How Do Auditors Respond to FCPA Risk?

Abstract

SUMMARY This article summarizes “How Do Auditors Respond to FCPA Risk?” (Lawson, Martin, Muriel, and Wilkins 2019), which investigates the pricing of audits for clients that violate the Foreign Corrupt Practices Act (FCPA). FCPA compliance has become a top priority for regulators who rely heavily on accountants as they combat illegal activity. We find that auditors charge higher fees for violators both before and during formal FCPA investigations. We also find that fees are more sensitive to accounts that are more susceptible to FCPA risk. Our findings are stronger (weaker) for clients with high (low) foreign sales. While this may seem intuitive from an audit materiality perspective, regulators are not required to prove materiality as they pursue FCPA violations (Ebright 2016). Our study should be of interest to practitioners and auditors, as the Public Company Accounting Oversight Board (PCAOB) is considering whether updates should be made to PCAOB AS 2405

To control or to compromise? The prominence of chief compliance officer and foreign corrupt practices act violation

“…We show that auditors could perceive the potential risks of CCO prominence and incorporate this factor into the audit fees. We also confirm the result in prior research that FCPA violation is positively associated with audit fees (Lawson et al., 2019). Last, our findings can be of interest to audit practitioners and regulators.…”

“…To comply with the Organization for Economic Cooperation and Development's Anti‐Bribery Convention (OECD, 2017), the U.S. Congress amended the FCPA in 1998 by including an anti‐bribery provision that applies to foreign companies and individuals who make corrupt payments taking place within the U.S. (15 U.S.C. 78dd‐3; DOJ 2017; Lawson et al., 2019). The FCPA also mandates firms to comply with the accounting provisions by keeping records that accurately reflect the transactions of business and maintaining qualified accounting internal controls (U.S. Congress, 1977; DOJ 2017).…”

“…Common FCPA violations include flaws in accounting provisions, bribery to obtain and retain business, and conduct frauds in audit reporting (Lawson et al., 2019; Lin et al., 2018). As a result, firms having FCPA violation history, operating a business in locations of high corruption rating, and suffering from internal control weaknesses are more venerable to FCPA threats (Colon, 2015).…”

“…This inevitably makes the CCOs sign off compliance problems in the gray area, not to mention some activities like bribery are vaguely defined when developing business in a foreign culture (Campbell, 2013). Since the profits obtained through bribery are economically significant (Karpoff et al., 2017; Lawson et al., 2019), the prominence of CCO may happen because top management intends to adopt a more risky compliance policy to have a CCO in the management team to provide necessary support and advises. Hence, if CCO's prominence in corporate management results in compromising on top executives’ preference for more aggressive compliance strategies, we expect the prominence of CCO to be accompanied by an increase in the FCPA control aggressiveness.…”

“…In order to reduce the unfair business obtained through briberies, the U.S. Congress enacted the Foreign Corrupt Practices Act (FCPA) in 1977, which prohibits U.S. organizations and their agents from making certain payments to foreign officials and business professionals (Lin et al., 2018; Lawson et al., 2019; U.S. Congress, 1977). However, firms often gain significant economic profits with special tax discount, secure licenses, and larger market share via corruption activities (Karpoff et al., 2017), thus making the risk of FCPA compliance concern for regulators (e.g., the U.S. Securities and Exchange Commission [SEC]; the U.S. Department of Justice [DOJ]).…”