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SEC Charges Former CFO with Hiding Internal Control Failures

A Florida firm's CFO and CEO knowingly hid information about inadequate inventory controls and engaged in improper accounting maneuvers, the SEC al...
Iris DorbianJuly 31, 2014
SEC Charges Former CFO with Hiding Internal Control Failures

The Securities & Exchange Commission has brought charges against Marc Sherman, the CEO of QSGI, a Florida-based computer equipment firm, and Edward L. Cummings, former CFO, for misleading outside auditors and shareholders about internal control deficiencies.

The SEC is alleging that both knowingly hid key information about the firm’s inadequate inventory controls at a Minnesota facility in 2008. Financial reports contended, for example, that CEO Sherman “participated in management’s assessment of the internal controls,” a claim that the SEC insists is false. Further, the SEC says that both Sherman and finance chief Cummings “each certified that they had disclosed all significant deficiencies in internal controls to the outside auditors,” when in reality they did not.

In trying to introduce new controls to its Minnesota facility six years ago, QSGI failed to design inventory control procedures that took into account the existing control environment, such as employees’ qualifications and experience levels, the SEC alleges. “Sales and warehouse personnel often failed to document their removal of items from inventory,” according to the SEC press release. “When they did prepare the paperwork, accounting personnel often failed to process it and adjust inventory in the company’s financial reporting system.”

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Both Sherman and Cummings are charged with violating The Sarbanes-Oxley Act of 2002, which mandates that any deficiencies in internal controls over financial reporting be made public.

In addition to withholding and misrepresenting important information, both Sherman and Cummings are additionally accused of engaging in improper accounting procedures that not only “rendered QSGI’s books and records inaccurate” but “were performed in order to maximize the amount of money that QSGI could borrow from its chief creditor.” The improper accounting involved trying to accelerate the recognition of certain inventory and accounts receivables in QSGI’s books and records “by up to a week at a time,” says the SEC.

Without admitting or denying the charges, Cummings has agreed to settle the case against him and pay a $23,000 fine. But in doing so, he will be banned from holding an executive position at a publicly traded company for five years. He will also be prevented from working as an accountant for any company, public or private, for at least five years.

The SEC will pursue its case against Sherman in a separate administrative proceeding.

Scott W. Friestad, associate director in the SEC’s Enforcement Division, said: “Corporate executives have an obligation to take the Sarbanes-Oxley disclosure and certification requirements very seriously. Sherman and Cummings flouted these regulatory requirements and misled investors and external auditors in the process.”

In July 2009, a year after QSGI allegedly failed to improve its internal control systems at its Minnesota facility, the company filed for bankruptcy. It later emerged from bankruptcy in 2011.

To read the SEC’s charges against both Sherman and Cummings, click here.