SEC Settles Charges With Texas Company for Faulty Evaluations of Internal Controls

The U.S. Securities and Exchange Commission (SEC) recently settled charges against Texas-based oil company Magnum Hunter Resources (MHR) and several individuals for deficient evaluation of the company’s internal controls over financial reporting and failures to maintain internal control over financial reporting between Dec. 31, 2011, and Sept. 30, 2013.

The internal control over financial reporting (ICFR) refers to a company’s process for providing reasonable assurance to the public regarding the reliability of its financial reporting. According to the SEC’s rules, the company’s management is required to evaluate and annually report on the effectiveness of ICFR, including disclosing any identified material weaknesses that creates a reasonable possibility that the company will not timely prevent or detect a material misstatement of its financial statements.

It is important to note that management may not conclude ICFR is effective if a material weakness exists.

The agency alleged that MHR and two senior officers — former Chief Financial Officer Ronald Ormand and former Chief Accounting Officer David Krueger — failed to properly evaluate and apply applicable ICFR standards and improperly concluded that MHR had no material weaknesses.
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The SEC also charged former MHR consultant Joseph Allred and former MHR audit engagement partner Wayne Gray with improperly evaluating the severity of MHR’s internal control deficiencies and misapplying relevant standards for assessing deficiencies and material weaknesses. Accordingly, the public was not told that MHR had a material weakness in its ICFR.

Shamoil T. Shipchandler, director for the SEC’s Fort Worth Regional Office, commented:

Effective internal controls are a critical safeguard against false and inaccurate information that may harm shareholders. 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.