Policeman for the World: The Impact of Extraterritorial FCPA Enforcement on Foreign Investment and Internal Controls
Christensen, Hans B., Maffett, Mark G., Rauter, Thomas
The Accounting Review · 2022 · Volume 97 · Issue 5
Abstract
We show that a mid-2000s increase in extraterritorial enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), characterized by greater international regulatory cooperation and more frequent use of the FCPA's accounting provisions, has a significant deterrent effect on foreign direct investment in high-corruption-risk countries. The decrease in investment is at least as large for non-U.S. as for U.S. firms, suggesting that widespread extraterritorial enforcement helps to create a level foreign investment playing field. Firms under U.S. jurisdiction with fundamental characteristics that make it more difficult to maintain effective internal controls invest less in high-corruption-risk countries after the FCPA enforcement increase, suggesting regulatory compliance costs play a role in deterring investment. Consistent with investments in accounting systems being one way, firms limit enforcement risk when investing in high-corruption-risk countries, firms pursuing new investments spend more time evaluating potential targets, and firms with existing investments report fewer restatements related to unintentional errors. JEL Classifications:F50; F60; K2; M4; O1.
Keywords
foreign corruption regulation, extraterritorial enforcement, Foreign Corrupt Practices Act (FCPA), foreign investment, internal controls
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