oversight

Actions Being Taken in the United States To Control Questionable Corporate Payments

Published by the Government Accountability Office on 1977-04-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                A REVIEW OF L CTIONS BEING
                          TAKEN IN THE UNITED STATES TO CONTROL
                             QUESTIONABLE CORPORATE PAYMENTS Y-
                                                             ‘7

                         PAPER PRESENTED BY
                            ELMER B, STAATS
                      COMPTROLLER GENERAL OF TJ3E
                             UNITED-STATES --
              AT THE MEETING OF THE GOVERNING BOARD OF THE
        INTERNATIONAL ORGANIZATION OF SUPREME AUDIT INSTITUTIONS
                             MALAGA, SPAIN         pd.=- oY3qs”
                             APRIL 4, 1977                                                                         .

                                                                                                IIllIll
                                                                                                    lllllIll11          IllI
                                                                                                            llllllllll111111
                                                                                                          093825




          Over the past              few years          many American             corporations           have

disclosed           payments        made to government                  officials         of other

countries,            their      political          parties         or others        to obtain         business

advantages.               The payments             usually         were made as petty                corrup-

tion      to facilitate              favorable          action,        to gain       competitive

advantage           over       others,       or because            of extortion          by corrupt

officials           or their         agents.

          Some corporations                  are    said       to have      falsified        their

records,           lied       to auditors,          used off-the-books                  or "slush"

funds       and,      in some cases,               illegally         deducted        on their         Federal

income       tax      returns,           to reduce         their     taxes,       the    improper

foreign       payments            as normal         and necessary             business       expenses.

          These       revelations            have had a political                   impact      in    those

other       countries           concerned,          have       diminished         the    international
           I




 .


,.
       =       .
                                                               -2-


     stature            of multinational               corporations,                and have              undermined

     confidence                in public          and private          institutions                  of    the Western

     World.

                    In the United             States    as a result,                there       has been much

     scrutinizing                by the        Government            of the       behavior            of American

     corporations                to identify           the     form       and extent            of questionable

     or illegal                payments        and to determine                actions          necessary               to

     discourage                and prevent          such payments              in       the    future.

                    The United         States       is not      alone       in      these       efforts.                Several

     international                organizations,               private         institutions                 and many

     governments                are taking          similar          courses        of action.                  But,     with

     the           expansion      of the marketplace                   and the           resulting              develop-

     ment of large                multinational               corporations,               new problems                  have

     arisen             which     require          new solutions.

     ACTIONS BY THE UNITED STATES CONGRESS
                                                w"(
                                            cd0
           The Congress of the United States has responded                                                         vigorously

     to these            problems          with     a series          of actions              over        the    past        two

     years.

     Hearings            by Congressional               Committees
                                                                                     ~g-/vOi30~
                    The Subcommittee               on Multinational                 Corporations                 of the

     Senate           Foreign.Relations                Committee           held         hearings           on the        circum-
                                                                             .
     stances            that     led    to,       and the      legality           of,     corporate              payments
               ,
‘.         l       .                                                   -3-
,.

     made outside                     the United             States.           The hearings           in mid-1975
                                                                                                       &-&,W      1
     focused                    on questionable           foreign    payments                   by the Exxon, Gul&&&~lc(2~
                                                            c&$ i!Mp
     OilC%%~z'Northrop
         3        >                                   , and Lockheed corporations.
                                                                                                                  ~.g-&mO~
                        The Senate          Ranking,           Housing         and Urban             Affairs         Committee

     held               a hearing          in August           of that         year         focusing          on the       question-

     able               payments          by Lockheed.

                        In October           1975 the          Subcommittee                 on International            Trade
                                                                                                                         s&   o-m7
     of the               Senate          Finance          Committee          held     hearings              on a resolution

     to protect                     the    ability          of the       United         States         to trade           abroad.

     The resolution,                          #265,         was passed           by the         Senate          on November           12,

     1975.                 It     states       that        the U.S.          Special         Trade          Representative

     for               Trade      Negotiations              and other          officials             should        start

     negotiations                     on the          development             of a code of conduct                        for

     international                        trade.

                        The Senate           Banking,          Housing         and Urban             Affairs            Committee

     and the                    Subcommittee           on Multinational                     Corporations                of the

     Senate               Foreign          Relations           Committee             held     more hearings                concern-

     ing               Lockheed       Aircraft             Corporation           in     early        1976.

