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 UPS.
In summary fashion, this recent SEC administrative order finds:
“This matter concerns UPS’s failures to adhere to the basic accounting principle that the “fair value” of an asset is the price that would be received to sell that asset in an orderly transaction between market participants. These failures resulted in material misrepresentations to investors regarding its earnings and other reported items and activities.
In 2019, UPS’s corporate strategy group conducted a months-long analysis of one of the company’s worst performing business units, UPS Freight. Although UPS was carrying the business on its balance sheet at $1.4 billion, the 2019 analysis, which was available prior to the company’s annual goodwill impairment test, concluded Freight was likely to sell for only about $350 million to $650 million. This reflected that the nearly $500 million of goodwill associated with Freight was impaired. An impairment in that amount would have materially reduced UPS’s earnings, goodwill balances, and shareowners’ equity.
However when conducting the goodwill impairment testing required by Generally Accepted Accounting Principles in 2019, UPS ignored the company’s own assessment of Freight’s fair value. Instead it relied on valuation estimates prepared by an external consultant to support the carrying value UPS had assigned to Freight without giving the consultant the information it needed to fairly value the business. For example, UPS did not inform the consultant that its internal analysis had concluded a prospective buyer would expect Freight to generate significantly less profit after it was sold because it would no longer benefit from synergies and other cost savings it was getting as part of UPS. Using financial information and assumptions provided or approved by UPS, the consultant valued Freight at about $2 billion. It was clear that the consultant’s valuation was based on assumptions a prospective buyer would not make in valuing Freight, and therefore did not produce a fair value estimate determined in accordance with GAAP. Nevertheless, UPS relied on this valuation and did not record a goodwill impairment.
UPS decided to seek a sale of Freight in 2020. In October 2020, UPS executed a non-binding term sheet with a prospective buyer to sell Freight for $800 million subject to various adjustments that were likely to reduce the final price. Yet when conducting the goodwill impairment test for 2020, UPS did not consider this proposed transaction when valuing Freight. Instead UPS relied again on the consultant’s valuation of Freight without informing the consultant of the terms of the sale transaction the company was pursuing. As in 2019, the consultant again valued Freight at about $2 billion using financial information and assumptions provided or approved by UPS that market participants would not make, and thus did not reflect Freight’s fair value.”
Under the heading “UPS’s Insufficient Controls and Procedures,” the order finds:
“UPS’s failure to impair Freight’s goodwill as required under GAAP arose, in part, from inadequate internal accounting controls and internal control over financial reporting. UPS failed to devise and maintain controls and procedures sufficient to provide reasonable assurances that its accountants were appropriately considering reliable indicia of Freight’s fair value, including the company’s internal assessments of Freight’s likely sale price range and, in 2020, information regarding the negotiations to sell Freight for considerably below its carrying value.
UPS’s disclosure failures arose, in part, from and reflected inadequate disclosure controls and procedures. UPS failed to maintain controls and procedures designed to ensure that its disclosures in reports filed with the Commission relating to its earnings, goodwill balances, shareowners’ equity, and estimates were not materially false or misleading.”
The SEC’s order finds that UPS violated, among other things, the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, UPS agreed to pay a $45 million civil penalty and to retain an independent compliance consultant who will review “the company’s policies, procedures, and controls relating to: preparation and use of fair value estimates in connection with annual and interim period goodwill impairment testing; and collection and assessment of information concerning UPS’s public disclosure obligations […] and the collection and assessment of information potentially subject to those requirements.”
In the SEC release, Melissa Hodgman (Associate Director of Enforcement) stated:
“Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own. Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations.”
