National Energy Services Resolves Books And Records And Internal Controls Matter

The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.

Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.

Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.

However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions by this site.

The latest example concerns National Energy Services Reunited Corp. (a British Virgin Islands corporation headquartered in Houston).

In summary fashion, this administrative order finds:

“This matter involves financial reporting, accounting, and controls failures by National Energy, a former special purpose acquisition company (“SPAC”). National Energy became an operating company in 2018 when it acquired two oilfield-services companies located in the Middle East and North Africa (collectively, the “target companies” or National Energy’s wholly owned “subsidiaries”). Several years later, National Energy identified significant deficiencies in the target companies’ accounting and controls, which led to a multi-year restatement of the Company’s consolidated financial statements concerning, among other things, previously reported accrued liabilities, cost of services, and net income.

In March 2022, National Energy identified potentially significant accounting errors in its expense accruals and accounts payable, and unsupported balances in other accounts, after completing a global transition to new accounting software. National Energy’s Audit Committee formed an independent committee to investigate the accounting errors and lead the Company’s restatement process. On March 14, 2022, National Energy publicly disclosed that its financial statements for 2018 through 2020 should no longer be relied upon. The independent committee’s investigation found that National Energy’s accounting errors were caused by pervasive, systemic deficiencies in the Company’s systems, processes, controls, and resources, including supply chain, finance, and accounting. The deficiencies primarily traced back to the original target companies and their legacy practices before National Energy acquired them in 2018. Their investigation also found that National Energy failed to properly assess these legacy practices before the Company relied upon them for financial reporting. Several factors aggravated these deficiencies after the acquisitions, including National Energy’s rapid business growth, high rates of employee turnover, and management pressure to meet internal performance expectations.

In March 2023, National Energy started implementing a formal remediation plan while it continued the restatement process. On December 29, 2023, National Energy filed a multiyear restatement that primarily increased the Company’s accrued liabilities and cost of services, and significantly decreased net income, for the restated periods. National Energy disclosed that the Company had failed to properly account for its accounts payable and accrued liabilities, failed to properly classify and report certain operating expenses as cost of services, and failed to properly classify and report certain private warrants as liabilities. The Company also disclosed numerous material weaknesses in its internal control over financial reporting (ICFR), and ineffective disclosure controls and procedures (DCP). National Energy has made significant progress in its remediation plan, but the process is not complete, and the Company’s material weaknesses have not been fully remediated.”

Based on the above, the SEC found that National Energy violated, among other things, the FCPA’s books and records and internal controls provisions.

Without admitting or denying the SEC’s findings, National Energy agreed to a cease-and-desist order that requires it to, among other things, pay a civil penalty of $400,000, and commit to certain undertakings, including a requirement to fully remediate the company’s material weaknesses in ICFR and ineffective DCP within one year from the date of the SEC’s Order. As set forth in the SEC’s Order, if National Energy fails to satisfy the undertakings, the company is ordered to pay an additional civil penalty of $1.2 million.

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