                        During       the     Banking         Committee           hearings,             it     was argued

     that               the      bribes      and the         question          of Lockheed's                  ability           to

     repay               some loans,               which     the   U.S.        Government              had guaranteed,

     were related.                         But Lockheed            stated            that      its     questionable
.           ,
 ..         +,                                                           -4-
5

      foreign             payments            had not          involved            any funds            received              from

      the         loans         which       the Government                 had guaranteed.

                   The Subcommittee                      on Multinational                   Corporations                 released

      during          its        hearings            many documents                    showing        an extensive               pattern

      of payments                    by Lockheed              in Japan           and Europe.               These         revelations

      touched             off        the    political            repercussions                    now familiar                to us

      all         in Japan,             Italy,          and the Netherlands,                        jeopardized                some of

      Lockheed's                 foreign            sales,       and prompted                several           nations          to

      begin         similar             investigations                   of questionable                 corporate

      payments.
                                -Tjipj-00 76%                -
                   The Subcommittee                      on Priorities                   and Economy in Government

      of the          Joint            Economic          Committee              held      hearings         in March             1976

      to determine                     the policy             of the U.S.                Department            of State          on

      the         issue         of corporate              bribery              in other           countries.             It     was

      announced                 that       the United            States          would       propose           a multilateral

      agreement                 on corrupt              practices              before      the United            Nations

+&ommission                      on Transnational                   Corporations.Dd                      *%qY

                   Meanwhile,                 the    Senate       Banking              Committee         completed              action

      on a bill                 to     deal      with        "corrupt           overseas           payments        by American

      business              enterprises"                 which      it         forwarded           to the       Senate          itself

      in July             1976.            The Senate            passed           that     bill       in September               but

      it         was not         acted           on in the House of Representatives.
                                                      -5-


The bill

        --prohibited                 direct      or indirect           payments           made to a

            foreign          official           to assist          a company's            business        dealings

            with      that      government,

        --requires            corporations            registered               with     the U.S.        Securi-

            ties      and Exchange               Commission           to keep accurate                 books

            and records               and to maintain               a system           of internal

            accounting               controls      to insure           that          management        would

            be able          to prevent           future       prohibited              payments,        and

        --makes        it     illegal           to mislead          an accountant                by lying

            or by making                statements          that      exclude          material        facts.

        In the U.S.             House of Representatives,                             hearings        were held

on an identical               bill       in September              1976 by the            Subcommittee

on Consumer Protection                         and Finance          of the House Commerce

Committee.            However,           action      by the House was not                        completed

in the      94th      Congress           which     adjourned           in October             1976.

        On January             18, 1977,          a new Senate               bill      was introduced

which      contains,          among other            measures,              the      same provisions

as the bill           of the previous                year.          In the House              a new bill

also    was introduced                  on January          10 which           is identical            to the

one of the previous                     year     on which          action           was not      completed.
I     .     I
                                                                  -6-


                 In still        another          congressional                 reaction,             the House

    Subcommittee                on International                     Economic       Policy            of its      Inter-
                                         stm,3u
    national           Relatio        I-Ps Committee           -SFeld        hearings          in     1975 and 1976

    on the          policy       effects          of    corporate              payments         in     foreign          countries.

    Subsequently,                the Committee                 forwarded           to the House                of Repre-

    sentatives               a bill      providing             for       the    termination              of investment

    insurance           and guarantees                  issued           to U.S.        investors             by th&&&!~171

    seas Private                Investment             Corporation--a               U.S.        Government

    corporation              --where       the     investor             makes a significant                      payment

    to a foreign                government             official           to influence                the     actions         of

    his         government.             The bill          passed          the House of Representatives

    in August           1976 but           it     was not            acted      on by the             Senate.

                 On October           1, 1976,           the      Senate        adopted         Resolution              516

    supporting               United      States         participation               in      the Organization

    of Economic               Cooperation              and Development's                    "Declaration                on

    International                 Investment             and Multinational                     Enterprises."                  The

    declaration               states,           among other              things,        that         "multinational

    enterprises               should       not     render--             and they        should         not     be soli-

    cited         or expected            to render--              any bribe         or other                improper

    gift,         direc t or indirect,                     to any public                servant          or holder

    of public           office."
                                                                   - 7-
.*    .I



..

