What is good Board culture? How can a Board of Directors help to drive culture throughout an organization? What can a Board itself do to improve Board culture? Does diversity help to make a company more well-run? How can Board diversity help to drive corporate culture? Those questions are critical for the success of any organization. Yet many CEOs, CCOs and Board members have not considered these issues. In this episode, I visit with Sheila Hooda on culture on a Board of Directors and how Board’s can drive culture throughout an organization. Some of the topics we highlight are the following:

1. What is good Board culture?
2. What is the Board’s role in building an ethical culture within a company?
3. How can the Board assess senior management leadership to set appropriate culture?
4. How can the Board help to sharpen the company’s cultural focus?
5. What is the Board’s role in cultural evaluation and feedback?
6. What information should the Board ask for or consider in assessing a company’s culture?
7. What information should the Board impart to the Chief Compliance Officer or Chief Integrity Officer regarding culture?
8. Should Board members be a part of CCO cultural initiatives such as town hall meetings or focus groups?

Sheila Hooda is an independent, non-executive board member, 30+ year operating executive & C-suite advisor, and has provided strategic direction, driven growth and transformed Fortune 500 firms. She serves on the Board of Directors of Mutual of Omaha Insurance Company, serving on the Risk and Investment Committees; and the Board of Virtus Investment Partners, a leading Investment Management firm, serving on the Audit and Finance & Risk Committees. She is CEO & President of Alpha Advisory Partners, an advisory firm providing strategy, M&A & turnaround counsel for Financial & Business services firms. Her sector expertise incl. global Financial, Professional and Business services; Technology & FinTech, Insurance; Asset mgt; Capital Markets; Banking; Education & Consumer.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) for public business entities, certain not-for-profit entities, and certain employee benefit plans. It becomes effective for public entities for annual reporting periods beginning after December 15, 2017. In addition to changing things dramatically in the accounting and financial realms, this new revenue recognition standard which may significantly impact the compliance profession, compliance programs and compliance practitioners going forward. In this episode, we consider auditors and the new revenue recognition standard, including disclosures, the ICFR and PCAOB guidance on the new revenue recognition standard.

Matt Kelly and I have put together a five-part podcast series where we explore implications of this new revenue recognition standard. Each podcast is short, 11-13 minutes and deals with one topic on the new revenue recognition standard. The schedule for this week is:

Part 1: Introduction;

Part 2: What the logic of your transaction price?;

Part 3: Shaking up software revenue recognition;

Part 4: Auditors need to pay attention; and

Part 5: What does it all mean for compliance (and everyone else)?

Kelly identified three areas where he sees immediate auditor impact. The first is that the audit firms’ regulator, the Public Company Accounting Oversight Board (PCAOB) has clearly communicated to auditors they must pay attention to this new revenue recognition standard. One of the clear themes throughout this podcast series has been the increased amount of judgment which will come into these calculations going forward. This means companies will need to have more complete documentation which can then be reviewed and tested by their auditors. Add to this PCAOB auditing standards and there may well be a time for some sorting out of what will be required going forward.

Secondly, with this new emphasis on judgment, auditors will have a renewed emphasis on fraud detection. There may be some incentives for sales executives to manipulate the numbers a bit or to close the deal more quickly to hit a bonus. Such pressure could transgress into fraud and as Kelly noted “auditors will be looking more closely at fraud risk because there could well be circumstances where sales commissions could be higher because of the new revenue standard; that would let some firms recognize more of a transaction more quickly.” Finally, Kelly also noted the International Controls for Financial Reporting will have renewed focus from auditing firms.

Kelly pointed to the straightforward issue of whether a contract exists and then posed some of the questions auditors may be asking going forward: How do we know the organization’s contracts are complete and accurate? How does a company demonstrate its contract management system has not be tampered with after execution? What are the controls around these programs you might use to manage your financial transactions? Are we capturing all of the contracts that our employees are generating and that employees are not generating some contracts, have not informed management or that the company’s contract management system has not captured them? Finally, is there contract system security to insure there is no manipulation after the contract is signed?

Another key area for auditing will be whether the pattern and practice of doing business is the same as the contract performance terms and conditions. One immediate area is payment terms. Most contracts specify 30 days net payment terms. However often this date may slip 30, 60 days or even longer. Now take this same concept into the FCPA realm around vague deliverables in third party agent’s agreement and you begin to see some additional issues. If the performance deliverable terms are so vague as to render them meaningless, how will that be handled under this new revenue recognition standard.

My observation is there is a continuum, working backward from the PCAOB, to auditors and audits to the disclosures companies may have to make. Under GAAP, a disclosure may only need to be made if it is material. Yet in the FCPA world there is no materiality standard. At what point does the lack of materiality of a contract outside the United States make your books and records not correct leading to a potential exposure under a law unrelated to traditional revenue recognition; IE., the FCPA? Kelly concluded by noting that companies need to be (or have been in) discussions with their audit firm for to plan these things out as “these sorts of complexities are not to be dismissed because we don’t know when they might boil up and suddenly grab you in the rear end. And when that happens it will happen at the least convenient time and cause the most pain.” (ouch!)

