Four public companies have been fined a total of $435,000 for failing to remedy material weaknesses in their internal controls over financial reporting for seven to 10 consecutive annual reporting periods.
The U.S. Securities and Exchange Commission said two of the companies — Mexican steel producer Grupo Simec and kefir smoothie maker Lifeway Foods — failed to complete the required evaluation of the effectiveness of their ICFR systems for two consecutive annual reporting periods and that Grupo Simec is still in the process of remediating its material weaknesses.
Software maker Digital Turbine and biotech firm Cytodyn were also cited by the SEC for ICFR deficiencies. All four companies agreed to settlements, with Grupo Simec paying the largest fine of $200,000.
“Adequate internal controls are the first line of defense in detecting and preventing material errors or fraud in financial reporting,” SEC Chief Accountant Wesley Bricker said in a news release. “When internal control deficiencies are left unaddressed, financial reporting quality can suffer.”
According to the SEC, Grupo Simec disclosed material weaknesses in each of its Form 10-K annual reports from 2008 through 2017, with the lack of an “appropriate consolidation system to allow management to properly supervise the preparation of consolidated financial information” being a persistent problem.
In certain years, the company also acknowledged having a “very vulnerable procedure to determine costs due to manual calculations.”
Grupo Simec’s “persistent and extensive material weaknesses indicate that management did not appropriately address, and in some periods adequately assess, its admitted ICFR material weaknesses and associated risks,” the SEC alleged.
The commission also said Grupo Simec’s CEO and CFO failed to complete their annual ICFR evaluation in 2015 and 2016 and that while the company has completed the design and testing of its internal controls, “there continues to be material weaknesses that it is still in the process of remediating.”
In Lifeway’s case, the SEC noted that its “failure to address its material weaknesses has been compounded by three announced restatements since fiscal 2012.”
“Disclosure of material weaknesses is not enough without meaningful remediation,” said Melissa Hodgman, an associate director in the SEC’s Enforcement Division.