The Foreign Corrupt Practices Act and Internal Controls.
Three core areas play a substantial role in examining the history, current state, and future effectiveness of the FCPA: penalties, international and domestic whistleblower provisions, and the socioeconomic status of countries combined with ethical development. Past successes in enforcement, the unique role the FCPA plays as the world's first and foremost anticorruption legislation, and the importance of the anticorruption movement to human advancement all point to the need for increased enforcement and continued modernization of the FCPA. The FCPA has proven effective over the years, but for it to remain relevant and at the forefront of anticorruption and fair-reporting efforts, it must be updated to include stricter standards for internal controls and software monitoring systems for large multinational corporations.
HISTORY OF THE FCPA
The current significance of the FCPA stems from the same issues that resulted in its creation. As Mike Koehler wrote in the Ohio State Law Journal, the "discovery of the foreign corrupt payments problem in the mid-1970s resulted from a combination of work by the Office of the Watergate Special Prosecutor." (2) Investigators discovered illegal "slush funds" being used to distribute bribes and other illegal foreign payments, which led to further investigation into the reliability of the accounting records. Koehler states that the goal of the investigation was not to determine if the foreign payments were illegal under U.S. law but to investigate whether the payments should be disclosed to potential and current investors.
This became a major issue of U.S. foreign affairs following the discovery of payments made by U.S. companies such as Gulf Oil, Northrop Corp., Mobil, and especially Lockheed Corp. (3) All these companies made payments to foreign parties for a business purpose that was considered questionable. Lockheed was particularly important because of its status as the largest U.S. defense contractor and because it essentially owed its existence to federally guaranteed loans. (4) Koehler concludes that while "foreign policy was the primary policy concern from the discovered foreign corporate payments which motivated Congress to act ... foreign policy was not the sole reason for motivating Congress. The legislative record also evidences that Congressional motivation was sparked by a post-Watergate morality, economic perceptions, and global leadership." (5)
The Watergate and Lockheed scandals sent the country into a frenzy for anticorruption regulations focused on foreign policy and triggered an overwhelming need to protect U.S. businesses and investors from unreliable records. Ethics, transparency, and anticorruption are the pillars upon which the legislation was founded, and they remain an integral part of the future of international business because of the FCPA's requirement of accurate accounting records and intolerance of bribery payments.
After more than 40 years of the FCPA, the impact of corruption around the world is still staggering. The DOJ and the SEC released A Resource Guide to the U.S. Foreign Corrupt Practices Act, which highlights how corruption negatively affects economic growth by averting resources from vital areas such as infrastructure, public health, and education, and it "undermines democratic values and public accountability and weakens the rule of law" by harming efforts to fight poverty, crime, and terrorism all over the world. (6) These are only the social downfalls; there are even more ways that corruption is destructive to business: Corruption is anticompetitive, increases the cost of global business, and inflates the price of government contracts in developing countries. Furthermore, bribery undermines employee confidence while permitting other kinds of misconduct and harmful behavior at the company, such as employee embezzlement and financial fraud. (7) All these costs of corruption rang true in the 1970s, and they are even more applicable in today's world of fast-spreading news, social media, and technological growth.
Transparency International's Corruption Perceptions Index (CPI) tracks the levels of corruption in the world today, and it shows a staggering amount of highly corrupt countries, as evidenced by the color red in Figure 1. (8) Economic well-being undoubtedly plays a large role in the perceptions index; developed (first-world) countries tend to have less corruption than undeveloped or developing (third-world) countries. Therefore, countries with unstable governments tend to have higher corruption rates. The economic and political situations of each country play a large role in determining its level of corruption, and that is why countries that are more stable should step into leadership roles and lead the global fight against corruption.
According to A Resource Guide to the U.S. Foreign Corrupt Practices Act, the intention of the FCPA was "to halt those corrupt practices, create a level playing field for honest businesses, and restore public confidence in the integrity of the marketplace." (9) The first section of the FCPA contains the antibribery provision, which prohibits the exchange of something of value for the purpose of influencing an act or decision that would be advantageous for that individual or company. (10) The FCPA applies to conduct within the U.S. as well as outside the country. The antibribery provisions apply to many different types of transactions, such as actions taken to ensure winning a contract, influencing certain processes, evading penalties, or obtaining exceptions to laws or regulations, and it has been expanded to include bribes paid to obtain favorable tax treatment. (11)
By focusing on the intent of an entity rather than the action, individuals and companies can violate the FCPA by intending to commit a corrupt act, not just for actually committing the act. (12) Corporations also can be held liable for bribes paid by subsidiaries if the parent company participated significantly in the illegal activity and exercises control under traditional agency principles. (13) This is an intensely debated subject--one that can cost multinational corporations millions of dollars in penalties if their subsidiaries are caught participating in illegal payment schemes.
