Auditors and the Foreign Corrupt Practices Act: Lessons from Latin America

Abstract

Purpose

This paper aims to help auditors manage the risk of Foreign Corrupt Practices Act (“FCPA”) violations of the companies that they audit, particularly those with operations in Latin America.

Methodology/approach

First, the paper describes the relevant provisions of the FCPA. Second, it identifies the common schemes and transactions associated with heightened risk of FCPA liability in Latin America and provides recommendations to minimize this risk. Third, it discusses the responsibilities of auditors under U.S. securities laws and regulations with respect to the FCPA violations of their clients. Finally, it describes the sanctions that auditors could face if they fail to fulfill their responsibilities regarding these FCPA violations. The paper is based on data collected from various documents including laws, cases, accounting and auditing standards, litigation releases, press releases, deferred prosecution agreements, and enforcement actions.

Findings

Auditors have a responsibility under Section 10A(a) of the Exchange Act to design procedures that provide reasonable assurances of detecting the FCPA violations of their clients, which are illegal acts with direct and material effects on the financial statements. In addition, auditors have a responsibility under Section 10A(b) of the Exchange Act to report the violations of the FCPA that they detect during the audit to the appropriate level of management. If management does not take the necessary remedial steps, auditors must report FCPA violations to the U.S. Securities and Exchange Commission. In order to reduce their FCPA-related liability and fulfill their responsibilities under U.S. securities laws and accounting standards, auditors should closely scrutinize transactions with a high risk of FCPA liability. An analysis of FCPA cases occurring in Latin America reveals six categories of transactions with heightened FCPA risk.

Originality/value of paper

While there is much literature regarding a company’s compliance with the FCPA, there has not been much literature about the auditor’s responsibilities with respect to the FCPA violations of their clients. This paper attempts to start bridging this gap by providing guidance to auditors regarding their responsibilities to detect and report FCPA violations.

Citation

Colón, R. and Bladuell, H.G. (2014), "Auditors and the Foreign Corrupt Practices Act: Lessons from Latin America", Accounting in Latin America (Research in Accounting in Emerging Economies, Vol. 14), Emerald Group Publishing Limited, Leeds, pp. 105-133. https://doi.org/10.1108/S1479-356320140000014003