The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.
Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.
Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.
However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions by this site.
The latest example concerns an SEC enforcement action against Key Tronic (a contract manufacturer of products such as computer components and medical devices), Brett Larsen (Key Tronic’s CFO from July 2015 to June 2024, and is now the company’s CEO) and Nicholas Fasciana (Key Tronic’s Senior Vice President of U.S. Operations).
In summary fashion, this administrative order finds:
“This matter concerns improper expense management at a Key Tronic manufacturing facility in Oakdale, Minnesota (“Oakdale”), and the company’s response to allegations from an internal complaint related to that facility hours before Key Tronic was scheduled to release quarterly earnings.
In the first half of Key Tronic’s fiscal year 2021, approximately July 2020 to December 2020, Key Tronic employees at Oakdale generated false entries in the Oakdale facility’s inventory system that indicated the inventory was undergoing manufacturing during a monthly fiscal period even though the facility did not work on the inventory in that period. The misconduct in Oakdale resulted in Key Tronic recording an increase in the value of the inventory, which decreased manufacturing expenses and had the result of increasing income. The Oakdale employees then reversed the entries after the end of the period. Fasciana, who oversaw manufacturing for Oakdale and other sites, was aware of and directed some of this misconduct in Oakdale.
On the morning of its scheduled quarterly earnings release in January 2021, Key Tronic received an internal complaint about the Oakdale misconduct. Within hours, Key Tronic, including then-CFO Larsen and others in senior management, informed the company’s Board and outside auditor of the complaint, and investigated and confirmed the complaint’s core allegations. That same day, Key Tronic reopened its books and quantified and recorded the misconduct’s quarterly financial impact of nearly $1 million by reversing the improper income. In addition, Key Tronic recorded about $764,000 in pre-tax adjustments to correct other recently identified accounting errors, including adjustments necessary to correct the Oakdale misconduct. These adjustments had the effect of offsetting most of the reversal of the improper income. A portion of these adjustments were booked out-of-period (“OOP adjustments”), as they related to prior quarterly periods.
Had Key Tronic recorded the OOP adjustments in the periods in which the errors occurred, its reported quarterly net income of $1.58 million would have been reduced by 44% and its quarterly net income and earnings per share (“EPS”) growth would have been reduced. While Key Tronic concluded that the adjustments fell below the company’s revenue-based materiality threshold, it did not conduct a sufficient materiality analysis in light of the surrounding circumstances. Additionally, although its auditor advised Key Tronic to consider delaying releasing earnings in light of the complaint’s allegations, Key Tronic released earnings as scheduled. On the earnings call later that day, Key Tronic reported year-over-year increases in net income and EPS but still fell short of its guidance.”
The SEC found that Key Tronic violated the FCPA’s books and records and internal controls provisions and that Larsen and Fasciana caused the violations.
The SEC ordered that Key Tronic, Larsen and Fasciana cease and desist from future violations and that Larsen pay a $20,000 civil penalty and that Fasciana pay a $15,000 civil penalty.
