Estimating Loss: When and How to Calculate and Disclose Financial Reserves for FCPA Settlements (Part Two of Three)

When a publicly traded company is negotiating an FCPA settlement, it must consider reserving funds for the associated loss.  Calculating a reserve becomes necessary when the company faces a probable, estimable and material loss.  Once that occurs, the company will likely be required to make a public disclosure about the reserve, exposing it to a host of potentially adverse consequences, including harm to the company’s reputation, a decrease in stock price and increased exposure to foreign prosecutions.  How should a company involved in settlement negotiations with the government address this sensitive issue?  How should it go about setting such a reserve?  When during those negotiations should the company begin to consider reserving funds for a future settlement?  How should the reserve be calculated?  How should it be disclosed?  The Anti-Corruption Report is publishing a multi-part series addressing these crucial issues.  This article, the second in the series, discusses the issues a company should consider before setting a reserve, the risks related to setting reserves and the risks of miscalculating the reserve.  The first installment in the series discussed the accounting principles governing the setting of the reserve, examined when during an investigation a company should set a reserve and described who should be involved in setting the reserve.  See “Estimating Loss: When and How to Calculate and Disclose Financial Reserves for FCPA Settlements (Part One of Three)” (Jun. 26, 2013).  The third and final installment will discuss how to calculate a reserve and how to draft the disclosures announcing the reserve.  It will also include a compendium of actual FCPA reserve-related disclosures from recent SEC filings, compiled with help from Intelligize’s database and search tools.

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