<<

. 70
( 82 .)



>>

Questionable Foreign Payments 355


Specifically, the Conference Board found that “a heavy majority” of the com-
panies enforce compliance with their policies through a “periodic (usually annual)
statement from their managers.”20 An example of such a statement follows:

Representing my organization, I warrant that, to the best of the my knowledge, none
of our employees is in violation of the company™s policies and practices with regard
to business ethics, offering or accepting gifts and gratuities, contributions, conflict of
interest, safeguarding company assets, community and governmental participation,
and sales agents, consultants and other professional services, and that these policies
and practices are reviewed with key employees annually.21

Moreover, several public accounting firms request such statements.22
John C. Taylor, partner of Paul, Weiss, Rifkind, Wharton, and Garrison, sug-
gests that the prevention of improper payments can be controlled through proper
internal controls:
The policy must require that every payment and every transaction with outside par-
ties is reflected on the books of the corporation promptly, accurately and in the nor-
mal financial reporting channels.
The policy must absolutely prohibit bribes, payments for illegal acts, and legally pro-
scribe political contributions.
The policy must be specific and intelligible to people in the field who will have to
operate within its bounds.23

Hence the policy must define what are “proper and improper payments at a high
corporate level directly responsible to the board.24
For example, the policy should include predetermined fixed levels of responsi-
bility regarding the decisions in the sensitive payments area. Thus it is essential that
the policy identify those executives in charge of the acceptable arrangements for
proper payments as well as their reporting responsibility to the audit committee or
the board of directors.25
With respect to enforcing such a policy, Taylor indicates that “normal auditing
techniques are the best means of uncovering departures from the policy.”26 Such
techniques should be coupled with these procedures:

. . . review of all professional and consulting fees. . . . use of annual representation
letters from all personnel in sensitive positions . . . constant review of signatories on
all bank accounts world wide. . . . obtain letters from outside professionals, agents,
and joint ventures certifying that they are not using corporate funds . . . for improper
purposes.27

20
Greene, “Assuring Ethical Conduct,” p. 17.
21
Ibid.
22
Ibid.
23
John C. Taylor III, “Preventing Improper Payments Through Internal Controls,” Conference Board
Record 13, No. 8 (August 1976), pp. 17“18.
24
Ibid., p. 18.
25
Ibid.
26
Ibid.
27
Ibid.
356 Reviewing Certain General Business Practices


Hugh L. Marsh, former general manager of internal auditing for the Aluminum
Company of America, points out the compliance of Alcoa with the Foreign Cor-
rupt Practices Act. Such compliance includes:

Policy guidelines for business conduct
Representation letters of compliance with company policy
Conflict of interest surveys at the request of the board of directors
Monitoring and auditing procedures to ensure compliance with company policy and
reports to the Audit Committee
Maintaining a corporate Security Department
Circulating a summary of the Foreign Corrupt Practices Act by the chief executive
officer to all managers worldwide28

Moreover, Marsh continues:

. . . I urge you to sit down with your chief financial officer and legal counsel and ob-
tain a thorough understanding of the implications of this law. I urge you to involve
these people as well as your external auditors in assessing the risk within your own
business and developing an inventory of control practices. . . . I urge that you con-
sider development of a policy statement for standards of conduct of your business
and develop monitoring procedures that are appropriate.29


Additional Summary Guidelines
As James S. Gerson et al. point out:

The committee should be aware that the Foreign Corrupt Practices Act (FCPA) re-
quires public companies to keep reasonably detailed records of all transactions and
to maintain internal accounting controls that provide reasonable assurance that those
transactions are properly authorized and recorded.30

With respect to boards of directors and their compliance with applicable laws
and regulations, the Business Roundtable states:

Law compliance is a fundamental requirement of both private and corporate persons.
Boards of directors participate in a number of different ways. The audit committee
of the board of directors, actions of other board committees, the approval and review
policies of the board, review by the corporate general counsel, and, where necessary,
by outside counsel retained by the general counsel or appointed by the board are all
procedures that can be used in fulfilling this function.