     International              Security     Assistance                    and
     Arms Export              Control    Act

               A related             development              in    1976 was the               International

     Security          Assistance               and Arms Export                 Control         Act        (P.L.      94-329),

     signed        into       law on June 30.                      One of its            provisions            requires

     that      a report            be submitted                 to Congress         within            60 days         .if    the

     President              determines           that      officials            of a foreign                country

     receiving              security          assistance            have      obtained           illegal            or other-

     wise      improper            payments            from      an American             corporation                in return

     for     a contract              to purchase              defense         articles          or services,                 or

     extorted          money or other                   things         of value          in    return         for     allow-

     ing     a United             States        citizen          or corporation                to conduct             busi-

     ness      in that            country.             The report          shall         recommend           whether           or

     not     the      United         States        should          continue        the        security         assistance

     program          for     that      country.              In response           to requirements                     of

     this      act,         the    State       Department              adopted      new regulations                     in

     September.               These          require       the      reporting            of political                contri-

     butions          and fee          or commission                payments        on foreign               military

     sales      and some foreign                       commercial          sales.

     1976      Tax Reform              Act

               The 1976 Tax Reform                        Act      (P.L.      94-455)          which        became          law

     in October,              includes           a requirement             that     all        U.S.        companies

     with      foreign            subsidiaries,               report       to the         Secretary            of the
    _-       .,                                                         -    8    -



         Treasury            all      direct           or indirect               payments             made to employees,

         officials             or agents               of any other               government.                   If     determined
\
         by the         Secretary              to be an illegal                       bribe,          the      income      produced

         would        not      be entitled               to any foreign                      tax      benefits.            Also,

         foreign         bribe-produced                    income           of a domestic                    international

         sales        corporation               will       be immediately                      taxable.               The House-

         Senate         Conference              Committee              on the bill                   altered          the amendment

         to provide                that   bribes           paid        by a domestic                    international               sales

         corporation                to foreign             officials              will         be immediately                 taxable.

         Current            law provides                that         such bribes               are not          deductible,              but

         permits            deferral           of the          tax     on the money.

         TASK FORCE ON OUESTIONABLE CORPORATE
         PAyMENTS ABROAD

                   At       the White           House          former        President                Ford      likewise         was

         active.             He established                    in March           1976 a Task Force                      on Ques-

         tionable            Corporate            Payments             Abroad.               Its      purpose          was to find

         out whether                "additional                avenues           should            be undertaken              in the

         interest            of ethical                conduct         in    the         international                 marketplace

         and the            continued           vitality              of our          free         enterprise           system."

         This        task      force       has not             released           its        final          report,      but       did

         provide            interim        suggestions                 to the            President             in the        spring

         of 1976.
..*
              .   I                                                       -g-                .
.      .




                        In August           former       President                  Ford         submitted           the Task Force's

           proposed           Foreign          Payments           Disclosure                  Act      to the         Congress.

           This         legislation            would       require              that         payments          made to any

           individual            or entity              in connection                   with         an official              action,

           or sale           to or contract                with         a foreign                 government           for      the

           conzaercial           benefit              of the      individual,                     company,           or foreign

           affiliate,            be reported               to the             Secretary              of Commerce.                By

           requiring            reporting              of all          significant                 payments,           whether

           proper           or improper,               the bill           avoids             problems          of definition

           or proof           of bribery               and extortion.                      The report                would      be made

           public           one year          after      its      receipt.

                       However,         Mr.      Ford's         bill          did      not        receive        serious         considera-

           tion        before         the     94th      Congress              adjourned.                It     is expected              to

           receive           a full         hearing        in     the present                     Congress,           the     95th.

           PROPOSED INTERNATIONAL                         AGREEMENT

                       Former         President          Ford          also         sought         priority           consideration
      --
           fdr        the    United         States'        proposed                 international                agreement            on

           questionable                corporate           payments.                   Introduced              in a United

           Nations           Forum in March                1976,          the        agreement               would     result         in an

           international                treaty          based          on the          following              principles.

                       e     The treaty           would         apply          to      international                  trade      and

                             investment              transactions                with         governments,              such as
*    .                                                         - 10 -


                   government           procurement                 and other           governmental          actions

                   affecting           international                 trade       and investment.

