Auditor Liability and Litigation: FCPA Violations and other Illegal Acts by Issuer Clients


Recent news that Wal-Mart, the world’s largest retailer in terms of sales, terminated its internal probe into bribery allegations in Mexico upon discovery of violations brings the subject of illegal acts by companies to the forefront. In recent years, the Department of Justice (DOJ), along with the Securities and Exchange Commission (SEC), has been aggressively enforcing the provisions of the Foreign Corrupt Practices Act of 1977 (FCPA).

The accounting profession has long been divided over its role in detecting illegal acts by clients, and rightly has maintained that auditors, after all, are not trained as detectives. Accordingly, it has traditionally argued that any such responsibilities be tightly constrained, even as the financial statement-using public suffers from an exaggerated view of auditors’ role.

Although auditors of financial statements may, by virtue of their training, experience and history with the client, recognize that some acts that come to their attention may be illegal, the determination as to whether an act is in fact illegal is ultimately a legal judgment.

When an illegal act is suspected, however, it must be investigated for two distinct reasons. First, the possible occurrence of an illegal act has obvious implications for the auditors’ consideration and evaluation of the issuer’s internal controls over its financial reporting process, which could result in changes to the nature, timing or extent of planned substantive auditing procedures, and would furthermore have reporting implications under Sarbanes-Oxley.

Second, the expected or possible effects of the suspected illegal act would need to be considered in the context of the impact on the reporting entity’s financial statements – at the worst, an illegal act could jeopardize an entity’s continued existence, causing the auditors to conclude there is a need to include “going concern” language in the auditors’ report. Read the full article for details.

Forensic accounting expert Dr. Barry Jay Epstein, CPA, CFF, is available to answer questions in regard to auditors’ liability and responsibility for FCPA violations and other illegal acts by issuer clients. He can be reached at 312-222-1400 or

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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