Wal-Mart auditor unlikely to suffer in bribery case
The bribery scandal at Wal-Mart Stores Inc’s Mexican unit is unlikely to land the giant retailer’s auditor, Ernst & Young, in hot water if the government’s record on prosecuting such cases is any indicator, academics and other experts said.
Bribery cases brought under the Foreign Corrupt Practices Act are on the rise, but a review of past U.S. government FCPA settlements shows that external advisers, including audit firms, almost never become legal targets.
An investigation by The New York Times published last week alleged a multi-year pattern of bribery of local officials by Wal-Mart’s Mexican operations, followed by a cover-up.
No allegations have been made against Ernst & Young. The U.S. audit firm declined to comment.
Mancera – a Mexican member of E&Y’s global network – is listed as the auditor of Wal-Mart de Mexico and did not respond to a request for comment.
Wal-Mart did not respond to a request for comment either, but it has said it is investigating potential issues.
The Securities and Exchange Commission (SEC) and the U.S. Department of Justice have settled 73 FCPA cases since 2007. That is more than double the number settled in the prior three decades. The anti-bribery law was enacted in 1977.
Since 1977, only one settlement involved an audit firm. It was a 2001 case against KPMG’s Indonesian affiliate – KPMG Siddharta Siddharta & Harsono. It was alleged KPMG-SSH staff paid a local tax official to lower the tax bill for a client, a local firm owned by oilfield services group Baker Hughes.
“To be honest, auditors don’t get sued that often. It’s hard to sue the auditors,” said Francine McKenna, author of the blog, re:The Auditors.
Certain aspects of the Wal-Mart case may raise questions, however, experts said.
According to The New York Times, the Mexican bribes were accounted for with vague invoices for legal services submitted to the Mexican operations.
If this was the case, the auditor would have had a chance to detect a potential problem, said Doug Carmichael, a professor at Baruch College and the first chief accountant of the Public Company Accounting Oversight Board (PCAOB), the U.S. regulator of audit firms, in an emailed response to questions.
Auditors must ensure clients send inquiry letters to attorneys involved in a corporation’s legal business for a given year. Auditors also routinely scan legal fee records to identify attorneys who were doing work for the company, Carmichael said.
Those sort of reviews would give a careful auditor an opportunity to notice payments that were not linked to the corporation’s legal business, he said.
FCPA cases often expose faults in corporate internal controls, said Kara Novaco Brockmeyer, chief of the SEC’s FCPA unit. Under 2002′s post-Enron Sarbanes-Oxley accounting and corporate governance reforms, auditors must test and review every corporate client’s internal controls.
Brockmeyer said when an issue arises, the auditor must alert the board, and if it responds inadequately, alert regulators.
Bribery can be a tricky issue for auditors because the amounts of money may be relatively small, said Howard Scheck, chief accountant of the SEC’s division of enforcement.
At Wal-Mart, The Times said, bribes totaled $24 million. That is not much compared to the company’s $15.5 billion in sales in Mexico and $312 billion globally in 2005, the last year covered in The Times investigation.
Still, Scheck said, even small amounts could be material to a company’s stock price. “Investors would care that they’re getting their business through bribes,” he said.
Wal-Mart has launched an internal investigation. Mike Koehler, an assistant professor of business law at Butler University, and the author of the FCPA Professor blog, said the inquiry is likely to go global and cost millions of dollars.
Auditors rarely face fallout from bribery problems. In seven of 10 large FCPA cases, the original auditors were still reviewing the books today, a Reuters review found.
One exception is German engineering giant Siemens, which replaced its auditor, KPMG, with Ernst & Young shortly before its record $800 million 2008 FCPA settlement.
A spokeswoman for KPMG in Germany said by email that no investigation had challenged the quality of their audits.
Siemens’s Supervisory Board at the time called the move “a signal in the spirit of the best possible corporate governance.”