Wednesday, November 06, 2013

In Form 10-Q, Avon Products, Inc. Details Efforts to Reach Settlements with SEC and DOJ on FCPA Issues

In its most recently filed Form 10-Q, Avon Products, Inc. detailed efforts to reach a settlement with the SEC and the Department of  Justice on compliance with the Foreign Corrupt Practices Act (FCPA). As previously reported in October 2008, the company voluntarily contacted the SEC and DOJ to advise both agencies of its internal investigation, overseen by the audit committee, focused on FCPA compliance issues and reviews.  The company said that has cooperated and will continue to cooperate with investigations of these matters by the SEC and the DOJ. The company has, among other things, signed tolling agreements, responded to inquiries, translated and produced documents, assisted with interviews, and provided information on its internal investigation and compliance reviews, personnel actions taken and steps taken to enhance corporate ethics and compliance program.

As far as the internal investigation and compliance reviews, the company noted that they have focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, use of third-party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are substantially complete. In connection with the internal investigation and compliance reviews, certain personnel actions, including termination of employment of certain senior members of management, have been taken, and additional personnel actions may be taken in the future. In addition, the company said that it continues to enhance its ethics and compliance program, including FCPA compliance-related training and FCPA third-party due diligence programs.

As previously reported in August 2012, the company is in talks with the SEC and the DOJ regarding resolving the government investigations. As previously reported in its Form 10-Q for the period ending June 30, 2013, the company made an offer of settlement to the DOJ and the SEC in June 2013. Although that offer was rejected by the DOJ and the staff of the SEC, the company accrued the amount of its offer in the second quarter of 2013. In September 2013, the SEC staff proposed terms of potential settlement that included monetary penalties of a magnitude significantly greater than the company’s earlier offer.

The company disagrees with the SEC staff's assumptions and the methodology used in its calculations; and believes that monetary penalties at the level proposed by the SEC are not warranted. The firm anticipates that DOJ also will propose terms of potential settlement, although they have not yet done so. If the DOJ’s offer is comparable to the SEC’s offer, and if the company were to enter into settlements with the SEC and the DOJ at such levels, observed the 10-Q, the company’s earnings, cash flows, liquidity, financial condition and ongoing business would be materially adversely impacted.

Although the company said it is working to resolve the government investigations through settlement, these discussions are at early stages and at this point the success of these efforts is uncertain, as is the timing or terms of what such settlements would be. The company expects that any settlements with the SEC and DOJ will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. The company may be required to incur significant future costs to comply with the non-monetary terms of any settlements with the SEC and the DOJ.

There can be no assurance that the company’s efforts to reach settlements with the government will be successful. If settlements are not reached with the SEC and/or the DOJ, the company cannot predict the outcome of any subsequent litigation with the government; but added that any such litigation could have a material adverse effect on corporate earnings, cash flow, liquidity, financial condition and ongoing business.

Finally, the third quarter 10-Q noted that the company has not recorded an additional accrual beyond the amount recorded in the second quarter of 2013 because at this time, in light of the early stages of discussions of possible settlement terms with the government, the magnitude of the difference between the earlier offer and the amount proposed by the SEC and the absence of a proposal from the DOJ, and the inability to predict whether the company will be able to reach settlements with the government, the firm cannot reasonably estimate the amount of additional loss above the amount accrued to date.

Until these matters are resolved, either through settlement or litigation, the company expects to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations. Furthermore, under certain circumstances, the company may also be required to advance and/or reimburse significant professional fees and expenses to certain current and former company employees in connection with these matters.


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