Jonathan T. Marks CPA, CFF, CFE and NACD Board Fellow

FCPA: CEO Overriding/Circumventing and Exploiting Internal Controls, and Issuing False Certifications

Background

The Securities and Exchange Commission (“SEC”) announced that Westport Fuels Systems, Inc. (Westport”), a Canadian clean fuel technology company headquartered in Vancouver, Canada, and its former chief executive officer, Nancy Gougarty (“Gougarty”), age 64 of Leesville, South Carolina, have agreed to pay more than $4.1 million to resolve charges that they violated the Foreign Corrupt Practices Act (“FCPA”) by paying bribes to a foreign government official in China.

SEC’s Order

According to the SEC’s order, beginning no later than 2016, Westport, acting through Gougarty and others, engaged in a scheme to bribe a Chinese government official to obtain business and a cash dividend payment by transferring shares of stock in Westport’s Chinese joint venture to a Chinese private equity fund in which the government official held a financial interest.  The SEC order states that Westport concealed the identity of the Chinese private equity fund in its public filings, as well as in its books and records, by falsely identifying a different entity as the counterparty to the transaction. Gougarty caused Westport’s violations by circumventing Westport’s internal accounting controls and signing a false certification concerning the sufficiency of those controls.
“A company’s commitment to compliance is only as strong as the effort put in by senior management,” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit. “Here, the chief executive exploited weaknesses in the company’s controls to engage in bribery, undermining shareholder interests.

The SEC’s order finds that Westport violated the anti-bribery, books and records, and the internal controls provisions of the Securities Exchange Act of 1934 and that Gougarty caused certain of Westport’s violations. 

Westport violated, and Gougarty caused Westport’s violation of, Section 13(b)(2)(B) of the Exchange Act which requires every issuer with a class of securities registered pursuant to Exchange Act Section 12 to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any difference

Outcome

Without admitting or denying the SEC’s findings, respondents consented to a cease-and-desist order. Westport also agreed to pay $2,546,000 in disgorgement and prejudgment interest and a civil penalty of $1,500,000, and Gougarty agreed to pay a civil penalty of $120,000. In determining to accept Westport’s offer, the SEC considered remedial acts undertaken by Westport concerning its anti-corruption and financial reporting compliance programs, and its cooperation afforded SEC staff.

Practice Considerations

Revisit your Code of Conduct. The SEC cited the fact Westport’s Code of Conduct omitted any reference to due diligence when engaging in a transaction with a third party in which a government official may have a financial interest.

Regarding overriding or circumventing internal controls, The PCAOB states that Management is in a unique position to perpetrate fraud because of its ability to directly or indirectly manipulate accounting records and prepare fraudulent financial statements by overriding established controls that otherwise appear to be operating effectively.

By its nature, management override of controls can occur in unpredictable ways. The PCAOB outlines several procedures to specifically address the risk of management override of controls. I highly recommend reviewing the procedures.

I welcome your comments and suggestions.

Best,

Jonathan T. Marks, CPA, CFE

Attribution: PCAOB, SEC, WSJ