Sarbanes Oxley Material Misstatements are a significant event under the Sarbanes Oxley Act. How do determine whether there is a risk of a material misstatement? A material weakness is one or more control deficiencies that create a reasonable possibility of a material misstatement in your company’s annual or interim financial statements. This does not necessarily mean that a material misstatement has occurred, but only that the controls might not be good enough to detect or prevent a material misstatement on a timely basis. Risk assessments can help identify concerns.
Misleading statements and allegations of fraud can be alleged for a material misstatement. In fact, Willful misrepresentation of a material fact does not require an intent to deceive nor evidence that the officer believes or acted upon the false representation. Matter of S- and B-C-, 9 I&N Dec.
435, 448-49 (A.G. 1961).
Securities and Exchange Commission (SEC) guidance points regarding Sarbanes Oxley Section 404 identify factors to determine whether a control deficiency is a material weakness. These include:
- How susceptible is the financial reporting element to loss or fraud?
- How significant are financial statement amounts and transaction totals that are exposed to the deficiency?
If you identify any material weaknesses, you must describe them in your assessment of the internal controls that appear in your annual report. You should also consider including the following in your assessment:
- A analysis of how the material weakness affects the company’s financial reporting and internal controls
- Your current plans (or the actions you’ve already taken) to address the material weakness
Finally, you should describe these material weaknesses to the audit committee and your external auditor, along with any control deficiencies you’ve found that didn’t rise to the level of a material weakness, but which you think are important enough to merit their attention. Control deficiencies of this kind are defined as “significant deficiencies” in the SEC’s rules.
If, for example, you have ‘material customers’ such as commercial health plans, Medicaid, or Medicare and there is an adverse event that has a risk of causing or is causing a significant change in the relationship and or expected revenue from a material customer, this should be disclosed.
FDA Adverse Events should be Disclosed
Additionally, FDA Adverse Events are reportable and material and must be disclosed for publicly traded companies. See Matrixx Initiatives v. Siracusano
Basic v Levinson Standard Regarding Materiality
In Basic Inc. v. Levinson – 485 U.S. 224, 108 S. Ct. 978 (1988) which established that “To fulfill the materiality requirement there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.”
The antifraud provisions of the Securities and Exchange Commission (SEC), the rule issued by the SEC pursuant to 10(b) of the Securities Exchange Act of 1934 (the 1934 Act):
- generally prohibit, in connection with the purchase or sale of any security, misleading statements of material fact.
- In Basic, the representatives of one company had meetings and telephone conversations with the officers of another (the “target” company), concerning the possibility of a merger.
- In 1977 and 1978, during the pendency of these discussions, the target company made three public statements, the first of which denied that the company was engaged in merger “negotiations,” and the latter two of which said, in effect, that the company knew of no company developments that would explain the abnormally high trading activity and price fluctuations in the company’s stock.
- In the United States District Court for the Northern District of Ohio, former target company shareholders who had sold their stock, after the first public denial and before the trading suspension, filed against the target company and its directors a class action which alleged that the company and its directors had issued three false or misleading public statements in violation of the anti-fraud provisions of the SEC.
- The District Court granted summary judgment to the company and its directors, on the ground that the alleged misstatements were immaterial. This was reversed by the Court of Appeals which expressed the view that, under the circumstances, the target company had the duty to disclose certain omitted facts about the merger discussions and that the omitted facts were material.
Sarbanes Oxley Material Weakness and Risk Assessment Expert
Expert-led Sarbanes Oxley Audit for a Fortune 100 public company in compliance with Section 404 of the Sarbanes Oxley Act for public companies’ annual reports including the company’s own assessment of internal control over financial reporting, and an auditor’s attestation. My role was to ensure that the application controls and general controls were in place to ensure the accuracy of financial information that is disclosed to the SEC and investors in a public company. This required fluency in and discussion with outside counsel and public accounting firms regarding not only Sarbanes Oxley (SOX) but Public Company Accounting Oversight Board (PCAOB) Standards to implement risk assessments that avoid, among other things, “material misstatements.”
Expert serves on the audit committee of a public company and is deemed an “audit committee financial expert.” While Sarbanes Oxley generally applies to public companies with over $100 million in revenue, the defined terms, such as “material customer,” are generally accepted, Standard terms are also used by the SEC. Expert uses knowledge of SOX, PCAOB, and other Standards to inform my opinions regarding material and disclosable events in my role on an audit committee.