Corporate Social Responsibility (IVOR nr. 77) 2010/5.3.3.2:5.3.3.2 The accounting controls provision

Corporate Social Responsibility (IVOR nr. 77) 2010/5.3.3.2

5.3.3.2 The accounting controls provision

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The FCPA requires US and non-US companies with securities listed in the US to "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets" by the company.1 A company must furthermore devise and maintain accounting controls sufficient to provide "reasonable assurances" that four objectives are met: (i) that transactions are executed in accordance with management's instructions; (ii) that access to assets is controlled according to management's instructions; (iii) that transactions are recorded as necessary to permit proper accounting and the preparation of financial statements; and (iv) that records are reconciled with existing assets at reasonable intervals. The FCPA does not mandate any particular kind of internal control framework. Transactions should be recorded in conformity with accepted accounting standards designed to prevent off-the-books transactions such as kick-backs and bribes. "Reasonable detail" is "such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs."2 The test is whether a system, taken as a whole, reasonably meets the FCPA's specified objectives. According to the SEC, an adequate internal control system should fit in with the best practices that have been formalised in a widely accepted form by COSO (see section 5.2.2). Two important rules are:

(i)

the prohibition of the 'falsification of books and records' required to be kept under the record-keeping provisions of the FCPA.3 This applies to any person and there is no materiality requirement. Books are defined broadly to include "accounts, correspondence, memoranda, tapes, discs, papers, books, and other documents or transcribed information of any type." The rule prohibits masking transactions or characterising them in any oblique way. It should be noted that almost every FCPA case involves payments that were concealed or mischaracterised; and

(ii)

the prohibition on any officer or director from making (or causing to be made) materially 'false or misleading statements' or omitting to state any material facts in the preparation of filings required by the US Securities Exchange Act.4 This rule extends to internal auditors as well as to outside auditors. A failure to clarify a representation can also constitute a violation.

Common high-risk areas are considered to be foreign branch offices and foreign subsidiaries. Because of different accounting and oversight systems, these entities are often used as vehicles for concealing or mischaracterising transactions. Also, when acquiring a new foreign entity, it is advisable to employ effective due diligence as prior bribe payment scenarios are likely to be found in certain countries (see also chapter 7 on due diligence). Red flags, i.e. certain hazy transactions or contract partners with unclear roles or related to local government officials, should be internally investigated and a good place to start the risk assessment is with the books and records.

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