The FCPA: The New SEC and DOJ Enforcement Priority – Part III: The Books, Records and Internal Control Provisions

The books, records and internal control provisions of the FCPA are contained in Securities Exchange Act Sections 13(b)(2)-(7). Generally, these provisions apply to all issuers and transactions. They are broader than the anti-bribery provisions, which focus on certain corrupt payments.

Section 13(b)(2)(A) is perhaps the key provision. It requires every SEC registrant or issuer to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer” (emphasis added). The Section includes neither a materiality nor a scienter requirement. Rather, the “in reasonable detail” provision of the statute is intended as a substitute to “effectively prevent off-the-books slush funds and payments of bribes.” H.R. Rep. No. 95-831, at 10 (1977), reprinted in 1977 U.S.C.C.A.N. 4121, 4122.

The “in reasonable detail” requirement of Section 13(b)(2)(A) was given further definition in the 1988 amendments to the statute, which added Section 13(b)(7), defining “reasonable.” In the FCPA, that term means that degree of detail which “would satisfy prudent officials in the conduct of their own affairs.” The concept of a prudent man is not an “unrealistic degree of exactitude.” H.R. Rep. No. 100-576 at 917 (1988).

The books and records provisions have three key objectives: (1) to ensure that the books and records reflect the transactions in conformity with acceptable method of reporting economic events; (2) to prohibit inaccurate financial books and records; and (3) to make sure that transactions are properly reflected to permit the preparation of financial statements in accord with GAAP.

To implement the books and records provisions the SEC promulgated two rules. Rule 12b-2-1 prohibits the falsification of the books and records: “No person shall directly or indirectly, falsify or cause to be falsified, any book, record or account.” That Rule is fortified by Rule 13(b)2-2, which prohibits making false statements to an auditor, thus aiding in the preparation of accurate books and records.

The internal control provisions are contained in Section 13(b)(2)(B). That Section requires that every issuer:

devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that:
(1) transactions are executed in accord with management’s general or specific authorization;
(2) to maintain accountability for assets;
(3) access to assets is permitted only in accord with management’s general or specific authorization; and
(4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences …

The purpose of these provisions is to ensure that entities adopt accepted methods of recording economic events, protecting assets and conforming transactions to management’s authorization. No specific system of controls is mandated. Section 13(b)(5) aids enforcement by providing that “[n]o person shall knowingly circumvent or knowingly fail to implement a system of internal controls or knowingly falsify any book, record or account.”

The books and records (a phrase not defined in the statute) and internal control provisions were designed to compliment each other. These provisions, which were fortified in the Sarbanes-Oxley Act by, for example, the CEO/CFO certifications in Section 302 and 906 requirements, work together to ensure that transactions are accurately recorded. The sections also aid enforcement of the anti-bribery provisions by requiring disclosure of any bribe – prevention through “sun-light” or disclosure.

Next: An overview of the anti-bribery provisions

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