I hope you will continue to join us for our exploration this week. Tomorrow in Part V, we will conclude with what it all means going forward.

If one were to reflect upon the providing of gifts and business entertainment to foreign governmental officials, one might reasonably conclude that after 40 years of the FCPA, companies might follow its prescriptions regarding gifts and business entertainment. However, there have been some notable FCPA enforcement actions in this area.

The 2012 Guidance clearly stated the FCPA does not ban gifts and entertainment. Indeed, the Guidance specified that “A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law. Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.”

What does the FCPA Itself Say? 

While prohibiting payment of any money, or thing of value, to foreign officials to obtain or retain business, the FCPA arguably permits incurring certain expenses on behalf of these same officials. There is no de minimis provision. The presentation of a gift or business entertainment expense can constitute a violation of the FCPA if this is coupled with the corrupt intent to obtain or retain business. Under the FCPA, the following affirmative defense regarding the payment of expenses exists:

[it] shall be an affirmative defense [that] the payment, gift, offer or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to…the promotion, demonstration, or explanation of products or services; or…the execution or performance of a contract with a foreign government or agency thereof.

As with most matters under the FCPA, there is little direct guidance on what conduct may step over the line set out above. Of course, there is always the gut check test, which simply measures “if it feels wrong in your gut, it probably is wrong”. It is something good to always keep in mind in any circumstance.

Opinion Releases 

Somewhat surprisingly, there are not any recent DOJ Opinion Releases from the past 10 years dealing with the values for gifts and business entertainment under the FCPA. However, there are three Opinion Releases from the early 1980s which can provide some guidance to current practitioners.

In Opinion Release 82-01, the DOJ approved the gift of cheese samples made to Mexican governmental officials, by the Department of Agriculture of the State of Missouri to promote the state of Missouri’s agricultural products. However, the value of the cheese to be presented was not included in the Opinion Release. In Opinion Release 81-02, the DOJ approved a gift of its packaged beef products from the Iowa Beef Packers, Inc to officials from the Soviet Ministry of Foreign Trade. The total value of all the samples presented was estimated to be less than $2,000 and the Iowa Beef Packers, Inc averred that the individual sample packages would not exceed $250 in value.

The final Opinion Release relating to gifts is 81-01. In this release, Bechtel sought approval to use the SGV Group, a multinational organization headquartered in the Republic of the Philippines and comprised of separate member firms in ten Asian nations and Saudi Arabia, which provide auditing, management consulting, project management and tax advisory services. The SGV Group desired to solicit business on behalf of Bechtel who had proposed to reimburse the SGV Group for gift expenses incurred in this business solicitation. Regarding the reimbursement of gift expenses by Bechtel to the SGV Group the DOJ stated:

(d) Expenses for gifts or tangible objects of any kind incurred without Bechtel’s prior written approval will be reimbursed only where such expenditures are permitted under the local laws, the ceremonial value of the item exceeds its intrinsic value, the cost of the gift does not exceed $500 per person, and the expense is commensurate with the legitimate and generally accepted local custom for such expenses by private business persons in the country.

Policies and Procedures for Gifts and Business Entertainment

 Gifts to Governmental Officials 

Based upon the FCPA language and relevant Opinion Releases and allowing for inflation over the past 30 years, it would appear reasonable that a Company can provide gifts up to a value of $500. Below are the guidelines which the Opinion Releases would suggest incorporating into a compliance policy regarding gifts:

  • The gift should be provided as a token of esteem, courtesy or in return for hospitality.
  • The gift should be of nominal value but in no case greater than $500.
  • No gifts in cash.
  • The gift shall be permitted under both local law and the guidelines of the employer/governmental agency.
  • The gift should be a value which is customary for country involved and appropriate for the occasion.
  • The gift should be for official use rather than personal use.
  • The gift should showcase the company’s products or contain the company logo.
  • The gift should be presented openly with complete transparency.
  • The expense for the gift should be correctly recorded on the company’s books and records.

Business Entertainment of Governmental Officials 

Based upon FCPA language (there are no Opinion Releases on this point), there is no threshold that a Company can establish a value for business entertainment. However, I believe there are clear guidelines which should be incorporated into your business expenditure policy, which should include the following:

  • A reasonable balance must exist for bona fide business entertainment during an official business trip.
  • All business entertainment expenses must be reasonable.
  • The business entertainment expenses must be permitted under (1) local law and (2) customer guidelines.
  • The business entertainment expense must be commensurate with local custom and practice.
  • The business entertainment expense must avoid the appearance of impropriety.
  • The business entertainment expense must be supported by appropriate documentation and properly recorded on the company’s book and records.