28
Hugh L. Marsh, “The Foreign Corrupt Practices Act: A Corporate Plan for Compliance,” Internal
Auditor 36, No. 2 (April 1979), pp. 73“74.
29
Ibid., p. 76.
30
James S. Gerson, J. Robert Mooney, Donald F. Moran, and Robert K. Waters, “Oversight of the Fi-
nancial Reporting Process”Part I,” CPA Journal 59, No. 7 (July 1989), p. 28.
Questionable Foreign Payments 357


Legislation and regulation affecting the corporation change frequently. The general
counsel of the corporation should regularly brief the board on significant changes in
applicable laws, including legal developments affecting the corporation or their du-
ties as directors.31

Finally, in an article dealing with compliance with the amended act, Sandra G.
Gustavson and Jere W. Morehead suggest the following to help coordinate a com-
pany™s compliance efforts and loss control program:

• Develop clear, specific policy statements
• Establish and maintain a written code of conduct
Implement formal approval procedures for payments32



The External Auditor™s Responsibility
As noted in Chapter 11, the external audit examination cannot guarantee that irreg-
ularities or illegal acts are nonexistent. According to the Auditing Standards Board:

Certain illegal acts have a direct and material effect on the determination of financial
statement amounts. Other illegal acts, such as those described,33 may, in particular
circumstances, be regarded as having material but indirect effects on financial state-
ments. The auditor™s responsibility with respect to detecting, considering the finan-
cial statements effects of, and reporting these other illegal acts is described in this
Statement. These other illegal acts are hereinafter referred to simply as illegal acts.
The auditor should be aware of the possibility that such illegal acts may have oc-
curred. If specific information comes to the auditor™s attention that provides evidence
concerning the existence of possible illegal acts that could have a material indirect
effect on the financial statements, the auditor should apply audit procedures, specif-
ically directed to ascertaining whether an illegal act has occurred. However, because
of the characteristics of illegal acts as explained above, an audit made in accordance
with generally accepted auditing standards provides no assurance that illegal acts
will be detected or that any contingent liabilities that may result will be disclosed.34

As a case in point, “When something has come to a director™s attention in the
area of commercial bribery, what can the auditors do to help directors find out if
there is a problem: for example, in a department where there may be a suspicion
of a kickback?”35 According to David L. James, former partner of Arthur Young
and Co. (now Ernst & Young), the board member should discuss this matter with
“a member of the audit committee, preferably the chairman.” Furthermore, James
points out:

31
The Business Roundtable, Corporate Governance and American Competitiveness (New York: The
Business Roundtable, 1990), p. 10.
32
Sandra G. Gustavson and Jere W. Morehead, “Complying with the Amended Foreign Corrupt Prac-
tices Act,” Risk Management 37, No. 4 (April 1990), p. 5.
33
See Chapter 11 for additional emphasis.
34
Statement on Auditing Standards, No. 54, “Illegal Acts by Clients” (New York: AICPA, 1988), par. 7.
35
Gerald F. Boltz, Grover R. Heyler, David L. James, and Francis M. Wheat, “Corporate Directors™
Responsibilities,” Financial Executive 45, No. 1 (January 1977), p. 21.
358 Reviewing Certain General Business Practices


When we get into the area of irregularities, e.g., fraud, questionable conduct, and the
like, we sit down with the audit committee, indicate that this question has been
raised, glean as much information from the director as possible, and then figure out
how to attack the particular problem.36

While the external auditors can assist the audit committee in the sensitive pay-
ments area, it is important to recognize that:

[w]ith respect to high level executive conflicts of interest, the Board of Directors has
the obligation, in selecting such executives, to make exhaustive background checks
of prospective candidates such as are now being followed in filling high U.S. Gov-
ernment posts.37

