The Commission filed an administrative action against a company alleging that it had misrepresented the identity of its CFO. According to the complaint, the company identified an individual in a number of quarterly filings as the acting CFO. The filings also contained certifications "that ostensibly bore the purported Acting CFO’s electronic signature when, in reality, the purported Acting CFO had not signed" the filings. Interestingly, a parallel criminal action was also filed in the case by the U.S. Attorneys Office.
The issue raises an interesting question as to materiality. Misrepresenting the identity of an officer will not always matter to the market. The CFO, however, is a particularly important position so the market presumably pays more attention to the person serving in that position. Moreover, in this case, the SEC alleged that the CEO really performed the CFO's functions. Materiality could be less about mis-identifying the CFO and more about failing to disclose that the positions had been effectively combined.
What made the claim particularly interesting, however, was the role of the chair of the audit committee in connection with the matter. According to the allegations of the SEC, the person designated as "Acting CFO" contacted the chair of the audit committee and informed the chair about the inaccurate disclosure. The audit chair allegedly contacted the CEO and, according to the complaint, was told:
- The purported Acting CFO had not actually served as the company’s Acting CFO; that [the CEO] had used the purported Acting CFO’s name on [the company's] public filings without the purported Acting CFO’s permission; told [the audit chair] not to worry about it because it was in the past; told [the audit chair] to not tell anyone about the purported Acting CFO, including the company’s Board of Directors or the public; and that, if she shared this information with anyone, [the company's] reputation would be affected negatively and its stock price would drop.
In re Kiang, Exchange Act Release No. 71824 (admin proc. March 2014).
Thereafter, the audit chair allegedly signed an annual report that "contained a false Sarbanes-Oxley certification" providing that "based on [the CEO's] and the other certifying officer’s most recent evaluation of the company’s internal control over financial reporting--any fraud, whether or not material, involving management had been disclosed to the company’s auditors and to the company’s Audit Committee."
The Commission brought and settled an administrative action against the audit chair. The SEC alleged that the audit chair violated Section 13(a) for causing the filing of a Form 10-K that included a "false Sarbanes-Oxley certification." The audit chair was ordered to "permanently refrain from signing any Commission public filing that contains any certification required pursuant to the Sarbanes-Oxley Act of 2002."
Thus, the chair of an audit committee was sanctioned only for a non-scienter based offense after learning about misrepresentations in filings about the identity of the CFO and failing to report the matter to the board. Given the knowledge of the alleged misrepresentation, this is a weak sanction.
Moreover, the subsequent "failure" was not entirely clear. The chair of the audit committee signed a filing that included the traditional SOX certification. The certification includes a representation by the applicable officer that fraud had been disclosed to the auditor and the audit committee. In fact, the alleged fraud was disclosed to the chair of the audit committee, yet this was apparently not deemed sufficient.
The case suggests that disclosure to one director on the audit committee is not the same as disclosure to the entire committee. As a result, the case stands for the proposition that a director learning about fraud has an obligation to disclose the matter to the entire committee. The approach also suggests that officers executing a certification may not fulfill their obligation by informing only the chair. As a result, reports of fraud should go to all members on a committee.