The Role of Government The Role of Government

Chapter 6
The Role of
Government
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Learning Outcomes
• Identify the five key pieces of U.S. legislation designed to
discourage, if not prevent, illegal conduct within
organizations.
• Understand the purpose and significance of the Foreign
Corrupt Practices Act (FCPA).
• Calculate monetary fines under the three-step process of the
U.S. Federal Sentencing Guidelines for Organizations (FSGO).
• Compare and contrast the relative advantages and
disadvantages of the Sarbanes-Oxley Act (SOX).
• Explain the key provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
Key Legislations
• The Foreign Corrupt Practices Act (1977).
• The U.S. Federal Sentencing Guidelines for Organizations
(1991).
• The Sarbanes-Oxley Act (2002).
• The Revised Federal Sentencing Guidelines for Organizations
(2004).
• The Dodd-Frank Wall Street Reform and Consumer Protection
Act (2010).
The Foreign Corrupt Practices Act (FCPA) 1
Legislation introduced to control bribery and other less obvious

forms of payment to foreign officials and politicians by American
publicly traded companies.
Prior to the passing of the law, the illegality of paying bribes was
punishable only through secondary sources of legislation.
• The Securities and Exchange Commission (S E C) could fine companies for
failing to disclose such payments under its securities rules.
• The Bank Secrecy Act required full disclosure of funds that were taken out
of or brought into the United States.
• The Mail Fraud Act made use of the U.S. mail or wire communications to
transact a fraudulent scheme illegal.
Jointly enforced by the U.S. Department of Justice (DOJ) and the

Securities and Exchange Commission (S E C).
Encompasses all secondary measures that were currently in use

to prohibit such behavior by focusing on:
• Disclosure.
• Prohibition.
Disclosure and Prohibition
• Disclosure: FCPA Requirement that corporations fully disclose
any and all transactions conducted with foreign officials and
politicians.
• Prohibition: FCPA inclusion of wording from the Bank Secrecy
Act and the Mail Fraud Act to prevent the movement of funds
overseas for the express purpose of conducting a fraudulent
scheme.
Criticized for lack of real authority because of its formal

recognition of facilitation payments.
• Facilitation payments: Payments that are acceptable (legal) provided they
expedite or secure the performance of a routine governmental action.
• Routine governmental action: Any regular administrative process or
procedure, excluding any action taken by a foreign official in the decision to
award new or continuing business.
Illegal versus Legal Behaviors under the FCPA
Illegal.
• Bribes.
• Record-keeping and accounting provisions.
Legal.
• Grease payments.
• Marketing expenses.
• Payments lawful under foreign laws.
• Political contributions.
• Donations to foreign charities.
The U.S. Federal Sentencing Guidelines For Organizations (FSGO),
1991
Chapter 8 of the guidelines that hold businesses liable for the
criminal acts of their employees and agents.
Requires that organizations police themselves by preventing and

detecting the criminal activity of their employees and agents.
Penalties under FSGO.

• Monetary fines.
• Organizational probation.
• Implementation of an operational program.
Monetary Fines under the FGSO 1
A fine sentenced under FSGO is calculated through a three-step

process
• Determination of the base fine: The base fine will be the greatest of:
• Monetary gain to the organization from the offense.

• Monetary loss from the offense caused by the organization, to the extent the
loss was caused knowingly, intentionally, or recklessly.
• Amount determined by a judge based on an FSGO table.
• Culpability score: Calculation of a degree of blame or guilt that is used as
a multiplier of up to four times the base fine.
• Can be increased (or aggravated) or decreased (or mitigated) according to
predetermined factors.
Aggravating factors of culpability Mitigating factors of culpability

score. score.
• High-level personnel were involved • Organization had an effective
in or tolerated the criminal activity. program to prevent and detect
• Organization willfully obstructed violations of law.
justice. • Organization.
• Organization had a prior history of • Self-reported the offense to
similar misconduct. governmental authorities.
• Current offense violated a judicial • Cooperated in the investigation.
order, an injunction, or a condition • Accepted responsibility for the
of probation. criminal conduct.
Determining the total fine amount: Base fine is multiplied by the

culpability score.
• Death penalty: Fine that is set high enough to match all the organization’s
assets.
• Warranted where the organization was operating primarily for a criminal
purpose.
Organizational Probation
Organizations can be sentenced to probation for up to five years.
Requirements for the status of probation.

• Reporting the business’s financial condition to the court on a periodic
basis.
• Remaining subject to unannounced examinations of all financial records
by a designated probation officer and/or court-appointed experts.
• Reporting progress in the implementation of a compliance program.
• Being subject to unannounced examinations to confirm that the
compliance program is in place and is working.
Steps for an Effective Compliance Program
• Management oversight.
• Corporate policies.
• Communication of standards and procedures.
• Compliance with standards and procedures.
• Delegation of substantial discretionary authority.
• Consistent discipline.
• Response and corrective action.
Revised FSGO (2004)
Key changes.
• Required companies to periodically evaluate the effectiveness of their
compliance programs on the assumption of a substantial risk that any
program is capable of failing.
• Revised guidelines required evidence of actively promoting ethical
conduct rather than just complying with legal obligations.
• Defined accountability more clearly.
Sarbanes-Oxley Act (2002) 1
Legislative response to the corporate accounting scandals of the

early 2000s that covers the financial management of businesses.
Regarded as one of the most controversial pieces of corporate

legislation in recent history.
Contains 11 sections related to prominent examples of corporate

wrongdoing.
• Public Company Accounting Oversight Board (P C A O B).
• Auditor independence.
• Corporate responsibility.
• Enhanced financial disclosures.
• Analyst conflicts of interest.
Sarbanes-Oxley Act (2002) 2
• Commission resources and authority.