The second section of the FCPA focuses on accounting provisions pertinent to public companies. These provisions are meant to "strengthen the accuracy of the corporate books and records and the reliability of the audit process, which constitute the foundations of our system of corporate disclosure." (14) The main categories of the accounting provisions are (1) books and records and (2) internal controls. The books and records section requires public companies to maintain accurate records and accounts of the business in reasonable detail and accurately reflect the transactions of the entity. (15) This part of the FCPA specifically addresses the requirement to record transactions accurately and not disguise bribery payments as something legal, such as consulting fees or commissions.
The internal controls section requires public companies to maintain a system of internal controls to ensure that transactions are accurate and that there is a segregation of duties. (16) This part of the legislation focuses on the need to have strong internal controls to prevent fraudulent activity from occurring easily in a company where one person might exercise too much authority over money or the accounting process.
There are very severe criminal and civil penalties if an individual or company is found to be in violation of the FCPA (see Table 1). Given the magnitude of these penalties, companies must increase employee awareness of the legislation and improve internal controls to minimize the likelihood that employees will engage in illegal behavior. The fines for participating in bribery or unethical accounting procedures can be extremely detrimental financially as well as socially for businesses and individuals caught committing illegal acts.
CURRENT REGULATORY ENVIRONMENT
The FCPA is an effective piece of legislation for deterring corruption and penalizing those guilty of bribery and other corrupt practices, but the origin of the problem needs to be addressed. If weak internal controls are the problem, then there should be a focus on mandating a system that has strong internal controls. The response to inadequate supervision of subsidiaries should be to require them to increase the transparency of their books and records.
Figure 2 depicts the amount of DOJ and SEC enforcement actions filed per year since 1977, the year of the FCPA's inception. The number of enforceable actions peaked in 2009 and has remained high since 2007.17 The total aggregate amount of bribery payments has also risen in that time frame. As shown in Figure 3, the number of bribes peaked in 2008 with the Siemens case, and since then there have been several years with large bribery payment totals, including 2008, 2010, and 2016. (18)
How well the FCPA protects U.S. businesses and consumers depends on how it is applied. Based on recent history, the next years will likely see an increase in the number of companies brought under scrutiny while the DOJ and SEC crack down on bad actors and ensure compliance with ethical standards and legal requirements.
The need for more transparency in financial statements and better internal control monitoring for companies is leading to calls for regulators to either streamline regulations or revise current standards to keep up with the continuous development of the market. For example, the piloting and implementation of automation and artificial intelligence across diversified product sectors test how transactions should be analyzed and verified as reliant and material. Besides the significant variabilities involved in automation projects, determining the most effective strategy in both centralized and decentralized environments challenges regulators and business enterprises.
As indicated by current practices in enterprise risk management (ERM), decreasing the amount and number of bribery payments is achievable through effective risk management strategies. Utilizing transformative technology and aligned ERM strategies in the workplace will further establish procedures that beget accurate financial statements and reliable records, working toward a more optimal, profitable enterprise for corporate management and investors.
A significant amount of pressure and change in organizations' internal workplace environments is attributed to the emphasis on internal controls and fraud-resistant frameworks. In 1992, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published Enterprise Risk Management--Integrated Framework, the original Framework forming the basis for the design of internal controls and testing their effectiveness. (19) The Framework was subsequently updated in 2013 and 2017. The Framework includes the "COSO Cube," which contains the core components outlining a structure that organizations can use to formalize their internal control framework, ensuring compliance with regulatory standards. (20) There is a direct relationship between objectives, which are what an entity strives to achieve, and ERM components, which represent what is needed to achieve them.
The compliance and enforcement paradigm shift for companies is affecting organizations in real time. For example, in 2012, the SEC investigated allegations that Oracle processed unauthorized vendor payments totaling $2.2 million in collusion with India's government. The SEC alleged that Oracle violated the FCPA's books and records provisions and internal controls provisions by failing to accurately record the side funds that Oracle India maintained with its distributors. Oracle failed to maintain a strategy or a system of effective internal controls that could have prevented the improper use of company funds. This ignited policy initiatives to streamline multinational organizations' practices. At the same time that companies face new challenges in the design and implementation of internal controls, the government is heightening its scrutiny of their internal controls and raising the risks of civil and criminal prosecution of violations. (21)
ENTERPRISE RISK MANAGEMENT
Globalization is partly responsible for the increased level of enforcement and transition of risk management practices. ERM encompasses the methods and processes that organizations design using an operational framework to achieve their objectives. In response to provisions of the Sarbanes-Oxley Act of 2002, each organization can leverage business and IT strategies to design and build a unique framework to calculate a reasonable outline of probable events and a structured response to potential threats across the entity.