Such investigations of the candidates will not only help curtail the problem of im-
proper payments and conflicts of interest but also will strengthen the board™s
image in the business community. As a result, the major objective is to review the
corporate policy and internal monitoring procedures, as discussed in this chapter
and the preceding chapter, with the external auditors.
In short, as Grover R. Heyler, partner of Latham and Watkins, concludes, “. . .
directors need to go beyond what the auditors might be able to do.”38 In addition
to the annual questionnaires regarding sensitive areas, Heyler suggests that:

• A conflict of interest committee can be established.
• The board can require reports on trading in the company™s stock.
• Controls on the disclosure of inside information and press releases can be
initiated.
• Provisions can be made for some independent review of relationships between
the company and firms affiliated with insiders.39


CORPORATE PERQUISITES
Meaning of Corporate Perquisites
During the latter part of the 1970s, the SEC scrutinized the area of perquisites, or
“perks,” as evidenced by several SEC releases. For example, SEC Release No. 33-
5758, issued in November 1976, stated:

. . . it has been suggested that disclosure should be required of the numerous emerging
forms of indirect compensation or “perquisites” now given to management personnel.

Furthermore, in April 1977 the SEC asked, in Securities Exchange Act Release
No. 13482, “Should the Commission amend its proxy rules . . . to provide for

36
Ibid.
37
Herbert Robinson and J. Karl Fishbach, “Commercial Bribery”The Corporation as Victim,” Finan-
cial Executive 47, No. 4 (April 1979), p. 16.
38
Boltz, Heyler, James, and Wheat, “Corporate Directors™ Responsibilities,” p. 20.
39
Ibid.
Corporate Perquisites 359


more detailed or comprehensive disclosure of management remuneration?” Fi-
nally, in August 1977, the SEC issued Interpretative Release No. 33-5856, “Dis-
closure of Management Remuneration,” whereby it pointed out that the securities
acts require not only the disclosure of direct remuneration paid to directors and of-
ficers but also personal benefits “. . . sometimes referred to as ˜perquisites.™ “ The
Commission believed that certain personal benefits received by management from
the corporation should be reported as remuneration:

Among the benefits received by management which the Commission believes should
be reported as remuneration are payments made by registrants for the following pur-
poses: (1) home repairs and improvements; (2) housing and other living expenses
(including domestic service) provided at principal and/or vacation residences of
management personnel; (3) the personal use of company property such as automo-
biles, planes, yachts, apartments, hunting lodges, or company vacation houses;
(4) personal travel expenses; (5) personal entertainment and related expenses; and (6)
legal, accounting, and other professional fees for matters unrelated to the business of
the registrant. Other personal benefits which may be forms of remuneration are the
following: the ability of management to obtain benefits from third parties, because
the corporation compensates, directly or indirectly, the bank or supplier for provid-
ing the loan or services to management; and the use of the corporate staff for per-
sonal purposes.
Certain incidental personal benefits which are directly related to job performance
may be omitted from aggregate reported remuneration provided they are authorized
and properly accounted for by the company. Parking places, meals at company fa-
cilities, and office space and furnishings at company-maintained offices are a few ex-
amples of personal benefits directly related to job performance.
In addition, certain incidental benefits received by management which are ordinary
and necessary to the conduct of company business may not be forms of remunera-
tion. These job-related benefits are benefits which are available to management em-
ployees generally, which do not relieve the individual of expenditures normally
considered to be of a personal nature and which are extended to management solely
for the purposes of attracting and maintaining qualified personnel, facilitating their
conduct of company business, or improving their efficiency in job performance.
While itemized expense accounts may be considered job-related benefits whose
value would be excluded from the aggregate remuneration reported, some may be
forms of remuneration if they are excessive in amount or conferred too frequently. In
any case, management is usually in the best position to determine whether a certain
benefit should be viewed as a form of remuneration based on the facts and circum-
stances involved in each situation.
The value of all forms of remuneration should be included within the appropriate

<<

. 70
( 82 .)



>>