The incorporation of these concepts into a compliance policy is a good first step towards preventing potential violations from arising, but it must be emphasized that they are only a first step. There must be procedures to implement these policies. At a minimum, you must require a business justification from the business representative requesting to provide the gift or business entertainment. Next it should be reviewed and approved by a front-line compliance professional. Then, depending on the amount and nature of the request, it may need CCO approval. Finally, if there is a Compliance Oversight Committee it should go to that Committee for a final check to make sure everything is in order.

These guidelines must be coupled with active training of all personnel, not only on a company’s compliance policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and business entertainment. Lastly, it is imperative that all such gifts and business entertainment be properly recorded, as required by the books and records component of the FCPA.

And, as always, do not forget the gut check test.

Three Key Takeaways

  1. Gifts and business entertainment continue to plague companies for compliance violations.
  2. The key is not the amount but of having a policy and procedure and following it.
  3. Always remember to record gifts and business entertainment expenses correctly.

 

This month’s sponsor is the Doing Compliance Master Class. In 2018 I am partnering with Jonathan Marks and Marcum LLC to put on training. Look for dates of one of the top compliance related training going forward.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) for public business entities, certain not-for-profit entities, and certain employee benefit plans. It becomes effective for public entities for annual reporting periods beginning after December 15, 2017. In addition to changing things dramatically in the accounting and financial realms, this new revenue recognition standard which may significantly impact the compliance profession, compliance programs and compliance practitioners going forward. In this episode, we consider how the new revenue recognition standard could shake up the software industry.

Matt Kelly and I have put together a five-part podcast series where we explore implications of this new revenue recognition standard. Each podcast is short, 11-13 minutes and deals with one topic on the new revenue recognition standard. The schedule for this week is:

Part 1: Introduction

Part 2: What the logic of your transaction price?

Part 3: Shaking up software revenue recognition.

Part 4: Auditors need to pay attention.

Part 5: What does it all mean for compliance (and everyone else)?

One of the industries which may greatly feel the impact of the new revenue recognition standards is the software industry. Kelly noted, the new revenue recognition rule will ultimately allow some portion of the software sector to recognize more of their long-term contract revenue immediately. He believes they initially may think something along the lines of “Hey that’s sounds good right. We can hit our quarterly numbers. However, that then brings about bigger strategic questions.” So the reality may be somewhat different as a software company might need to think about this might well drive much more volatile revenue patterns over a multi-year period.

Kelly provide an example of the volatility from one of the companies he has studied, Microsoft. He stated that “when Microsoft adopted the revenue recognition standard earlier this summer, it actually pushed its revenues up because all those liabilities that would have been deferred revenue on the balance sheet recognized them all at once. Microsoft’s total revenue for 2017 went from $8.9bn to $26.5bn.” All that just because of a change in revenue recognition.

He then gave a more tangible example of a specific contract, where a company entered into a contract for five years, paying $500,000 and receiving 1000 seat licenses and four years of updates. Under the prior revenue recognition standards, the software company recognized a $100,000 in that first year when they signed the deal and then they had $400,000 of deferred revenue, which they recognized in chunks of $100,000 per year. Now a software company under the same scenario could recognized the entire $500,000 in the first year. While this may look great, it has serious implications. First and foremost, it will impact the software company’s balance sheet for the final four years of the five-year contract. It will seem most bare, with no deferred revenue. Kelly concluded “that’s the sort of thing that the software companies sector is going to go through a bit of a blender in early 2018 as people start to realize what all this means.”

Another obvious area of change will be in commission payments for sales persons and third parties. Previously they may have been paid when the revenue was recognized over the life of a contract. Now it may be all up front in the first year. This could cause a commission payment to be made in Year 1 of a 5-year contract. This would present the same cash flow issue for a sales person. Now consider this in a FCPA context. The five-year split of a commission payment has acted as an internal compliance control to keep such payments low enough so as not to create a fund for bribery. Now that type of internal control may not be available to the Chief Compliance Officer.

In a white paper for CalcBench, Kelly and Pranav Ghai found several themes emerging for software companies under the new revenue recognition standard.

First, software companies expect the new standard to accelerate revenue recognition for some long-term software contracts, where previously the revenue would have been recognized in increments across the life of the contract. This is because the new standard eliminates the need for “vendor-specific objective evidence” (VSOE). With the VSOE requirement gone, the new standard will allow firms to recognize more of the revenue from a long-term contract immediately.

Second, numerous firms said the new standard will change how they account for sales commissions, which qualify as costs of obtaining contracts. Under the new standard, sales commissions can be capitalized over the term of a contract, rather than expensed immediately. That means deferred commissions will increase as an asset on the balance sheet, and the amortization costs will be expensed over the term of the contract.

