Restatements and Internal Control Failures Result in $500,000 Fine, CFO Sanctions


SEC SealFew things will attract the attention of the SEC Enforcement Division staff (and private litigants) more quickly than restatements of a company’s financial reports. Two restatements in five years will certainly obtain those results.

Advanced Emissions Solutions, Inc., an environmental solutions company headquartered in Colorado, settled SEC charges based on a long-running course of accounting failures. Advanced consented to the entry of a cease and desist order, and agreed to pay a civil penalty of $500,000. The SEC order stated that the penalty imposed might have been larger if Advanced had not cooperated with the investigation, and the Enforcement Division retained the right to petition the Commission to reopen the case to seek additional penalties if it determined that Advanced knowingly provided materially false or misleading information to the SEC or in any related proceeding.

As charged, Advanced materially misstated its financial reports in SEC filings from at least 2011 through the third quarter of 2013. During this period, the issuer failed to record a large loss contingency in connection with an adverse arbitration ruling and prematurely recognized revenue from long-term contracts. The SEC also claimed that Advanced failed to properly account for warranty accruals, improperly consolidated a joint venture and overstated revenues and gross profits from one of its subsidiaries. In early 2014, a newly-hired auditor and a consultant identified serious accounting and internal controls problems at the company. After failing to file Exchange Act reports for nearly two years, and having its stock delisted, Advanced filed restated financial reports to correct these and other errors in February 2016.

The company’s problems were rooted in part in an inadequate internal control system. As far back as 2006, Advanced's predecessor reported a number of material weaknesses in its Form 10-K report, including the lack of accounting personnel familiar with GAAP requirements. These problems still plagued the company into 2012, when Advanced reported similar material weaknesses in its controls and restated its 2010 and 2011 earnings.

Despite an awareness of its problems, and the experience of restating financial reports for two years, Advanced failed to deal with its accounting problems. During the period in which Advanced issued materially false financial statements and had pervasive internal accounting controls failures, the company raised more than $62 million in public stock offerings.

The SEC also charged Mark McKinnies, the company’s former CFO, with accounting and books and records violations. McKinnies had been Advanced’s financial head throughout its period of documented accounting problems. As alleged, McKinnies approved Advanced's filing of its false and misleading financial statements and oversaw the inaccurate recording of transactions in the company's books and records. He agreed, without admitting or denying the SEC allegations, to the entry of a permanent injunction and an officer-director bar for five years. McKinnies also agreed to pay disgorgement, prejudgment interest and a penalty totaling $238,692. The settlement is subject to court approval.

McKinnies also agreed to be suspended from appearing and practicing before the SEC as an accountant, including a bar from participating in the financial reporting or audits of public companies. He may apply for reinstatement to practice after five years.

In the Matter of Advanced Emissions Solutions, Inc., SEC Release No. 33-10329 (Mar. 29, 2017); SEC v. Mark McKinnies, SEC Litigation Release No. LR-23793 (Mar. 29, 2017).