Required certification of internal controls over financial reporting is especially meaningful to a company facing a decision whether to report any improper payments. The Public Company Accounting Oversight Board’s Audit Standard 2, issued in connection with Section 404, says a company’s internal controls must provide “reasonable assurance” that payments and receipts are authorized by management and the board.
Standard 2 provides a “direct connection between Sarbanes-Oxley and the FCPA,” says Jonny Frank, New York-based head of the fraud risks and controls practice at PricewaterhouseCoopers. That means that a bribe payment, as described by the FCPA, also represents a breach of a company’s controls over unauthorized payments.
In other words, says attorney Atkinson, “if someone has been able to pay a bribe, your internal-controls system has failed.”
Damned If You Do
A bribe can spell the end of an acquisition — and raise the prospect of hefty fines and investigations for the companies involved. U.S. firms buying businesses that have overseas operations “are much more careful about uncovering potential FCPA issues during due diligence,” according to Dick Cassin, an attorney in the Hong Kong office of Heller Ehrman White & McAuliffe. “An acquiring firm risks prosecution if it buys a business that has unresolved FCPA problems.”
For Lockheed Martin Corp., a $2.4 billion merger agreement with Titan Corp. eventually fell through last year after what Titan filings described as “allegations that improper payments were made, or items of value were provided by consultants for Titan or its subsidiaries.” (Under the FCPA, it’s illegal for a U.S.-based company to pay an intermediary when it knows that the payment will go improperly to a public official.)
And ABB had to hold off on the sale of two subsidiaries last year until it could settle its SEC charges. The charges, which it settled without admitting or denying guilt, were that ABB’s U.S. and foreign units paid $1.1 billion in bribes to officials in Nigeria, Angola, and Kazakhstan between 1998 and 2003. The SEC also alleged that ABB improperly booked the payments and lacked the internal controls to prevent them. In one instance, it alleged, ABB’s country manager for Angola doled out $21,600 in a paper bag to five officials of the state-owned oil company.
Despite praising the cooperation of ABB Ltd. for bringing the violations to the attention of the SEC and the Justice Department, the commission’s July agreement with ABB called for the company to disgorge $5.9 million in illicit profits. And in pleading guilty to the related Justice case, two ABB units were fined $10.5 million. Within a week of the settlement, ABB announced it had closed the sale of the two subsidiaries, including one that had been charged with FCPA violations.
The case provides a benchmark for merging or divesting companies to use in dealing with foreign bribery liabilities. Until now, the SEC hasn’t forced companies to cough up ill-gotten gains. If companies make improper payments when they acquire a business, according to Berger, “that money should be given back.”