A recent enforcement action on internal controls is noteworthy not because of the allegations it contains, but for what it does not allege, according to a securities and litigation law firm that called it out.

The Securities and Exchange Commission is pursuing charges against the CEO and former CFO of smaller reporting company QSGI, a tech services company in Florida, over internal control violations. The SEC says CEO Marc Sherman and former CFO Edward Cummings misled auditors in connection with 2008 financial statements regarding the state of internal controls, which sent auditors on a faulty audit trail because they were missing important information to plan their audit appropriately. The company subsequently filed for bankruptcy in 2009, the SEC says.

Law firm Morgan Lewis says the enforcement action is important because it doesn’t involve any allegations of misstatements in financial statements, deliberate or otherwise, nor does it contain any allegations of other wrongdoing, such a bribery or corruption. “Although prior SEC ICFR charges have been accompanied with allegations of false financial statements or violations of the Foreign Corrupt Practices Act, this SEC action only charges a former financial reporting executive with knowingly making false representations about his involvement in the design, maintenance, and operation of ICFR; his participation in the assessment of ICFR’s effectiveness; and the nonexistence of significant deficiencies in ICFR,” the firm wrote. The case serves as a “another reminder of the SEC’s focus on internal control over financial reporting.”

The SEC says Sherman and Cummings related to auditors that Sherman participated in management’s assessment of internal controls when he actually did not participate, and that the pair certified they had disclosed all significant deficiencies in controls when they actually had withheld information about inadequate inventory controls. The company’s efforts to introduce new inventory controls at a specific operation had largely failed, the SEC says, and the deficiencies continued into 2009 until the company ultimately filed for bankruptcy.

They SEC also says Sherman and Cummings hoodwinked auditors over a series of maneuvers to accelerate the recognition of certain inventory and accounts receivables by up to a week at a time, to maximize the company’s borrowing potential. The SEC says the accelerations caused books and records to be inaccurate, although it does not say the maneuvers led to material misstatements.

According to the SEC’s enforcement orders, Cummings agreed to settle the charges for $23,000 and a five-year bar from practicing as an accountant or serving as an officer or director at a public company. Sherman’s charges will be litigated. “Corporate executives have an obligation to take the Sarbanes-Oxley disclosure and certification requirements very seriously,” said Scott W. Friestad, associate director in the SEC’s Enforcement Division, in a statement. “Sherman and Cummings flouted these regulatory requirements and misled investors and external auditors in the process.”

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