The PCAOB, Audits and Compliance - Part III

May 24, 2016

When asked about write-downs and how they might be used to hide monies generated to fund a bribe, in the context of an acquisition. Howell noted, “anytime you have to calculate what that original value is, if you have a spin-off, if you have some sort of massive write-down, then they’re going to want to take a look at that to see, How did you do that write-down? Did you do it to dress up your balance sheet, to make it a little prettier because you got rid of some intangibles because you didn’t want to have them anymore for other purposes? Or there was some sort of thing that was out of the ordinary that you did? Then they really want to look at that to make sure that there’s support for it.”

Do the same or similar rules would apply when it comes to joint ventures? Howell began by noting that an audit is focused on the external financial statements for the company taken as a whole as presented to financial statements. While that statement is in the context of what the final opinion focuses upon, it is important to recall that an audit builds up from its parts.

One of the key inquiries from a Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) investigation or enforcement action is around the issue of systemic failures of internal controls. Such failure is a sure remedy for the finding by the SEC for violation of the FCPA, even absent an affirmative finding of bribery. Howell said that a systemic inquiry from the auditing perspective is critical as well.

Interestingly, Howell not only draws a line from the FCPA to the Sarbanes-Oxley Act of 2002 (SOX) to the Dodd-Frank Act of 2010; but also draws a line from the PCAOB to corruption risk because of the pronouncements from the PCAOB about what the auditors have to look for in terms of risk. This is because he believes “every PCAOB inspection report to date has mentioned fraud. That the purpose of mentioning fraud is that the failures in the accounting control environment that permitted a transaction to go unreported or misreported are the kinds of things that undermine the entire credibility of the financial statements and mean that you’re not going to be able to rely on that control environment. Fraud is central to all of this.”

Howell went on to explain that fraud usually occurs because there are weaknesses in controls which are exploited by bad actors to get the money or the resources, if not money, to actually then pay a bribe that is the focus of the FCPA. The PCAOB’s focus on fraud is because the controls need to be in place and they focus on internal controls over financial reporting. Howell noted he has not seen any FCPA settlement that did not have a material impact on the company in one way or another. He concluded by stating, “how can you say that you’’re not dealing with material misstatements of the financial statements if you fail to report something that clearly is going to result in tens or hundreds of millions of dollars of penalties, disgorgement of profits, investigations, and tearing the company inside out in order to do the final remediation?”

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