The Commission filed settled financial fraud charges against an issuer which discovered and remediated a series of accounting issues and the CFO who caused the books and records to be falsified, eventually resulting in a restatement. SEC v. DGSE Companies Inc., Civil Action No. 14-1909 (N.D. Tx. Filed May 27, 2014).
DGSE buys and sells jewelry, diamonds, fine watches, rare coins and currency, precious metal bullion products, collectibles and other valuables. Its CFO during the period was I. John Benson, also named as a defendant.
In early 2012 the Board of Directors determined that there were certain accounting irregularities which might impact reported financial information. The company announced that its filed financial statements beginning with the second quarter of 2007 should not be relied on. The Board retained a forensic accounting firm and launched an internal investigation. The Board’s investigation identified a series of irregularities including:
- Many unsupported and/or improperly-described accounting entries;
- No standard, formalized process for reconciling intercompany accounts;
- The recording of unsupported entries directly into the general ledger;
- A lack of regular inventory counts matching the general ledger;
- The lack of an audit trail with which to identify the reason for accounting adjustments;
- The use of antiquated accounting systems that allowed manipulation;
- Improper data security; and
- No backup of the accounting data.
These deficiencies compromised the accounting systems of the firm. The inter-company accounts became out of balance by millions of dollars.
Mr. Benson made a number of fraudulent accounting entries to bring the general ledger back into apparent balance. Those included ordering the preparation of adjusting entries to the general ledger and overstating the inventory by millions of dollars. He also executed a false management letter to the auditors, representing that company management was not aware of any fraud, that the company had good title to the merchandise and that consignment items had been excluded from the inventory. In addition, Mr. Benson knowingly executed misleading public filings and management certifications.
These irregularities stem from deficiencies in DGSE’s accounting systems and internal records. Those include: a lack of sufficient controls to adequately maintain and reconcile accounts; an antiquated accounting system; an insufficiently staffed accounting department; and a lack of adequate written policies and procedures.
As a result of its internal investigation, and additional work performed by accountants retained by the firm, DGSE restated its financial statements in its Form 10K-A, filed December 19, 2012. The firm also undertook an extensive series of remedial actions including: removing and replacing all members of the prior management team; retaining new independent auditors to report to the audit committee; engaging a national consulting firm to identify errors in electronic accounting system functioning: reconciling prior inventory discrepancies and balancing the general ledger; augmenting electronic inventory tracking; instituting a regular blind inventory check that is independently reconciled by a newly formed Accounting and Control Department; and reinforcing the Code of Business Conduct and Ethics and Related Person Transaction Policy.
The Commission’s complaint charges the company with violations of: Securities Act Section 17(a)(2) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Mr. Benson was charged with violations of Exchange Act Sections 10(b) and13(b)(5) and with aiding and abetting violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and certain related rules along with each subsection Securities Act Section 17(a).
DGSE resolved the charges, consenting to the entry of a permanent injunction prohibiting future violations of each Section with which it was charged. The firm was also required to appoint an independent consultant to review its accounting controls and to take the necessary remedial steps to correct any deficiencies.
Mr. Benson also settled the charges, consenting to the entry of a permanent injunction prohibiting future violations of the Sections with which he was charged. In addition, he is permanently barred from serving as an officer or director of a public company and is denied the privilege of appearing or practicing before the Commission as an accountant. Mr. Benson is also required to pay a penalty of $75,000.