When and how bribery, collusion, money laundering, and other regulatory violations would happen in complex organizations cannot be anticipated or calculated easily, but structuring a company with clearly defined processing activities and management practices defines the controls designed to minimize the risks associated with certain facets of a business enterprise. When it comes to the design of the internal compliance framework of a complex organization, COSO and ERM have a mutually reinforcing relationship because the regulatory standards fuel implementation of strong, effective internal controls that would otherwise be more susceptible to safety and security risks.
The challenge to comply with the FCPA and following COSO's Framework design for internal controls are worth the risk and reward in the ever-changing internal and external environment. The rapid development and growth of technology solutions offered in the marketplace challenge businesses to take advantage of new opportunities available through digital initiatives and secure high-performance, reliable data to streamline their internal environment. The FCPA continues to play a significant role in keeping businesses honest. The anticorruption movement is a global fight, and international legislation similar to the FCPA that encourages and requires a strong framework for internal controls will continue to further the mission to create a more ethical and just society.
Lauren M. Golick is a staff accountant at Skoda Minotti in Mayfield Village, Ohio. She can be reached at (440) 449-6800 or email@example.com.
Elizabeth A. Janko is a risk advisory consultant for Ernst & Young LLP in Chicago, Ill. She also is a member of IMA's Cleveland Area Chapter. Elizabeth can be reached at (440) 251-4035 or firstname.lastname@example.org.
Scott A. Yetmar, Ph.D., CMA, CFM, is an associate professor of accounting at Cleveland State University in Cleveland, Ohio. He also is a member of IMA's Cleveland Area Chapter. He can be reached at (216) 687-3999 or email@example.com.
(1) Stanford Law School and Sullivan & Cromwell LLP, "Foreign Corrupt Practices Act Clearinghouse," 2017, http://fcpa.stanford.edu/.
(2) Mike Koehler, "The Story of the Foreign Corrupt Practices Act," Ohio State Law Journal, 2012, pp. 929-1013.
(6) The Criminal Division of the U.S. Department of Justice and U.S. Securities & Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act, www.justice.gov/ sites/default/files/criminal-fraud/legacy/2015/01/16/guide.pdf.
(8) Transparency International, "Corruption Perceptions Index 2016," January 25, 2017, www.transparency.org/news/feature/ corruption_perceptions_index_2016.
(9) The Criminal Division of the U.S. Department of Justice and U.S. Securities & Exchange Commission.
(17) Stanford Law School and Sullivan & Cromwell LLP.
(19) The Committee of Sponsoring Organizations of the Treadway Commission (COSO), Enterprise Risk Management--Integrating with Strategy and Performance, "Executive Summary," 2017.
(21) U.S. Securities & Exchange Commission, "SEC Charges Oracle Corporation with FCPA Violations Related to Secret Side Funds in India," August 16, 2012, www.sec.gov/news/ press-release/2012-2012-158htm.
By Lauren M. Golick, Elizabeth A. Janko, and Scott A. Yetmar, Ph.D., CMA, CFM
Caption: Figure 1: Corruption Perceptions Index 2016
Caption: Figure 2: DOJ and SEC Enforcement Actions
Caption: Figure 3: Total Bribery
Table 1: FCPA Violation Penalties Antibribery: Civil Antibribery: Criminal Individual Fines up to $16,000 per Fines up to $250,000 violation Imprisonment up to five years Corporation Fines up to $16,000 per Fines up to $2 million violation Accounting Provisions: Accounting Provisions: Civil Criminal Individual Cannot exceed the greater Fines up to $5 million of the gross amount of Imprisonment up to 20 the gain to the defendant years or a specified dollar limit. Specified dollar limit: $7,50-$150,000 Corporation Cannot exceed the greater Fines up to $25 million of the gross amount of the gain to the defendant or a specified dollar limit. Specified dollar limit: $75,000-$725,000 Information source: U.S. Department of Justice and U.S. Securities & Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act, 2016.
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|Author:||Golick, Lauren M.; Janko, Elizabeth A.; Yetmar, Scott A.|
|Publication:||Management Accounting Quarterly|
|Date:||Sep 22, 2018|
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