• Studies and reports.
• Corporate and criminal fraud accountability.
• White-collar crime penalty enhancements.
• Corporate tax returns.
• Corporate fraud and accountability.
Delivers a collection of tools and penalties to punish offenders

with severity.
Does not help in creating an ethical corporate culture or hiring

an effective and ethical board of directors.
Title One: Public Company Accounting Oversight Board
Independent oversight body for auditing companies.
Charged with:
• Maintaining compliance with established standards.

• Enforcing rules and disciplinary procedures for those organizations that
found themselves out of compliance.
Title Two: Auditor Independence
• Prohibits specific “nonaudit” services of public accounting
firms as violations of auditor independence.
• Prohibits public accounting firms from providing audit services
to any company whose senior officers (chief executive officer,
chief financial officer, controller) were employed by that
accounting firm within the previous 12 months.
• Requires senior auditors to rotate off an account every five
years and junior auditors every seven years.
• Requires the external auditor to report to the client’s audit
committee on specific topics.
• Requires auditors to disclose all other written
communications between management and themselves.
Titles Three through Eleven 1
Title Three: Corporate Responsibility.

• Requires audit committees to be independent and undertake specified
oversight responsibilities.
• Requires CEOs and CFOs to certify quarterly and annual reports to the S E
C.
• Provides rules of conduct for companies and their officers regarding
pension blackout periods.
Title Four: Enhanced Financial Disclosures.

• Requires companies to provide enhanced disclosures.
• Includes a report on the effectiveness of internal controls and procedures for
financial reporting, and disclosures covering off-balance sheet transactions.
Title Five: Analyst Conflicts of Interest.

• Requires the S E C to adopt rules to address conflicts of interest that can
arise when securities analysts recommend securities in research reports
and public appearances.
Title Six: Commission Resources and Authority.

• Provides additional funding and authority to the S E C to follow through on
all the new responsibilities outlined in the act.
Title Seven: Studies and Reports.

• Directs federal regulatory bodies to conduct studies regarding
consolidation of accounting firms, credit rating agencies, and certain roles
of investment banks and financial advisers.
Title Eight: Corporate and Criminal Fraud Accountability.

• Provides tougher criminal penalties for altering documents, defrauding
shareholders, and certain other forms of obstruction of justice and
securities fraud.
• Protects employees who provide evidence of fraud.
Title Nine: White-Collar Crime Penalty Enhancements.

• Provides that any person who attempts to commit white-collar crimes will
be treated under the law as if the person had committed the crime.
• Requires CEOs and CFOs to certify their periodic reports and imposes
penalties for certifying a misleading or fraudulent report.
Title Ten: Corporate Tax Returns.

• Conveys the sense of the Senate that the CEO should sign a company’s
federal income tax return.
Title Eleven: Corporate Fraud and Accountability.

• Provides additional authority to regulatory bodies and courts to take
various actions with regard to tampering with records, impeding official
proceedings, taking extraordinary payments, retaliating against corporate
whistle-blowers, and certain other matters involving corporate fraud.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act
Legislation that was promoted as the fix for the extreme
mismanagement of risk in the financial sector that led to a global
financial crisis in 2008 to 2010.
Primary achievements.
• Consumer Financial Protection Bureau (CFPB): Government agency
within the Federal Reserve that oversees financial products and services.
• Financial Stability Oversight Council (F S O C): Government agency
established to prevent banks from failing and otherwise threatening the
stability of the U.S. economy.
• Volcker rule: Limits the ability of banks to trade on their own accounts in
any way that might threaten the financial stability of the institution.

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Chapter 6

Legislation introduced to control bribery and other less obvious

Jointly enforced by the U.S. Department of Justice (DOJ) and the

Encompasses all secondary measures that were currently in use

Criticized for lack of real authority because of its formal

Requires that organizations police themselves by preventing and

Penalties under FSGO.

A fine sentenced under FSGO is calculated through a three-step

• Monetary gain to the organization from the offense.

Aggravating factors of culpability Mitigating factors of culpability

Determining the total fine amount: Base fine is multiplied by the

Requirements for the status of probation.

Legislative response to the corporate accounting scandals of the

Regarded as one of the most controversial pieces of corporate

Contains 11 sections related to prominent examples of corporate

• Commission resources and authority.

Delivers a collection of tools and penalties to punish offenders

Does not help in creating an ethical corporate culture or hiring

• Maintaining compliance with established standards.

Title Three: Corporate Responsibility.

Title Four: Enhanced Financial Disclosures.

Title Five: Analyst Conflicts of Interest.

Title Six: Commission Resources and Authority.

Title Seven: Studies and Reports.

Title Eight: Corporate and Criminal Fraud Accountability.

Title Nine: White-Collar Crime Penalty Enhancements.

Title Ten: Corporate Tax Returns.

Title Eleven: Corporate Fraud and Accountability.

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