New SEC Case Emphasizes Importance of Internal Controls

The SEC recently brought an unusual case in which the alleged violations of law related principally to failure to maintain adequate internal control over financial reporting. In its complaint against PACCAR, the SEC identified errors in certain PACCAR periodic filings regarding segment reporting, footnote disclosures regarding impaired receivables and related reserves, and certain offsetting line items in its cash flow statements. The SEC alleged violations of the Securities Exchange Act's requirements that issuers file accurate periodic reports (section 13(a)), maintain adequate books and records (section 13(b)(2)(A)), and devise and maintain a sufficient system of internal accounting controls (section 13(b)(2)(B)). Interestingly, the complaint indicates that the errors were identified in response to comment letters from the SEC staff.