The SEC warns public companies that lax cybersecurity practices could violate rules governing internal accounting controls, and offer nine scams as cautionary tales.
The SEC has become increasingly active when it comes to cybersecurity. Last month, it issued an investigative report about Business Email Compromises (BCEs) involving nine public companies that lost nearly $100 million when they wired funds to thieves impersonating corporate executives or vendors. While the SEC did not take action against the companies, it noted that policies and procedures that allowed for the thefts, accomplished via simple means of email and wire transfers, could leave a company in violation of accounting rules requiring that public companies safeguard corporate assets. The report makes a strong case that all companies, not just the boards of public companies, need to be aware of and protect against scams of these sorts.
The Commission considered whether the victimized companies complied with the requirements of Sections 13(b)(2)(B)(i) and (iii) of the Securities Exchange Act of 1934. Those provisions require certain issuers to devise and maintain a system of internal accounting controls that provide reasonable assurances that management authorizes corporate transactions and access to company assets. “While the cyber-related threats posed to issuers’ assets are relatively new, the expectation that issuers will have sufficient internal accounting controls and that those controls will be reviewed and updated as circumstances warrant is not,” the report stated.
The Commission chose to issue the report as guidance and declined to bring charges against the companies. While these companies dodged a second bullet, all companies should take this opportunity to benefit from the SEC’s analysis, and how important it is that board members understand the multiple aspects of cybersecurity, cyber risk, and related compliance.
Some directors may still assume that a cybersecurity breach is one that involves hackers infiltrating a company’s computer systems and stealing the customer data. With this preconception, an enterprise will focus on hardware, software, and firewalls and other technical solutions, which can lull management into thinking that increasing the data security budget is enough to address security threats. But almost all breaches have a human element – these losses cited in the SEC report were based on social engineering,” which we’ve written about – exploiting human weakness, not technological failures. The only thing “hacked” was what should have been the proper level of suspicion of the employee targeted, and lax internal controls. So how should companies respond, and what do board members and top executives need to do to avoid problems? Continue reading