Risk & Compliance

SEC Faults Magnum Hunter’s Internal Controls

The oil company's former CFO failed to identify staffing problems in its accounting department as a material weakness, the SEC says.
Matthew HellerMarch 14, 2016

The former CFO and former chief accounting officer of Magnum Hunter Resources have been charged with failing to identify staffing problems in the oil company’s accounting department as a material weakness that should be disclosed publicly.

In a complaint filed last week, the U.S. Securities and Exchange Commission said ex-CFO Ronald Ormand and ex-CAO David Krueger improperly applied internal control over financial reporting (ICFR) standards in concluding MHR had no material weaknesses even though the firm’s consultant and its audit engagement partner raised red flags.

“T]he potential for error in such a compressed work environment presents substantial risk,” consultant Joseph Allred warned in February 2012, referring to the staffing problems.

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MHR filed for bankruptcy protection in December. To settle the SEC’s charges, the company agreed to pay a penalty of $250,000 subject to bankruptcy court approval, while Ormand agreed to pay a penalty of $25,000 and Krueger agreed to be suspended from appearing and practicing before the SEC as an accountant.

“Effective internal controls are a critical safeguard against false and inaccurate information that may harm shareholders,” Shamoil T. Shipchandler, director of the SEC’s Fort Worth regional office, said in a news release. “This action emphasizes that all those involved in ICFR assessments — companies, management, external auditors, and consultants — must take their responsibilities seriously and rigorously assess controls, including those over financial reporting.”

According to the SEC, Magnum Hunger began experiencing a strain on its accounting resources because of rapid growth through acquisitions that took the company from $6 million in revenues in 2009 to more than $100 million in 2011.

Both Allred and audit engagement partner Wayne Gray concluded in February 2012 that the manpower problems rose only to the level of a “significant deficiency,” rather than material weakness, but the SEC noted that MHR management “retained ultimate responsibility for assessing MHR’s ICFR, including evaluating the severity of any deficiencies in ICFR.”

“MHR management should have assessed whether a reasonable possibility existed that a material misstatement of the company’s financial statements would not be prevented or detected on a timely basis,” the SEC said.

Ormand was MHR’s CFO from May 2009 to July 2013.