The FCPA’s anti-bribery provisions attract lots more attention than its accounting standards — and there’s no mystery why. Public corruption is fascinating, while public accounting is . . . well, less fascinating. But although it might be tempting to ignore the accounting standards, doing that is never smart. Violations can be easier to prove than anti-bribery offenses and even more devastating, with potential jail terms and fines many times greater than under the anti-bribery provisions.
Without question, then, anyone dealing with compliance needs to be completely fluent in the accounting standards. With that in mind — and to suit our short attention span for anything “accounting” — we’ve come up with these ten steps to enlightenment. Our little list gives us a place to start, which helps. But to be honest, our public-company auditing friends can teach us volumes about the accounting standards. So we’re never shy to ask for their help.
1. Who’s Covered? The Foreign Corrupt Practices Act’s accounting standards — which are sometimes called the “books and records provisions” — apply only to domestic and foreign companies whose securities (any class of equity or debt) are listed in the United States. See 15 U.S.C. § 78m(b)(2). In FCPA-speak, those companies are called “issuers.”
2. Subsidiaries and Affiliates. In addition to being responsible for its own books and records, each issuer is also responsible under the FCPA for the books and records of subsidiaries and affiliates over which it exercises control. But an issuer that holds 50% or less of the voting power of a domestic or foreign subsidiary or affiliate is only required to attempt in good faith to use its influence to cause the subsidiary or affiliate’s compliance with the FCPA’s books and records provisions. See § 78m(b)(6).
3. Books and Records. What exactly do the accounting standards require? First, issuers must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation.
4. Internal Controls. Second, issuers must devise and maintain a system of internal accounting controls adequate to provide reasonable assurances that: (i) transactions are executed in accordance with management’s authorization; (ii) transactions are recorded as necessary to enable preparation of financial statements in accordance with GAAP and to maintain accountability of assets; (iii) access to assets is permitted only in accordance with management’s authorization; and (iv) the recorded accountability for assets is periodically compared with the existing assets and any differences are addressed.
5. SEC Enforcement. The accounting standards can be enforced through civil and administrative actions brought by the Securities and Exchange Commission. The SEC can seek disgorgement or civil monetary penalties ranging from $50,000 to $500,000 per violation for business entities (or more if the “gross pecuniary gain” to the accused exceeds $500,000). The SEC also has the power to bar individuals from serving as officers or directors of public companies.
6. DOJ Prosecution. Criminal prosecutions under the accounting standards — which must involve willful violations — are brought by the Department of Justice.
7. The Criminal Standard. A willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer’s books, records, or accounts in violation of § 78m.
8. Corporate Felons. Willful violations of the accounting standards are a felony under § 32(d) of the Exchange Act of 1934 and punishable by a fine of up to $25 million against entities.
9. Personal Crimes. Against individuals, criminal convictions for willful violations can result in a maximum fine of $5 million, and up to 20 years’ imprisonment if the individual knew he or she was breaking the law. [The maximum prison sentence for an anti-bribery violation is five years.]
10. No Bribery Needed. Offenses under the accounting standards can be enforced or prosecuted whether or not there has been any violation of the FCPA’s anti-bribery provisions. See § 78m(b)(5). So there is no requirement that any bribery to a foreign official be alleged or proven in an enforcement action or prosecution under the accounting standards.
View prior posts about accounting here.