Panasonic was charged by the Security and Exchange Commission (SEC) more than $143 million due to the companies violation of the Foreign Corrupt Practice Act (FCPA) and subsequent accounting fraud related to backdating an agreement with an airline. According to the SEC press release, Panasonic violated the Foreign Act by retaining consulting services from a government official who had ties to the domestic airline in the US that Panasonic was negotiating two agreements worth more than $700 Million with. The company eventually paid the government official about $875,000 for his/her consulting work but channeled the payments through a third party vendor in order to conceal the payment. According to the FCPA antibribery provision, it is illegal for a company to pay a government official in order to obtain an unfair advantage and the FCPA addresses only the person who offers the bribe. However, had the crime been committed in the United Kingdom (U.K), the government official would have been charged too since UKBA addresses both the person offering as well as receiving the bribe. Not only did Panasonic violate that act and tried to conceal the bribe but they also paid what was considered an excessive fee while no “tangible work” was performed. This eventually led to a violation of the accounting provision by making inaccurate records of the payment because Panasonic had both the knowledge and intent to commit the crime. During the start of the investigation, the Panasonic fired both the CEO and their CFO as they tried to set the “tone at the top” which was seen as the company’s “damage control” efforts.
Additionally, According to the SEC press release, “Panasonic overstated their pre-tax and net income by prematurely recognizing more than $82 million in revenue for the fiscal quarter ending June 30, 2012”. As we discussed in class, the most common type of financial statement fraud involves overstatements of revenues and earnings and understatement of costs and expenses so as to inflate the profitability or minimize the losses of an entity, which leads to financial misstatement. Panasonic’s improper revenue recognition was generated through recognition of fictitious revenue from a falsified agreement. SAS 99 clearly defines financial fraud involving accounting irregularities, as “Misstatements arising from fraudulent financial reporting are intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users”. According to the revenue recognition guideline, revenue should be recognized when it’s realizable and earned. If a contract is awarded to Panasonic, the company could have recorded revenue had they been paid upfront or even record a revenue accrual if they are yet to bill for the services provided. However, Panasonic decided to backdate an agreement that they had with an airline and provided falsified information to their auditors knowing that lying to auditors can be considered obstruction of Justice by the U.S. Department of Justice as well as trigger penalties under the Sarbanes-Oxley Act.
Panasonic, being a publicly traded company most likely worry about the bottom-line therefore revenue management is key to both the leadership and investors. Similar to any other publicly company, Panasonic is always under pressure to meet the earnings forecast, which is seen as a way to boost investor confidence. FASB has previously issued guidance on revenue recognition to ensure that company’s financial statements are accurately presented. Therefore, when an opportunity to make the company’s performance “Look good” presents itself, it takes great leadership for management to act with integrity. Panasonic instead chose to exploit the opportunity and deceive the public of their true financial position. Well, the rationale could have been that they had already executed the contract with the airline. However, there is no acceptable reason as to why the company chose to back date an agreement to meet their revenue target.
Lastly, Panasonic failed to implement effective controls for their selection of consultants and in by failing to do so ended up violating the FCPA. Independence is key in most industries and companies take various steps to ensure that they are not perceived as having undue influence in any of their dealings. For Instance, as a government contractor, prior to the company that I work for agreeing to any form of partnership with a third party. Each party must go through what we call “gate-review” which ensures that the partnership would not be risky for the firm or preclude the firm from doing substantial business in the future. When a company has effective anti-corruption programs in place, it minimizes risk to the company if an employee decides to act in a way that is non compliant to the established program. For Example, in 2012, a former managing director at Morgan Stanley pled guilty for FCPA violation. However, Morgan Stanley was not charged of any crime because they had adequate FCPA compliance programs in place. Panasonic concealed their involvement in using sales agents who did not pass their internal diligence requirements. Upon the revelation of the involvement, Panasonic formally terminated the sales agents but some employees within Panasonic still secretly continued to use the terminated sales agents as sub agents to conceal their dealings.