              8    The treaty           would          apply        equally          to those        who offer

                   to make improper                    payments          and to those              who request

                   or accept           them.

              o    Importing           governments               would         agree     to    (1)    establish

                   clear       guidelines              concerning              the     use of agents          in

                   government           procurement                 and in       other        covered      trans-

                   actions           and (2)       establish             appropriate            criminal

                   penalties           for     defined           corrupt         practices           by enter-

                   prises       and officials                  in    their       territory.

              e    All      governments            would         cooperate             and exchange         informa-

                   tiontohelp                eradicate           corrupt         practices.

              e    Uniform        provisions             would          be agreed          on for       requiring

                   enterprises,               agents,          and officials               to disclose         poli-

                   tical       contributions,                  gifts,          and payments           made in

                   connection           with       covered           transactions.

              The objective             was to have                 the United           Nations        Economic

    and Social             Council      pass a resolution                       creating        a group       of

    experts        charged       with         writing          the      text     of an international

    treaty        on corrupt           practices.                The Council             adopted        a resolution

    in August            1976 calling            for     a working              group      of representatives

    from      18 nations             to complete           its       task       by summer 1977.
.   .      .a
                                                                   - 11 -


        UNITED STATES GOVERNMENT
        AGENCIES' ACTIONS
                                                                    .

                  In addition             to congressional                 hearings            and consideration

        of new legislation,                   the U.S.           Securities             and Exchange              Commis-

        sion      and other         Government            agencies             also     are     conducting

        investigations.

        Securities           and Exchange              Commission

                  United        States       laws dealing               with      the buying            and selling

        of shares          or securities               are    designed            to protect            investors

        from misrepresentation,                        deceit,          or other           fraudulent        practices

        by requiring             public       disclosure              cf information              by those          who

        issue       shares       or securities.                  The Securities                 and Exchange

        Commission,             an independent               regulatory               agency     in the       executive

        or presidential                branch       of our Government,                      provides        for     the

        fullest       possible            disclosure          to the           investing         public      and pro-

        tects      the     interests,of             the      public        and investors                against      mal-

        practices          in    the      securities          and financial                 markets.

                  The Securities              Act      of 1933 requires                    a registration

        statement          to be filed           with        the      Securities            and Exchange

        Commission           before        a public          offering           of securities.               The

        Securities           Exchange         Act      of 1934 requires                    periodic       reports

        and proxy          materials          to be filed               with      the Commission             by regis-

        tered      companies.
 . .    .,                                                        - 12 -                                                         ,   *
. .


                 Payments         to foreign           officials             are not        specifically

       required        to be disclosed                    in materials           filed       with           the    Commis-

       sion      pursuant         to the       1933 Act            or the       1934 Act.              However,

       disclosure           is    required          of all        material           information              concerning

       registered           companies          and of all            information             necessary              to

       prevent       disclosures             that      have       been made from being                        misleading.

       Thus,      facts       concerning            questionable              payments           must be dis-

       closed       insofar        as they          are material.

                 Courts       in the     United            States     have not            yet     addressed              the

       issue      of whether           and under            what     circumstances                questionable

       payments       made by a United                     States      corporation               to foreign              offi-

       cials      would       be material            information              which       should            be disclosed

       tothe      public.          So far,          the     Commission,           through             its     enforcement

       and voluntary              disclosure           programs,             has been           the    sole        judge

       of the materiality                of       such payments               in this        country.

                 The Commission              is     investigating              questionable                  and illegal

       corporate          payments       and practices                 for     the       following            reasons:

       (1) bribes           and kickbacks              may involve             falsification                  of account-

       ing     records;          (2)   the     securities            laws      require           companies

       to disclose            material         facts        for     investors            to make informed

       investment           decisions          and to assess                 the quality              of management;

       (3)     corporate          management           and their             advisors        need           to become

       fully      aware       of these        problems            and to effectively                        deal    with
.'                                                               - 13 -
..

     them,         and (4)          to clarify          its      approach             and authority            in      the

     area.          The main           thrust         of the        Commission's              enforcement              actions

     has been         to restore                the    effectiveness                  of the      system      of corporate

     accountability                  and to encourage                  the boards             of directors              to

     exercise         their          authority          to deal          with         the    issue.

               The Securities                   and Exchange             Commission              has taken          the

     position         that          significant           questionable                 payments          or smaller

     payments         that          relate        to a significant                    amount      of business             are

     material         and are           required          to be disclosed.                       Other      questionable

     payments         may be considered                       material          if     repeatedly           made without

     broad         knowledge           and without             proper       accounting.

             As the           potential            magnitude           of the problem                   became apparent,

     the     Commission              sought        to encourage             voluntary             corporate            dis-

     closure         of the          questionable              or illegal              foreign          payments.

