The SEC recently brought an enforcement action against a company and its general counsel for failure to timely disclose, or record an accrual for, a loss contingency relating to an ongoing government investigation. Under GAAP, a public company must disclose a loss contingency when a material loss is reasonably possible. Furthermore, if the likelihood of material loss becomes probable, and if the loss is reasonably estimable, the company must then accrue for that loss.
In the action, the SEC alleges that the general counsel oversaw the company’s response to the government investigation but failed to disclose material facts about the investigation to the company’s chief executive officer, chief financial officer, Audit Committee and independent auditors. Those material facts included that:
- the company had sent the government agency an analysis estimating the amount at issue in the investigation,
- the company agreed to submit a settlement offer to the agency by a specific date, and
- prior to submitting the settlement offer, the company’s estimate of the amount at issue had grown significantly.
The SEC alleged that, because the general counsel failed to disclose key facts regarding the investigation, the company had submitted multiple materially false and misleading filings to the SEC that did not disclose any information about the government investigation or any material weakness in the company’s internal controls.
The SEC is seeking a judgment against the company and the general counsel providing for permanent injunctive relief and ordering them to pay disgorgement, interest and penalties.