A Walmart de México store in Mexico City. PHOTO: BLOOMBERG NEWS
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.
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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