     Accordingly,              it      advised         companies          with         possible          disclosure

     problems          to:

               e     Authorize               an in-depth            investigation                of the      question-

                     able      activities              by a special                  independent           review

                     committee.

               o     Request           the board          of directors                 to issue          an appropriate

                     policy          statement          on transactions                     involving        illegal

                     or questionable                   activities           in        the United           States       or

                     other          countries.
                                                  - 14 -


       0       Consider         whether     interim     public      disclosure            of the

               results         should     be made prior          to completion            of the

               investigation.

       8       Report      to the       Conxnission     on the      final       results      of

               the   investigation.

In additron,             the    Commission      is    encouraging           disclosure       by

the   companies           of investigations            in a current           or annual       report,

registration             statement        or by some other          means of reporting.
                                                     ,' 15 -


         In a May 1976 report                      prepared        for     the    Senate         Banking,

Housing       and Urban            Affairs         Committee,            the   Commission          made an

analysis          of    the     public         disclosures         of questionable                foreign

and domestic             activities             of 89 corporations.                  The report

concluded          that:

         "The almost         universal        characteristic           of the cases
           reviewed      to date by the Commission                  has been the
          apparent       frustration         of our system of corporate
          accountability           which has been designed                 to assure
           that there        %s a proper        accounting       of the use of
          corporate        funds-and       that    documents        filed     with the
          Commission         and circulated          to shareholders            do not omit
          or misrepresent            material      facts.       Millions        of dollars
          of funds have been inaccurately                     recorded       incorporate
          books and records             to facilitate         the making of ques-
          tionable       payments.         Such falsification              of records
          has been known to carporate'employees                           and often       to
          top management,            but 'often      has been concealed              from
          outside      auditors        and counsel         and outside        directors."

           This        year     the Commission               announced         on January           26 a series

 of rulemaking                 proposals         designed        to promote          the    reliability

 and completeness                  of the        financial         information           filed       to meet            ,

 requirements                 of United         States       securities          laws.      These proposals

 require          each issuer             of     securities              or shares       to maintain         books

 and records             accurately             reflecting         the     transactions            and disposi-

 tions      of assets            of      the    issuer       and an adequate             system       of internal

 accounting             controls          to provide          reasonable          assurance          that   specified

 objectives             are     satisfied.
    .a         .    .


1        ’                                                             - 16 -


                         In order          to protect            the      reliability              of     financial           informa-

             tion        and the         integrity            of the       independent               audit        of issuer

             financial             statements,             the    Commission               is proposing               rules     to

             prohibit            explicitly             falsification               of an issuer's                 accounting

             records            and making           false,       misleading               or incomplete               statements

             by officers,                directors,             or stockholders                  to an accountant                 engaged

             in an examination                     of    the     issuer.

                         Although          not     directed            solely       to     the problem             of questionable

             or illegal             corporate            payments          and practices,                  the Commission

             believes             that     these        proposals          would          create        a climate         which

             would        discourage             serious         abuses          uncovered           in    this       area.

             Federal            Trade      Commission

                         Another         regulatory             agency,          the Federal              Trade       Commission,

             is charged             with       keeping          competition               free     and fair           by preventing

             the        free      enterprise            system         from being            stifled,          substantially

             fettered            by monopoly             or restraints                   on trade,         or corrupted                by

             unfair            or deceptive             trade     practices.

                         The Federal             Trade        Commission             is trying            to determine            if

             United            States'        laws concerning                   unfair      competition               were violated

             by corporations                   making         questionable                payments.           The main          issue

             here        is whether            a corporation               making          such payments               has an unfair
    *.       .,


.        ’                                                       -   17     -




             competitive            advantage          over      another            that       does not          make such

             payments.             The Trade        Commission's                  inquiry            is the       first       use

             of our antitrust              laws        in combating                 the      practice            of making

             payoffs;        no      charges        have yet         been made by the Commission.

             Internal        Revenue       Service

                        The United       States            laws governing                   taxation          of business

             income       provide       that       bribes        and kickbacks,                      including            payments

             to Government            officials,              made in other                  countries            cannot          be

             deducted        in computing              taxable           income        if          the    -.ayment        would        be

             unlawful        in     the United             States.          The Internal                   Revenue         Service

             in our Department                 of the         Treasury            is responsible                  for      administer-

             ing       and enforcing           these        laws.

