United States: SEC Report Warns Of Potential Internal Controls Enforcement Actions Against Cyber Fraud Victims

On Oct. 16, the Securities and Exchange Commission (SEC) issued an investigative report warning that public companies victimized by cyber fraud could also face enforcement action for violating federal securities laws by failing to maintain sufficient internal accounting controls. While the SEC earlier this year issued interpretive guidance for public companies concerning the disclosure of cybersecurity risks and incidents, last week's report stresses the importance of companies having a sufficient system of  internal controls to prevent cyber fraud.

The report, which the SEC issued pursuant to 21(a) of the Securities Exchange Act of 1934 (Exchange Act), specifically cites Sections 13(b)(2)(B)(i) and (iii) of the Exchange Act. Those provisions require certain issuers to devise and maintain internal accounting controls sufficient to provide reasonable assurances that transactions are executed with, and that access to company assets is permitted only with, "management's general or specific authorization."

Cyber-related fraud is a prevalent threat to businesses. The SEC report cites an FBI estimate that "business email compromises" alone have caused more than $5 billion in losses since 2013. The report discusses the SEC's investigation of nine issuers across various business sectors — including real estate, technology, energy and consumer goods — that fell victim to cyber fraud. Each company suffered losses ranging from $1 million to $45 million as a result of business email compromises. The SEC investigated whether the companies' controls were sufficient to comply with their obligations under Section 13 of the Exchange Act.   

Each of the nine companies investigated by the SEC were victims of one of two variants of business email compromises:

  • Emails from fake executives: The first email scam involved persons purporting to be company executives. Using email domains and addresses that spoofed company executives (typically the CEO), the perpetrators emailed company finance personnel to direct them to work with a purported outside attorney identified in the email. Though the perpetrators identified real law firm and attorney names and used legal services-sounding domains like "consultant.com," the purported outside attorney was actually an impersonator. The finance personnel were directed to wire funds to foreign banks and beneficiaries in order to complete supposed "time sensitive" transactions that were, in fact, invented by the perpetrators. In general, these frauds were not sophisticated in design or the use of technology. The scams typically targeted mid-level personnel who were not generally involved in the purported transactions and who rarely communicated with the company executives being spoofed, and often included spelling and grammatical errors.

  • Emails from fake vendors:  The second email scam involved persons impersonating existing vendors of the victim companies. This form of fraud was more technologically sophisticated — and harder to detect — because it involved intrusions into the email accounts of the company's existing third-party vendors. After hacking the vendors' email accounts, the perpetrators falsified invoices and payment requests that appeared to be for otherwise legitimate transactions. The perpetrators also communicated with the companies' procurement personnel in order to obtain details about actual purchase orders and invoices and subsequently request that the personnel change the vendors' banking information. After the fraudulent banking information was relayed to accounting personnel responsible for maintaining vendor data, the companies then made payments on outstanding invoices to foreign accounts controlled by the impersonator.  

The SEC report stresses that personnel at the victim issuers failed to follow company protocols. For example, several employees at the companies, including two at the executive level, disregarded or misinterpreted established procedures for authorizing payment requests, approving outgoing wires and verifying vendor data changes. While the SEC concluded that it would not pursue enforcement actions against the nine issuers that it investigated, the report serves as a clear warning to all public companies. The SEC refers to its "expectation that issuers will have sufficient internal accounting controls and that those controls will be reviewed and updated as circumstances warrant." Public companies "must calibrate their internal accounting controls to the current risk environment and assess and adjust policies and procedures accordingly." 

Though the SEC's report only refers directly to issuers' Section 13(b) obligations, the failure to prevent business email compromises and other cyber-related scams can trigger other significant risks for public companies. For example, the Sarbanes-Oxley Act of 2002 (SOX) requires certain high-level executives to attest in annual and quarterly SEC filings that the issuer maintains adequate internal controls for public disclosure. If a company's executives knowingly or recklessly certify that its controls are adequate and the company then experiences a cyber intrusion, the executives may be at risk of sanction for those certifications. Thus, cybersecurity should be an important part of an issuer's diligence and SOX controls process.

In light of the SEC report, public companies and their advisers should regularly reassess all elements of the company's existing internal controls for preventing and addressing the ever-evolving risks of cyber-related fraud, including whether enhancements to relevant policies, procedures and employee training are warranted.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions