersecurity breaches. In 2018, the SEC fined Yahoo $35 million for failing to properly investigate a 2014 breach compromising 3 billion user accounts. [2]

And in 2021, the SEC charged Morgan Stanley with internal control failures that led to unauthorized access of customer data. The company agreed to pay a $35 million penalty. [3]

As cyber threats grow, regulators expect financial firms to adapt internal controls and security measures accordingly. Outdated or negligent practices can lead to SEC charges.

Compliance Controls

In addition to reporting and cybersecurity, the SEC scrutinizes whether companies have adequate controls for regulatory compliance. This includes implementing policies, training, monitoring, and auditing focused on adherence to securities laws and regulations.

In June 2022, the SEC charged wealth management firm GWFS Equities Inc. with lacking proper controls around compliance with Regulation Best Interest, which governs investment recommendations. GWFS agreed to pay a $4 million penalty. [4]

And in 2021, the SEC fined TIAA-CREF Individual & Institutional Services for having weak internal controls related to compliance with securities laws on retirement rollovers. The firm paid $97 million to settle charges. [5]

Robust internal controls tailored to regulatory requirements are essential for firms to avoid violations and remain in good standing.

Gatekeeper Accountability

The SEC also targets third-party gatekeepers—such as auditors, consultants, and attorneys—for failure to identify or call out internal control deficiencies. Gatekeepers are expected to serve as independent checks and sound the alarm about control weaknesses.

In 2021, the SEC charged Ernst & Young and partners with misconduct in two audits. The SEC said EY failed to comply with auditing standards and lacked appropriate quality controls. EY paid $100 million to settle the charges. [6]

And in 2020, the SEC fined PricewaterhouseCoopers $7 million for violations related to internal controls audits and professional standards. $3 million of the penalty related specifically to control failures.

The SEC expects auditors and other gatekeepers to diligently evaluate internal controls as part of their duties in upholding market integrity.

Implementing Effective Internal Controls

Given the SEC’s extensive enforcement record on internal controls, implementing and maintaining effective control systems is imperative for companies. Some best practices include:

  • Conducting regular risk assessments to identify areas needing controls
  • Designing control activities tailored to financial, cyber, compliance, and other risks
  • Ensuring proper documentation and approval protocols for controls
  • Performing timely testing and auditing to validate control effectiveness
  • Providing frequent internal control training to employees
  • Engaging external auditors and consultants to independently assess controls

Following these steps can help position companies to avoid deficiencies and enforcement actions. But controls must also be continually reevaluated and updated as risks evolve.

Looking Ahead at SEC Enforcement

With its vigorous enforcement agenda, the SEC shows no signs of easing up on internal control failures. In 2022 and beyond, companies should expect more scrutiny and potential charges for control weaknesses that enable other violations or reporting errors.

Firms must make internal controls a top priority. Those neglecting this area risk facing the SEC’s wrath through stiff fines, penalties, disgorgement of profits, and more. But companies prioritizing strong control environments can demonstrate their commitment to integrity, transparency, and compliance.

Sources:

  1. SEC Charges Biotech Company and Executives With Accounting Fraud
  2. Yahoo Finance: SEC Charges Yahoo Finance With Failing to Disclose Massive Data Breach
  3. SEC Charges Morgan Stanley for Failure to Safeguard Customer Data
  4. SEC Charges Wealth Management Firm With Failing to Maintain Adequate Controls
  5. SEC Charges TIAA Subsidiary With Disclosure and Internal Controls Failures
  6. SEC Charges Ernst & Young and Partners for Exam Cheating and Improper Professional Conduct
  7. SEC Charges PricewaterhouseCoopers LLP With Violating Auditor Independence Rules

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Todd Spodek

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RALPH P. FRANCHO, JR

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JEREMY FEIGENBAUM

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ELIZABETH GARVEY

Associate

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CLAIRE BANKS

Associate

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RAJESH BARUA

Of-Counsel

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CHAD LEWIN

Of-Counsel

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