Last week, the Securities and Exchange Commission (SEC) filed a complaint in U.S. District Court against a company's director, former CEO and former CFO for allegedly making false and misleading statements to the company's auditors, in violation of Rule 13b2-2 of the Securities Exchange Act of 1934, as amended (Exchange Act).
This latest enforcement action underscores the SEC's continued focus on loss contingencies and serves as a reminder to directors and officers of the need to carefully assess company disclosures and the statements made to auditors about loss contingencies, including in management representation letters.
This enforcement action also highlights the challenges often associated with government investigations when making disclosure and/or accrual determinations under Accounting Standards Codification 450-20 (Contingencies'Loss Contingencies). The loss contingency at issue in this latest matter involved an SEC investigation into the company's investment in a separate biotechnology company. A chronology of relevant events is as follows:
- 2014. SEC commences an investigation into the company's investment in a certain biotechnology company.
- November 2014. The then CFO forwards a letter to the company's auditor from the company's outside counsel regarding the SEC's investigation. Thereafter nothing was updated or disclosed to that auditor (or the successor auditor).
- March 2015 - November 2017. SEC Division of Enforcement sends...
