SEC Administrative Case Reinforces Current Emphasis On Internal Controls

Consistent with its current focus on internal control over financial reporting (ICFR), the Securities and Exchange Commission recently sanctioned a company and individuals for failing to adequately evaluate and audit the company's ICFR. In settled orders, the Commission alleged that Magnum Hunter Resources Corporation (MHR) violated the SEC's periodic reporting rules when it reported management's conclusions that MHR's ICFR was effective as of December 31, 2011.

In the orders, the SEC alleged that a consultant to MHR had identified as a control deficiency "inadequate and inappropriately aligned [accounting] staffing," which resulted in delays in preparing financial statements and reports, and which presented "substantial risk" of misstatement. The consultant concluded that the staffing deficiency represented only a significant deficiency and did not rise to the level of a material weakness in ICFR. According to the SEC, the consultant did not explain how a