Joe Howell on the PCAOB, Audits and Compliance - Part IV

PCAOB Audits and Compliance Part 4
There is no materiality standard under the FCPA. This is generally a different standard than internal auditors or accountants consider in a company. However Howell believes their approach is wrong based upon simply more than just a plain reading of the statute itself. This is because Howell feels it is not simply the materiality of the bribe, it may not even be the materiality of the contract that you receive because of the bribe. Howell’s view is that it is much broader as the materiality would be the entire cost that potentially the company could be liable for: pre-resolution investigation, an enforcement penalty and fine, and then post-settlement remediation or other costs.

Howell began by noting that a company must report contingent liabilities in its financial statements, if only in notes. Even if a company cannot estimate these costs, they must be described. A financial statement would be incomplete and actually wrong if they fail to describe a liability when you know that you have one. This means “If a company discovers that a bribe was paid and a fraud was perpetrated and that money was used to pay a bribe, they now know that they have some sort of liability, a cost that they’re going to have to recognize at some point, but they don’t know how much it is yet.”

Any FCPA investigation is going to have a profound cost. If a company desires to take advantage of the new Department of Justice (DOJ) Pilot Program and self-disclose to the DOJ and Securities and Exchange Commission (SEC), it still may result in a risk of a fine, disgorgement of profits and other penalties. Howell added, “then monitoring at the backend and penalties and reputational risk. All of which go together to be material to the company. Even though the bribe was a little bribe, even though the fuse was a small fuse, the bomb is a big bomb. When you see a fuse, notice that it’s been lit, you have an obligation to report that. That’s material. It’s relevant to the reader of the financial statements. Because the fuse is small, you can’t say, I don’t have to report it.”

While Howell believes that such contingencies will resolve themselves over time, he believes it is important to make that immediately available to readers of the financial statements. He went on to state that there are large numbers of diverse constituencies who depend on your accurate financial statements. These include, “your bankers, creditors, as well as your shareholders. You may have relationships that are contractual relationships with suppliers, customers that could be affected by this. You may have contracts with your employees that are affected by this. There may be contracts with other third parties that could be affected or impaired because of your violation of the FCPA, in one instance.”

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FCPA Compliance and Ethics