                        In April        1976,       the       Internal            Revenue            Service         issued        new

             instructions            to its        field       offices            to help            uncover         tax    evasion

             and avoidance            schemes involving                     bribes,            kickbacks             and similar

             illegal        payments.           These         instructions                  will         be followed          in         the

             auditing        of about          1200 coprorations                     whose gross                 assets       exceed

             $250 million.              The Revenue              Service's                examining           officers            will

             direct       a minimum of             11 specific                  questions            to present            and former          -

             officials         or employees                whohave        had sufficient                     authority,             control

             or knowledge            of corporate              activities                 so as to be aware                   of any

             possible        misuse      of     funds.
  8   .
. *
                                                         -.18       -


               For   example,            one of the            questions            the     examiner         will      ask is:


                         'I* * * did the corporation,             any corporate        officer
                 or employee       or any third      party    acting      on behalf      of the
                 corporation,       make, directly        or indirectly,         any bribes,
                 kickbacks      or other     payments,     regardless         of form, whether
                 in money, property,          or services,        to any employee,           person,
                 company or organization,            or any representative             ti any
                 person,      company or organization,            to   obtain    favorable
                 treatment      in securing     business      or to otherwise          obtain
                 special      concessions,     or  to   pay   for    favorable      treatment
                 for business        secured   or for special          concessions       already
                 obtained?"

                Responses             must be in writing                  and signed          by the          individual

      being      questioned,              either       in affidavit                form     or as a written

      declaration             made under            penalties            of perjury.            If     the     individual

      refuses        to answer,             a summons will                be issued.            The managing

      partner        of the           corporation's             public          accounting           firm     also      is

      required          to attest           to the       affidavits              submitted           by selected

      corporate            officials           and key         employees.

                Under       recent        arrangements,                 the Revenue           Service         also      will

      be examining              all      Securities            and Exchange               Commission          reports

      for     matters         having        tax     significance.

                The Revenue              Service       has also               established       procedures              to

      improve        its       effectiveness             in detecting                the misuse             of corporate

      funds.         Included            are      guidelines            for     detecting        schemes created

      for     political           contributions                and bribery            in the         United         States
.I    .a
                                                                  - 19 -

     and other                 countries.              Some of these                  guidelines           call       for:

               Q Examining                       the books         and records              of American

                      companies                  located         in other        countries.

               o      Examining                  international             transactions               of multi-

                      national              corporations.

               e     Working               to strengthen                cooperative             efforts            with

                      nations              with      whom the           United         States       has tax           treaties.

               The purpose                  of the new instructions                            and guidelines                 is to

     determine                 whether           corporations            have reduced               their          income        taxes

     by deducting                      payoffs       as expenses.                If      the    Internal            Revenue

     Service          charges              a corporation                with     such an act,                its      officers

     may face          charges              of conspiring                to violate             tax    laws,          making          a

     false         return,              and giving          a false            statement           to Internal               Revenue

     agents.              If      it      is determined             that        a company           has committed                 tax

     fraud,         the         case will            be referred               to the       U. S. Department                     of

     Justice          for         prosecution              in     the    courts.

     Department                 of Justice

               Having             thousands            of lawyers,              investigators,                and agents,

     this      Department                  plays       an important              role       in protection                 against

     corporate                 criminals            and in maintaining                    healthy           competition               of

     business             in our           free       enterprise           system.
                                                                                   E




                                                     -.20         -



          The Department's                   Criminal            Division              has formed              a task           force

to investigate                allegations            of corporate                      foreign          payments.                The

taskforce           is     studying          available            information                 to determine                  whether

violations              of existing           criminal            laws have occurred.                            Particular

emphasis         will       be placed           on possible                violations               of the           mail        fraud

statutes,           the     securities            laws,          the Bank Secrecy                       Act,     as well

as statutes              prohibitingthe                  submission                of false             statements               to

Government              agencies.

Department              of Defense

          Similarly,             the Departtient                 of Defense                  has been much con-

cerned       about         the    possibility             of questionable                        corporate            payments

made by its              contractors            in   defense              industries.

