By Sarah Nassauer
A small shareholder group says Wal-Mart's longtime auditor,
Ernst & Young, knew about possible bribery in Mexico long
before the company disclosed it to U.S. authorities, highlighting a
little-plumbed area of U.S. anticorruption law.
CtW Investment Group, which works with union pension funds that
hold about 0.15% of Wal-Mart Stores Inc. stock, made the claim in a
letter last Thursday to the Public Company Accounting Oversight
Board, which oversees public companies' outside accounting
firms.
The letter cites an internal Wal-Mart email dated Feb. 27, 2006,
that says employees in Wal-Mart's Bentonville, Ark., headquarters
"briefed Ernst & Young over the past several months," along
with some of the company's directors, on an internal investigation
into the possible bribery. It wasn't until late 2011 that Wal-Mart
disclosed its investigation to the Justice Department and
Securities and Exchange Commission, according to the company's
securities filings.
CtW said in its letter that Ernst & Young likely should have
reported the suspected bribery to the SEC and should be
investigated by the accounting oversight board, because the acts
under investigation and how the investigation was handled could
have affected the retailer's financial statements.
The challenge raises the question of external auditors'
responsibilities when their clients may have violated the Foreign
Corrupt Practices Act, the tough U.S. antibribery law. If an
outside auditor discovers a potentially illegal act, it generally
is only expected to notify responsible authorities within the
company, accounting and legal experts said. But it may be obliged
to notify the government if the appropriate steps aren't being
taken and a company's books may be compromised, they said.
Ernst & Young, which has been Wal-Mart's outside accountant
for decades, said it couldn't comment on matters involving its
clients. Wal-Mart wouldn't comment, saying the bribery
investigation is ongoing. PCAOB and the SEC also declined to
comment.
The PCAOB can investigate public company accounting firms for
poor audits, including fraud, and in some cases hands out
disciplinary fines or revokes a firm's right to practice. It has
never sanctioned an outside accountant for issues related to the
Foreign Corrupt Practices Act, a spokesman for the regulatory body
said. Nor have any been penalized by the SEC, which along with the
Justice Department has jurisdiction over the FCPA.
Wal-Mart first looked into allegations it used bribes to expand
its store base in Mexico almost a decade ago. They were raised
initially by a whistleblower in Mexico in October 2005, according
to the internal Wal-Mart email, and later detailed in articles by
The New York Times. Since 2011, the investigation has cost Wal-Mart
at least half a billion dollars in legal and consulting fees,
increased compliance costs, and other expenses, according to
company filings.
CtW's letter is more evidence that alleged FCPA violations often
have long tentacles for companies and their associates. Over the
past decade, the federal government has stepped up enforcement of
FCPA violations, which often set off a welter of shareholder
lawsuits before fines are handed out.
The email cited by CtW became public in one such lawsuit.
Ernst & Young isn't likely to be penalized under current
laws, half a dozen accounting and legal experts said. But it
wouldn't be unreasonable for PCAOB to investigate its role, say
experts who reviewed CtW's letter.
External auditors that find suspicious payments or potential
bribery aren't legally obliged to tell an outside regulator like
the SEC except in limited circumstances, said Thomas Ray, who was
chief auditor and director of professional standards at the PCAOB
for three years and is currently a lecturer at Baruch College.
Auditors are required to report those acts to management and the
board's audit committee, which is responsible for monitoring
financial reporting and disclosure. Then the accounting firm needs
to evaluate whether the problems would have a material impact on
financial statements, Mr. Ray said, speaking generally about the
law.
That determination is often in the eye of the beholder, but
could either be quantitative or qualitative. For example, it may be
important "who is making the bribe and how significant those people
are within the company, " not just the dollar amount, he said.
Then, if the company doesn't take appropriate action, an outside
accounting firm might be legally required to report the problem to
a federal agency, Mr. Ray said.
Write to Sarah Nassauer at sarah.nassauer@wsj.com
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