Finally, the data does raise questions about how well-prepared some software firms are for the new standard. While numerous firms say they plan to implement the standard by Jan. 1, 2018— but still report that they are uncertain about its possible effect, or even what adoption method they will use.

Perhaps one of the most unintended consequences will be for software companies looking for some sort of a merger, exit or those looking for an investment round from private equity or venture capital. The difficulty for PE or VC will be to determine what a software company’s value might be over a period of time. This may end up being one of the most critical questions facing software companies and those who invest in them.

I hope you will continue to join us for our exploration this week. Tomorrow in Part IV, we will consider how and why auditors need to pay attention.

Simply having a Code of Conduct, together with compliance policies and procedures is not enough. As articulated by former Assistant Attorney General Lanny Breuer, “Your compliance program is a living entity; it should be constantly evolving.” The 2012 FCPA Guidance stated “When assessing a compliance program, DOJ and SEC will review whether the company Guiding Principles of Enforcement has taken steps to make certain that the code of conduct remains current and effective and whether a company has periodically reviewed and updated its code.” Some of the questions you should consider are:

  • When was the last time your policies and procedures were released or revised?
  • Have there been changes to your company’s internal controls since the last revision?
  • Have there been changes to relevant laws relating to a topic covered in your company’s policies and procedures?
  • Are any of the policies and procedures outdated?
  • What is the budget to create/revise your policies and procedures?

After considering these issues, you should benchmark your current policies and procedures against other companies in your industry. If you decide to move forward, I suggest a process which can be fully documented as a basis to include revisions to your compliance policies and procedures.

Get buy-in from senior leadership of your company 

Your company’s highest level must give the mandate for a revision to compliance policies and procedures. It should be the Chief Executive Officer, General Counsel or Chief Compliance Officer, or better yet all three to mandate this effort. Whoever gives the mandate, this person should be consulted at every major step of the policies and procedures revision process if it involves a change in the direction of key policies.

Establish a core policies and procedures revision committee 

You should have a cross-functional working group would be ideal to head up your effort to revise your compliance policies and procedures. This group should include representatives from the following departments: legal, compliance, communications, HR; there should also be other functions which represent the company’s domestic and international business units; finally, there should be functions within the company represented such as finance and accounting, IT, marketing and sales.

From this large group, the topics can be assigned for initial drafting to functions based on their relevance or necessity. These different functions would also solicit feedback from their functional peers and deliver a final, proposed draft to the Drafting Committee. It is important that you establish a timetable for the revision process and you hold representatives accountable for meeting their revisions.

Conduct a thorough technology assessment 

The cornerstone of the revision process is how your company captures, collaborates and preserves all the comments, notes, edits and decisions during the entire project. In addition to this use of technology in revising your compliance policies and procedures revisions, you should determine if they will be available in hard copy, online or both. There must be a distribution plan, particularly if the Code and compliance policies and procedures will only be available in hard copy.

Determine translations and localizations 

The 2012 Guidance made clear that your compliance policies and procedures must be translated into local language for your non-English speaking workforce. The key is that your employees have the same understanding of the compliance policies and procedures-no matter the language. 

Develop a plan to communicate the revised policies and procedure 

A rollout is always critical because it is important that the revised policies and procedures are communicated in a manner which encourages employees to review and use the policies and procedures on an ongoing basis. Your company should use the full panoply of tools available to it to publicize the revised compliance policies and procedures. This can include a multi-media approach or physically handing out a copy to all employees at a designated time. You might consider having a company-wide compliance policies and procedures meeting where the new or revised documents are rolled out across the company all in one day. But remember, with all thing compliance; the three most important aspects are ‘Document, Document and Document’. However, you deliver the new or revised policies and procedures, you must document that each employee received it.

Stay on Target and Budget 

You should work to set realistic expectations that to stay on deadline and stay within your budget. This is equally applicable to your policy and procedures revision. Also remember to keep a close watch on your budget so that you do not exceed it.

These points are a useful guide to not only thinking through how to determine if your policies and procedure need updating, but also practical steps on how to tackle the problem. If it has been more than five years since it was last updated, you should begin the process now. It is far better to review and update if appropriate than wait for a massive FCPA investigation to go through the process.

Three Key Takeaways

  1. If you have not revised your compliance policies and procedures in the past five years, you should do so no.
  2. Set a timeline and budget and stick to it in the compliance policy and procedure revision process.
  3. Document your process of revision to demonstrate more complete operationalization of your compliance program as set out in the DOJ Evaluation of Corporate Compliance Programs.

 

This month’s sponsor is the Doing Compliance Master Class. In 2018 I am partnering with Jonathan Marks and Marcum LLC to put on training. Look for dates of one of the top compliance related training going forward.