Illegal Corporate Activities and Their Effect on Financial Statement Disclosures: How Forensic Accountants Can Help
Anthony L. Fanelli
The purpose of this paper is to examine recent sanctions and legal actions taken against multi-national corporations in emerging markets by the Securities and Exchange Commission (SEC) and other non-US regulatory agencies to develop an exploratory study to determine the effects of illegal activity on financial statement disclosures. In order to determine if an illegal activity has occurred and if any financial statement disclosure is required the Foreign Corrupt Practices Act (FCPA) and international security agencies, such as the SEC, must enforce security laws. Based on the research findings it is proposed that Forensic Accountants can help the independent auditor and those in charge with corporate governance, to properly determine if an illegal act that has occurred should be disclosed.
It is evident that illegal corporate activities including corruption and bribery have increased as a result of the global economy expansion especially in emerging markets. Bribery is the crime of giving or taking money or some other valuable item in order to influence a public official (any governmental employee) in the performance of his or her duties. Bribery can also involve corrupt dealing with the employees of a business competitor in order to secure an advantage.[i] Exceptions include for the facilitation or to expedite the performance of a routine governmental action; where the payment was lawful under the laws and regulations of the foreign government where the gift took place; or where the giving of value was a reasonable and bona fide expenditure as, e.g., for travel and lodging expenses incurred by the foreign person for the purposes of the promotion, demonstration, or explanation of products or services, or for the execution of a contract with the said foreign person.
On March 18, 2010 the Securities and Exchange Commission charged Innospec, Inc., an American chemical company, with violating the Foreign Corrupt Practices Act (FCPA) by engaging in widespread bribery of foreign government officials in Iraq and Indonesia to obtain and retain business. In their annual report, Innospec, disclosed that it had pled guilty to twelve count indictment in relation to illegal payments made to government officials in Iraq and Indonesia. Innospec agreed to settle for $40.2 million with the Government Authorities to resolve all matter relating to the investigations. [ii] This particular case involved government officials that accepted bribes from Innospec in a short time frame; the next example however shows how bribery can run undetected for a longer time frame while involving multiple levels of employees.
On March 26, 2012 the Securities and Exchange Commission charged medical device company Biomet with Foreign Bribery. The SEC alleged that Biomet had paid bribes from 2000 to August 2008, and employees and managers at all levels were involved along with the distributors who sold Biomet’s products. In their annual report Biomet disclosed that it had agreed to pay a monetary penalty of $17.3 million to resolve the charges and to additionally disgorge profits and pay prejudgment interest in the amount of $5.6 million.[iii]
In both cases the fraudulent activity was uncovered and later disclosed in the companies’ annual report. However, if Forensic Accountants assisted auditors these fraudulent activities could have been detected earlier and not continued for 8 years like in the case with Biomet. Auditors do not look to aim to detect fraud within companies; auditors check the companies’ math and applications of accounting rules. Forensic Accountants are trained in forensic analysis, which analyzes financial documents for illegal activities.
Although there were times were the research did seem very repetitive and challenging it was a great experience. Overall, I really enjoyed being a part of this research and I highly recommend others to conduct a research experiment of this type.
[i] “bribery.” Nolo’s Plain-English Law Dictionary. Nolo.com. N.p., n.d. Web. Aug. 2013.
[ii] “Innospec, Inc.” Innospec, Inc. N.p., n.d. Web. 17 Jul. 2013. <http://www.sec.gov/litigation/litreleases/2010/lr21454.htm>.
[iii] “SEC Charges Medical Device Company Biomet with Foreign Bribery.” SEC.gov. N.p., n.d. Web. 17 July 2013. <http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171487958>.