On July 30, 2014, the SEC announced charges against the CEO and the former CFO of a computer equipment company based in Florida for misrepresenting the state of the Company’s internal controls over financial reporting and failure to disclose to its auditors deficiencies in its internal controls. The SEC’s action is a strong reminder to public companies of the importance of maintaining adequate internal controls as required by the Sarbanes-Oxley Act of 2002 (SOX).

Under SOX, a company’s CEO and CFO are required to certify with each periodic report (i.e., Forms 10-Q and 10-K) that they have disclosed to the company’s outside auditors all material deficiencies and material weaknesses in the design or operation of internal control over financial reporting. In the action identified above, the SEC charged the CEO and former CFO with certifying that the CEO participated in management’s assessment of the internal controls when in fact the CEO did not actually participate. Furthermore, the SEC charged that each had certified that they had disclosed all material deficiencies in the company’s internal controls to outside auditors when each had instead misled the auditors about certain internal controls. Specifically, the SEC alleged that each misled the outside auditors by failing to provide information about inadequate inventory controls and improper accounting practices.

The SEC stated that each had violated the Securities Exchange Act of 1934 law by signing a Form 10-K containing the false management report on internal controls over financial reporting and signing the Section 302 certification required by SOX whereby they represented that they had evaluated the annual report and disclosed all significate deficiencies to the outside auditors.