The Foreign Corrupt Practices Act (FCPA) should be top of mind for not only current accounting and finance employees (along with senior management, stakeholders and other relevant parties), but other professionals who are looking to advance their finance and accounting career or break into the industry.
Within the FCPA there are two provisions: anti-bribery and accounting. With our focus mainly on accounting, Brian Loughman of Ernst & Young, Aaron Marcu of Freshfields Bruckhaus Deringer US LLP, and Kerry Schalders of Dex One Corporation detail for the Association of Corporate Counsel that the FCPA “requires companies registered with the SEC to keep accurate records of all business transactions and maintain an effective system of internal accounting controls” for both public and private companies. The importance of this lies in the fact that violations “can result in lengthy and disruptive SEC and DOJ criminal investigations and stiff criminal penalties for companies and individuals,” explain Loughman et al.
The origin of the FCPA goes back to the time of Watergate. Stuart H. Deming of Deming PLLC writes in Business Law Today’s “FCPA Prosecutions: The Critical Role of the Accounting and Recordkeeping Provisions” article that “one of the lesser-known problems disclosed by the revelations of the Watergate era in the United States was the accounting and recordkeeping practices that made improper payments possible. To address these practices…the FCPA placed new and significant obligations on issuers to make and keep accurate records and to maintain a system of internal accounting controls.”
Top 5 Controls
The focus and significance placed on these accounting controls has not lessened since that time. Matt Ellis for FCPAméricas lists the five most important accounting controls as:
- Accounts Payable
- Expense Reimbursement
- Petty Cash
The overall goal of these controls is to have accurate and detailed record books backed up with approvals and documentation that align with company procedures. Ellis expounds further on the control goals by saying that they are to “assure that (i) transactions are executed in accordance with management’s authorization; (ii) access to assets is permitted only with the proper authorization; and (iii) the accounting records reflect the existing assets.”
Also for FCPAméricas, Carlos Henrique da Silva Ayres outlines the distinction that “falsifying or failing to keep sufficient records of a transaction may also violate the FCPA if the company is publicly listed in the United States—even if the underlying transaction is entirely legal.” This supports the notion of how careful and meticulous accounting and finance professionals must be.
In addition to the accounting employees, a company’s policies and procedures surrounding this must be detailed and comprehensive so that all employees can adopt the proper mindset and habits. Ayres goes on to say that these accounting controls are applicable to a company’s entire activity regardless of the financial amount.
In Business Law Today, Deming speaks a lot about liability, violations, and internal controls. In terms of liability, there are two distinctions: civil and criminal. He explains that “to be held civilly liable, it makes no difference whether the controlling entity lacks knowledge of the conduct” and that “criminal liability may be established where an individual or entity…knowingly circumvents or fails to implement a system of internal controls or knowingly falsifies any book, record, or account.” The illustrates the notion of intent within violations and really highlights the need for a company to have a comprehensive plan in place because claiming ignorance will not be sufficient, especially since recordkeeping violations are not reserved for senior management, but anyone.
In discussing the need for clean books and records, Deming brings to the forefront that the overall goal is to “strengthen the accuracy of the corporate books and records and the reliability of the audit process.” The records that bring the most attention are the ones having to do with audits and financial statement preparation.
To illustrate his points, Deming describes examples of violations, two of which are below:
- “Even if the amount of a transaction does not affect the bottom line of an issuer in quantitative terms, it may still constitute a violation of the recordkeeping provisions if not accurately recorded.”
- “Manipulating records to mask transactions by characterizing them in some oblique manner or actually falsifying a transaction can implicate an issuer and those individuals involved.”
The element of intent comes into play in the second example while both showcase the importance of accounting and finance professionals being above board in all aspects of company business. For those looking to begin a career in the accounting/finance industry, it behooves those individuals to grasp the gravity of this compliance.
At the core of the compliance is making sure company finances are recorded and reflected correctly. Deming concludes that “the purpose of internal controls is to ensure that issuers adopt accepted methods of recording economic events, protecting assets, and confirming transactions to management’s authorization. No specific system of internal controls is required.”
The open-endedness of the specifics of the controls can be viewed as a positive or negative. While each company can develop a plan that works best for them, it also requires a plan to be made and in place with employees being mindful of it.
The burden, therefore, lies with company management. Deming points out that “the accounting and recordkeeping provisions…create affirmative duties on the part of issuers and officers, directors, employees, agents, and stockholders acting on behalf of an issuer.” Furthermore, Deming explains that “subject to criminal sanctions, internal control reports are now required expressing management’s responsibility for establishing and maintaining adequate internal controls for financial reporting and assessing their effectiveness.”
This responsibility is a central notion to the FCPA compliance and should be kept at the forefront in the minds of company accounting and finance professionals.
For the Association of Corporate Counsel, Loughman et. al. outlines ten pieces of advice for companies trying to mitigate risk:
- Determine your FCPA risk.
- Develop an FCPA compliance policy.
- Train your personnel regularly on your FCPA compliance policy and FCPA requirements.
- Establish an FCPA compliance team, including legal, financial reporting and internal audit personnel.
- Identify countries where in-house counsel employed by your company and its subsidiaries and affiliates are not covered by attorney privilege doctrines.
- Determine whether any other country’s anti-bribery laws may apply to your company.
- Judiciously consider using outside counsel in your company’s FCPA compliance program, especially where privilege may be an issue.
- Direct your company’s financial reporting personnel to keep accurate books and maintain a system of internal accounting controls.
- Make FCPA review part of M&A and JV due diligence.
- The SEC and DOJ expect robust and verified compliance.
These suggestions highlight the necessity that senior management not only needs to support policy and procedures that protect their company’s financial operations but provide the necessary materials and training for employees.
Perhaps Richard A. Sibery of Ernst & Young LLP says it best in the Corporate Counsel Business Journal when he says that “many more companies are taking additional steps to raise awareness of the importance of compliance with FCPA among their global employees, to assess whether they have the proper controls in place going forward and to provide training as to how employees should react if an FCPA compliance failure should be detected.”
da Silva Ayres, Carlos Henrique. “Key Aspects of the FCPA Accounting Provisions.” FCPAméricas, 22 Feb. 2018. <http://fcpamericas.com/english/enforcement/key-aspects-fcpa-accounting-provisions/>
Deming, Stuart H. “FCPA Prosecutions: The Critical Role of the Accounting and Recordkeeping Provisions.” Business Law Today, 22 Feb. 2018. <https://www.americanbar.org/publications/blt/2010/08/06_deming.html>
Ellis, Matt. “The Ten Most Important FCPA Internal Controls (Part 1: Accounting Controls).” FCPAméricas, 22 Feb. 2018. <http://fcpamericas.com/english/anti-corruption-compliance/ten-important-fcpa-internal-controls-part-1-accounting-controls/>
Loughman, Brian et al. “Top Ten Tips for FCPA Compliance.” Association of Corporate Counsel, 22 Feb. 2018. <http://www.acc/com/legalresources/publications/topten/fcpa-compliance.cfm>
Sibery, Richard A. “FCPA Compliance: How Accounting Professionals Can Help.” Corporate Counsel Business Journal, 22 Feb. 2018. <http://ccbjournal.com/articles/8134/fcpa-compliance-how-accounting-professionals-can-help>