Accounting Provisions of the Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act of 1977 (the “FCPA”) is widely known for its prohibition on bribing foreign officials. Less appreciated—but equally significant—are the statute’s accounting provisions. These requirements impose affirmative obligations on certain companies to maintain accurate books and records and to implement effective systems of internal accounting controls. Taken together, these provisions are designed not only to detect corruption, but to prevent it by eliminating the ability to conceal improper payments.

For business clients, particularly publicly traded companies and subsidiaries of public issuers, the accounting provisions of the FCPA present an independent and substantial source of regulatory risk. Violations may occur even in the absence of bribery, even where payments are lawful under local law, and even where senior management lacked actual knowledge of the misconduct.

I. Statutory Foundation and Purpose

The accounting provisions of the FCPA are codified primarily in Section 13(b)(2) and Section 13(b)(5) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78m. Congress enacted these provisions alongside the anti-bribery rules after the SEC uncovered widespread use of slush funds, false accounting entries, and undisclosed payments by U.S. companies operating overseas. Unlike the anti-bribery provisions, which focus on corrupt intent, the accounting provisions emphasize transparency and accountability.

II. Who Is Subject to the Accounting Provisions

The accounting provisions apply exclusively to “issuers” — any company that has a class of securities registered with the SEC or is required to file periodic reports with the SEC. This includes U.S. public companies as well as foreign companies that access U.S. capital markets. The accounting provisions apply to issuers regardless of whether they operate internationally or engage in conduct that violates the FCPA’s anti-bribery rules.

III. The Books-and-Records Requirement

The books-and-records provision requires issuers to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect their transactions and the disposition of their assets. Books and records include not only traditional accounting ledgers, but also invoices, expense reports, contracts, journal entries, supporting documentation, and other business records. False or misleading entries, even if quantitatively small, may constitute violations if they obscure the true purpose of transactions.

The books-and-records provision does not require proof of corrupt intent. An issuer may violate the provision simply by inaccurately recording payments, misstating their purpose, or failing to record them at all.

IV. Internal Accounting Controls Requirements

The FCPA requires issuers to devise and maintain a system of internal accounting controls sufficient to provide “reasonable assurances” that transactions are properly authorized, recorded, and accounted for. (15 U.S.C. § 78m(b)(2)(B))

Internal controls must be designed to ensure that: transactions are executed in accordance with management authorization; transactions are recorded as necessary to permit preparation of financial statements in conformity with applicable accounting principles; access to assets is limited to authorized personnel; and recorded assets are periodically compared to existing assets, with discrepancies investigated and resolved.

V. Reasonableness and Risk-Based Controls

The concept of “reasonable assurances” is central to the internal-controls analysis. Congress deliberately avoided imposing a strict-liability regime mandating uniform controls for all issuers regardless of size, industry, or geographic footprint. Enforcement agencies and courts assess internal controls in light of an issuer’s specific risk profile, including the nature of its operations, the countries in which it operates, the degree of decentralization, and the level of corruption risk associated with its business.

VI. Section 13(b)(5): Knowing Circumvention and Falsification

Section 13(b)(5) prohibits any person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls, or from knowingly falsifying any book, record, or account required to be maintained under the Act. This provision extends liability beyond the issuer itself and reaches individuals, including officers, employees, and third parties who participate in falsification or circumvention.

VII. Subsidiaries, Affiliates, and Indirect Liability

Issuers are responsible for consolidating the financial results of their subsidiaries and ensuring that subsidiary transactions are accurately reflected in consolidated books and records. Where an issuer owns more than 50 percent of a subsidiary’s voting power, it must cause the subsidiary to maintain compliant control systems. Where ownership is 50 percent or less, the issuer must make good-faith efforts to influence the subsidiary to adopt appropriate controls.

VIII. Common Risk Scenarios and Enforcement Themes

SEC and DOJ enforcement actions highlight recurring fact patterns leading to accounting violations: use of third-party agents without adequate oversight, improper recording of commissions or discounts, slush funds or off-book accounts, falsified travel or entertainment expenses, and inadequate segregation of duties. Enforcement authorities frequently emphasize that weak controls—rather than isolated bad actors—are at the root of systemic compliance failures.

IX. Relationship to the Anti-Bribery Provisions

Although analytically distinct, the accounting provisions and the anti-bribery provisions are closely related in practice. Many FCPA enforcement actions include both types of charges. At the same time, accounting provisions can serve as a standalone basis for enforcement where evidence of bribery is insufficient or unavailable. Regulators frequently pursue accounting charges because they are easier to prove and emphasize governance failures rather than corrupt intent.

X. Civil and Criminal Enforcement

The SEC has primary authority to pursue civil enforcement of the accounting provisions, while the DOJ may pursue both civil and criminal charges. Civil enforcement does not require proof of intent or knowledge, whereas criminal prosecutions require evidence of scienter. Penalties may include disgorgement, civil fines, injunctions, compliance monitors, and, in criminal cases, substantial fines and imprisonment for individuals.

XI. Compliance Program Implications

Effective compliance with the accounting provisions requires close coordination between legal, finance, audit, and compliance functions. Key components include clear authorization procedures, robust approval and review mechanisms, third-party due diligence, audit rights, training for finance and operations personnel, and prompt remediation of identified weaknesses. Enforcement agencies evaluate not only whether controls exist on paper, but whether they operate effectively in practice.

XII. Internal Investigations and Remediation

Potential accounting violations often arise during internal audits, whistleblower complaints, or compliance reviews. When issues are identified, companies must assess the scope of deficiencies, remediate control gaps, and determine whether voluntary disclosure is warranted. Timely remediation and cooperation with regulators may significantly influence enforcement outcomes.

XIII. Conclusion

The accounting provisions of the Foreign Corrupt Practices Act are a central pillar of the U.S. anti-corruption framework. For issuers, compliance with these provisions is not a narrow accounting exercise but a core governance responsibility. Companies that invest in strong control environments, transparent recordkeeping, and continuous oversight are better positioned to avoid regulatory enforcement and foster ethical cultures and sustainable global operations.