          The Department's                   contract            audit       agency           has been heavily

 involved          in audits          of transactions                     and sales              agents'         fees           to

make sure           that      improper          and inappropriate                         costs         are     not     reimbursed

through        Government             contracts.                 Although              the    audit        agency           has no

 investigative              responsibilities,                     it      is alert            to the possibility

of   improper             transactions            and maintains                    with       its       auditors            a

constant           state      of awareness.                 If         irregular             activity           is    found

 during      a contract             audit,        the matter                is referred                 to the Army,

 the Navy          or the Air            Force,      as appropriate,                         or other           defense

 agency      for        investigation.
                                                  1
                                                            -.21      -




ACTIONS IN THE PRIVATE SECTOR

          All         these       actions         are       evidence,            I believe,              of commitment

by the United                   States       to maintaining                    a world           market         place      more

free      of illegal                activities              and questionable                     moral         and ethical

practices              than       in the past.                 The United                States        Government              is

not      alone         in these          efforts.              Organizations                    in    our private

sector          are      also       seeking           solutions.

American              Institute          of Certified                 Public        Accountants

          For example,                 the American                  Institute            of Certified               Public

Accountants                issued        in January                1977 two statements                         on auditing

standards              to its        membership.

          One statement,                    entitled           "The        Independent                Auditor's          Responsi-

bility          for      the      Detection            of Errors            or Irregularities,"                         stresses

that      under          generally           accepted              auditing          standards               the    independent

auditor          has the            responsibility                   to search            for        errors        or irregularities

that      would          have a material                    effect         on the         financial             statements           of

the      organization                being        audited.                The statement                emphasizes              the

inherent              limitations            of the          audit         process         but        also      provides

guidance              as to procedures                   to follow             when the              auditor        suspects

that      errors           or irregularities                       may exist.

          The other               statement,             entitled             "Illegal           Acts.by           Clients,"

provides              guidelines            for       the    auditor's             conduct            when acts          such
    3   C.


.   -                                                            - 22 -


        as illegal            political             contributions,               bribes,           and other               violations

        of laws         and regulations                    are    encountered                during          an audit.          .The

        statement           emphasizes              that      an audit          in accordance                  with        generally

        accepted           auditing          standards            cannot        be expected                  to provide          assurance

        that     illegal            acts     will     be detected.                    However,          it     provides          sug-

        gestions           on procedures               for       identifying             illegal             acts     and actions

        to be taken                by the      auditor           when they            are     suspected              or found.

        New York           Stock       Exchange

                 A related             action        was recently               taken         by the New York                  Stock

        Exchange.             It     made a rule              proposal          for      companies             with        common

        stocks       listed          by it      under         which       the    companies              listed            by the

        Exchange           have until           June         30, 1978,          to create              audit         committees

        made up of nonmanagement                             directors          hare            free         of any relation-

        ship     with       the      company.              The proposed               rule     has been              endorsed

        by the       Securities              and Exchange                Commission.               These            independent

        audit      committees              would       have as their                  main objective                  the     evalua-

        tion     of the            corporate         audit        function            to determine                  the    adequacy

        and efficacy                of accounting                procedures            and controls.
                                                                - 23 -


GENERAL ACCOUNTING OFFICE AUTHORITY
TO AUDIT PRIVATE COMPANIES

          In the United                   States           the         General       Accounting               Office,             the

supreme          audit         institution,                     has legal           authority           to     examine             the

books      and records                   only      of companies                    doing     business               with      the

Government.               In the main,                     this         authority           is    limited            to companies

holding         negotiated,                rather               than      formally          advertised,                contracts

for      supplies         and services.

         -The governing                   laws          are made effective                       by clauses                that

must be inserted                    in Government                       contracts.               When the            General

Accounting             Office            finds          violations            of these            laws        and contract

provisions             in its            audits          of negotiated                 contracts,              it      refers           the

case,      if     it     is a civil                matter              involving           a price           reduction,             to

the      procuring             agency;            or,      if     it      is a criminal              violation,                   to the

Department             of Justice                 for      investigation                   and possible                prosecution,

          An important                   part      of the work                of the         General           Accounting

Office          is evaluating                   the      effectiveness                 of Government                   programs

and activities.                     It      is here              that      we can make valuable                            contribu-

tions      by evaluating                    the         performance                of the        Government                agencies

responsible              for      administering                        and enforcing              the        laws,         identifying

problems          or weaknesses                    needing              correction,              and then            recommending

actions          for     increased                effectiveness.
                                                 - 24 -


CONCLUSION

        It      will     require      time      before       all   the   problems     relating      to

corporate           practices        of making           questionable      payments      can be

resolved.              But    the   commitments           made by our Congress           and other

organizations                whose activities             I have referred        to are positive

steps        that      I believe      will      take      us all    in the    right    direction.