FCPA Violations, Geographic Disclosure and Material Weaknesses

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  In Paper Session: Table 11: Internal Controls

Abstract

The Foreign Corrupt Practices Act of 1977 (hereafter, FCPA) prohibits firms from bribing foreign government officials in foreign countries for business purposes. To prevent bribery from occurring in the first place, the Securities Exchange Act of 1934 (hereafter, the Exchange Act) and related regulations require that firms maintain adequate internal controls over authorization and record keeping. We examine two questions. First, are FCPA violators less transparent in their disclosure practices? Second, are FCPA violators more likely to have material weaknesses in internal controls over financial reporting? Relatedly, we also examine whether FCPA violators are more likely to have more foreign subsidiaries. To answer these three questions, we hand collect firms that were cited by the Department of Justice (DOJ) or the Securities Exchange Commission (SEC) for an FCPA violation. Next, we test whether cited firms are less likely to voluntarily disclose their foreign operations (sales and long-lived assets) in foreign countries, whether they are more likely to have material weaknesses in their internal controls over financial reporting, and whether they are more likely to have more foreign subsidiaries. We find evidence that affirms these three questions, and our results are robust to using alternative measures, and tests of endogeneity using an instrumental variable approach. Overall, our results suggest that FCPA cited violators are less transparent in reporting their foreign operations to financial statement users, and their internal controls are often too weak to prevent making illegal payments to foreign government officials.

Authors

• Kenneth J Reichelt, Louisiana State University - Baton Rouge

• Joseph Legoria, Louisiana State University - Baton Rouge

• Jared Scott Soileau, Louisiana State University - Baton Rouge