For any boy in the ‘60s, there was one woman on television who was the most witty, sexy, gorgeous and karate-kick butt. We lost her this week. I refer of course to Dame Diana Rigg, who will forever be known as Mrs. Emma Peel from the British television show The Avengers. She and John Steed (Patrick Macnee) waltzed through an episode each week, sipping champagne, nibbling crumpets with Mrs. Peel displacing all manner of bad guys with a well-time karate kick or two. (Steed usually disabled the bad guys with his ubiquitous umbrella.) Their repartee has perhaps never been duplicated on any television series since.
Rigg had a fabulous career after The Avengers, most notably as James Bond’s only movie version wife in the film On Her Majesty’s Secret Service. She was also a multiple Emmy winner and was a key character in Game of Thrones. She also played two of the toughest female leads on stage, in Medea and Who’s Afraid of Virginia Wolf, which are also two of the most gut-wrenching roles I have ever seen on stage. But even as a preteen in the ‘60s, I knew Diana Rigg had “IT”. As important as John Thompson, Lou Brock and Tom Seaver were to the world of sports, Diana Rigg was that to the stage, small screen and silver screen. I hope you and Mr. Steed are sipping a cocktail together about now.
Given her truly international scope, I thought Mrs. Peel would be a good way to introduce today’s topic of how to assess your internal controls regime for international operations. It is incumbent that you need to review as much information as you can to understand the financial and operational structure of an entity and how it is integrated with the corporate headquarters, or the US business unit’s financial and operational structure, if the foreign operation is part of a US business unit.
You could begin with the Transparency International-Corruption Perception Index (TI-CPI) to garner a sense of the reputation of the country in which your business unit is located, as well as the CPI for all other countries in which the location either markets business or has current customers. Another area for inquiry or review is the scope of your foreign operations. This means you will need to consider your sales model, whether employee based or primarily using third party representatives. You will also need to consider if such third-party representatives are coming into a commercial relationship with your company through your supply chain.
Other areas of inquiry should include whether your company’s finance and accounting staff produce financial statements that are integrated into the parent’s financial statements; whether your international business locations utilize a local bank account for local sales receipts as well as funds transfers from the US and whether the account has local check signers and whether dual signatures are required on the checks. You may also want to consider the extent to which disbursements are made in the local currency and, of course, if there is a local petty cash fund.
As with many other areas around internal controls, it is important to consider the local Delegation of Authority (DOA) and whether it is consistent with your corporate DOA. Some of the considerations regarding the local DOA should extend to which corporate or US business unit approvals are required for transactions initiated locally, such as: 1) approval of vendor invoices, 2) disbursements of funds, including wire transfers; 3) execution of facilities leases; 4) execution of contracts with agents; and 5) approval of pricing and credit terms to customers and distributors. You should also review whether the local DOA provides appropriate segregation of duties (SODs) at the local business unit level.
You should consider how sales of product are conducted. For example, is an inventory maintained at the local operation for shipment to customers; are products drop shipped from US directly to the customers of the local operation or are they drop shipped to distributors for delivery to the ultimate customer?
Hopefully you are already doing the above, but you should review what is being done to determine if employees or local contractors who are local nationals have gone through your due diligence process so that they have been properly vetted to determine whether they are government officials in any capacity or are relatives of government officials. Along the lines of a more formal Foreign Corrupt Practices Act (FCPA) analysis you should review to see if there has been any investigation of alleged fraud, including FCPA violations, at the location and, if so, what were the results of the investigation? Around customers, you should review with whom each international location does business to determine the extent to which its current customers are local government entities as well as the extent to which the location is pursuing sales activities for other local government entities.
If there has not been a sufficient assessment of controls, the compliance professional must then decide how to best determine whether the local controls are sufficient to satisfy the requirement of the FCPA and accurately reflect all transactions and prevent concealment of improper transactions. Some of these considerations would be an inadequate SODs because the separation of responsibility for physical custody of an asset from the related record keeping is a critical control. In practice, this means that persons who can authorize purchase orders should not be capable of processing accounts payable transactions. Further, the employee who prepares the deposit should not post the receipts to the customer accounts.
You should look to see if there is inappropriate access to assets. If there are, internal controls should be created to provide safeguards for physical objects such as inventory and cash, restricted information, critical forms and update applications. This means that an employee who only needs to view computer information should be restricted to “read and file scan” access and should not be granted “write and create” access. Moreover, controls should prevent the unauthorized removal of resale inventory and movable fixed assets from the premises.
It is not necessary to prove that a bribe has been paid to have an enforcement action against a company for violation of the internal controls provisions of the FCPA. That was the situation in the Securities and Exchange Commission (SEC) 2018 FCPA enforcement action involving Kinross Gold Corporation. It was this lack of effective internal controls, not the payment of a bribe, which was the basis for the civil enforcement action. This means that you should look to make certain the situation is not one of form over substance, where controls can appear to be well designed but still lack substance, as is often the case with required approvals.
Such a situation could arise in several different scenarios. The first is where an account manager’s signature attests to the accuracy of the payroll voucher information, but if the account manager does not have assurance that the supporting time records are accurate, the approval process lacks substance. Other examples are where a supervisor who approves expense reports but routinely does not look at the supporting documentation; a country manager provides a true control as an approver; or where the country manager or the local finance manager has ability to conceal the true nature of transactions without detection by anyone else.
Another important area involves sales and compensation for a foreign business unit. On the sales side of the equation, review the three-year historical sales for the location and the budgeted sales for the upcoming year. This can give insight into the relative pressure on employees to grow the business and, accordingly, the possibility of an employee seeing a bribe as a good way to grow the business. The inquiries can lead to questions about compensation such as: What is the sales incentive compensation plan for local sales personnel? For the country manager? Such an inquiry gives insight into the possibility of personal benefit which might result from someone paying a bribe to win a contract which results in a large sales incentive compensation to the employee.
I don’t know about you but I plan to catch up on The Avengers this weekend.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at firstname.lastname@example.org.
© Thomas R. Fox, 2020