From the perspective of FCPA compliance, the complaint filed by the SEC in conjunction with its settlement with Biomet, Inc., an Indiana-based medical device business, brings to the fore a number of relevant FCPA compliance issues. Of these, particularly relevant are the insights relative to red flags.
Though the complaint alleged violations of both the anti-bribery and accounting and record-keeping provisions, reference to the accounting classification of payments to the physicians employed by publicly-owned and -operated hospitals identified a number of red flags that bear on both sets of provisions. In terms of violating the books and record provisions, reference was made to payments being improperly recorded as “commissions,” “royalties,” “consulting fees,” “other sales and marketing,” “scientific incentives,” “travel,” and “entertainment.”
These same accounting classifications should also be viewed as potential red flags with respect to the possibility of violations of the anti-bribery provisions of the FCPA. Especially in the context of medical device and pharmaceutical industry, they are more apt to have added significance. But in connection with payments to anyone that may possibly be a foreign official, compliance and internal audit officials should monitor closely and regularly examine these types of classifications.
In addition, consistent with the foregoing, from the perspective of the internal accounting control provisions, these same classifications are directly relevant to the adquacy of internal accounting controls for the foreign activities of an issuer. For an issuer engaged in international business, the internal controls should include procedures that continually monitor and regularly examine classifications of accounting entries that include those identified in the Biomet complaint.
For attorneys, accountants, auditors, business officials, and others engaged in FCPA compliance matters, the SEC’s Biomet complaint provides an extremely useful perspective as to how accounting classifications can provide a form of red flag suggestive of FCPA violations. Active review of accounting classifications should certainly be part of any internal accounting controls as well as any compliance program for entities that are not issuers.