Stagwell Inc 10-Q

Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be included in our SEC reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”), who is our principal executive officer, and Chief Financial Officer (“CFO”), who is our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives. However, our disclosure controls and procedures are designed to provide reasonable assurances of achieving our control objectives. We conducted an evaluation, under the supervision and with the participation of our management, including our CEO, CFO and management Disclosure Committee, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(e) and 15(d)-15(e) of the Exchange Act. Based on that evaluation, and in light of the material weaknesses identified in the internal controls over financial reporting of Stagwell Marketing Group LLC (“SMG”), our CEO and CFO concluded that, as of September 30, 2021, our disclosure controls and procedures are ineffective to ensure that decisions can be made timely with respect to required disclosures, as well as ensuring that the recording, processing, summarization and reporting of information required to be included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 is appropriate. Material Weaknesses in Internal Control Over Financial Reporting In connection with the preparation of SMG's consolidated financial statements as of December 31, 2020, 2019 and 2018 and for the years then ended, SMG identified material weaknesses in its internal controls over financial reporting, including not designing or maintaining an effective control environment that meets SMG’s accounting and reporting requirements. Specifically, SMG did not maintain a sufficient complement of personnel with an appropriate degree of internal controls and accounting knowledge, experience and training commensurate with its accounting and reporting requirements. This material weakness contributed to the following additional material weaknesses: • SMG did not establish effective controls in response to the risks of material misstatement, including designing and maintaining formal accounting policies, procedures and controls over journal entries, significant accounts and disclosures, in order to achieve complete and accurate financial accounting, reporting and disclosures; • SMG did not design and maintain effective controls over information technology (“IT”) general controls for information systems that are relevant to the preparation of its financial statements. Specifically, SMG did not design and maintain: (i) program change management controls for the financial systems to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; (ii) appropriate user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs and data to appropriate SMG personnel; (iii) computer operations controls to ensure critical data interfaces between systems are appropriately identified and monitored, and data backups are authorized and restorations monitored; and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements; and • SMG has not established a sufficient risk assessment process to identify risks of material misstatement due to fraud and/or error and implement controls against such risks. 61 Table of Contents Remediation Efforts to Address Material Weakness We are evaluating the weaknesses and intend to evaluate what remedial actions are necessary to enhance and improve our internal controls over financial reporting (“ICFR”) and therefore have not yet remediated the material weakness described above. Our remediation efforts will continue to be evaluated through 2022. We believe the controls that will be put in place will eliminate the material weaknesses and solidify the effectiveness of our internal control over financial reporting. Changes in Internal Control Over Financial Reporting The business combination of MDC with SMG, which was completed on August 2, 2021, had a material impact on the financial position, results of operations and cash flows of the combined company from the completion date through September 30, 2021. The business combination also resulted in material changes in the combined company’s internal controls over financial reporting. In addition to the remediation efforts described above, the Company is in the process of designing and integrating policies, processes, operations, technology and other components of internal controls over financial reporting of the combined company. Management will monitor the implementation of new controls and test the operating effectiveness when instances are available in future periods. We have given consideration to the impact of COVID-19 and have concluded that there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of business, we are involved in various legal proceedings. We do not currently expect that these proceedings will have a material adverse effect on our results of operations, cash flows or financial position.