UPDATE 1-SEC charges QSGI CEO, former CFO over internal control failures
(Adds background, comments from attorneys for two defendants)
By Sarah N. Lynch
WASHINGTON, July 30 (Reuters) - U.S. regulators charged the chief executive and former chief financial officer of Florida-based computer equipment company QSGI Inc on Wednesday with misleading outside auditors and investors about internal control deficiencies over some of the company's inventory.
The Securities and Exchange Commission said that QSGI CEO Marc Sherman is planning to fight the charges in the agency's in-house court.
The company's co-founder and former CFO, Edward Cummings, is settling the case without admitting or denying the charges.
He agreed to pay a $23,000 penalty and also agreed to a five-year ban from practicing as an accountant before the SEC or serving as a public company officer or director.
The SEC's case makes good on a pledge that SEC Chair Mary Jo White made last year to refocus the agency's attention on bringing more accounting-related enforcement actions - an area that has seen less activity in recent years.
Sherman's attorney, Bruce Reinhart of McDonald Hopkins, said his client denies the charges and looks forward to his day in court.
"He never intentionally misled anyone or falsified any records," he said. "We believe at all times he was fully compliant with the law."
Ronald Sarachan, an attorney for Cummings, said his client "participated in designing and implementing" internal controls in order to help the company be compliant with the law. He added that no investors were harmed.
The SEC's case hinges on a key provision in the 2002 Sarbanes-Oxley law which requires company CEOs and CFOs to sign a management report to certify that they have disclosed all significant deficiencies to the outside auditors, reviewed the annual financial report and can attest to its accuracy.
In an interview with Reuters earlier this year, SEC Enforcement Director Andrew Ceresney said his investigators were planning to pursue some internal control-related cases, noting it is an area that has been less scrutinized in the past.
In this case, the SEC alleges that Sherman and Cummings told shareholders in a 2008 management report that they had assessed the company's internal controls.
In truth, the SEC claims, Sherman did not participate in assessing the internal controls.
The agency also says that Sherman and Cummings certified they had disclosed all significant deficiencies to outside auditors, but failed to tell them about inadequate controls over inventory from the company's Minnesota operations.
Although the company had tried to beef up the controls in its Minnesota facility in 2008, the effort failed.
The SEC says the internal control failures led to a "falsification" of the company's books and records.
The company ultimately filed for bankruptcy in 2009. It later reorganized and emerged from bankruptcy in 2011.
"Corporate executives have an obligation to take the Sarbanes-Oxley disclosure and certification requirements very seriously," said Scott Friestad, an associate director in the SEC's Enforcement Division.
"Sherman and Cummings flouted these regulatory requirements and misled investors and external auditors in the process." (Reporting by Sarah N. Lynch; Editing by Eric Beech and Sabdra Maler)