When the Securities and Exchange Commission announced last week that it was settling charges against printing and graphics company Quad/Graphics Inc., it cited multiple internal audit and compliance failures as contributing factors in securities law and bribery violations by the company.
The Wisconsin-based digital and print marketing provider has agreed to pay nearly $10 million to resolve charges that it violated the Foreign Corrupt Practice Act (FCPA) by engaging in multiple bribery schemes in Peru and China. It also settled charges that it violated U.S. sanctions and export control laws when it conducted business with a Cuban telecommunications company and created false records to conceal the transactions.
“As a U.S.-listed company expanding abroad, Quad/Graphics failed to ensure that its internal accounting controls were sufficient to prevent the type of widespread bribery in Peru and China and the concealment of commercial sales in Cuba,” said Tracy L. Price, deputy chief of the SEC’s FCPA Unit.
The SEC’s administrative order further detailed the breakdowns by internal audit, controls, and compliance at the company. “Internal audit had no visible role in anti-corruption testing and the company failed to conduct broad FCPA or ethics training until approximately 2012,” the SEC wrote in its order.
The SEC also documented several instances of faulty or non-existent controls at the company. “Quad lacked a system of internal accounting controls sufficient to detect or prevent the payments despite the presence of numerous red flags, including vendor invoices with rounded dollar amounts, large invoice amounts that were disproportionate to the services described, invoices that were consecutively numbered (sometimes with the same date), and invoices without purchase orders or other supporting documentation,” the SEC wrote.
Expanding Too Fast
In a blog post on the JD Supra law information website, FCPA expert Thomas Fox contributed the failures to fast expansion overseas without the required oversight by internal audit and compliance. “Quad/Graphics is a prime example of a company which expanded through merger and found itself in foreign market which significantly increased its risk profile, all the while with the corporate office blissfully unaware of the increased corruption risk the company had bitten off,” Fox wrote.
Prior to 2010, Quad was a privately held printing company with a focus on domestic sales. With the July 2010 acquisition of World Color Press, a Canadian printing company, Quad quickly became a public company with a major international presence. The company acquired over 16,000 World Color employees, several subsidiaries, and multiple plants throughout Latin America, and its common shares began trading on the NYSE. However, the company didn’t hire its first Chief Compliance Officer until 2011, and, according to the SEC order, that person was an “individual with no compliance experience or training and an information technology background.”
Remedial Actions
Quad’s remedial actions included:
- Terminating employees involved in the improper conduct
- Enhancing the role and resources within the compliance department
- Hiring a new International Trade Compliance Manager
- Ongoing recruitment for, and training of, new compliance and internal audit personnel with anti-corruption expertise
- Completing a root-cause analysis and implementing several internal controls enhancements
- Updating its code of conduct to further address FCPA issues
- Updating policies and procedures designed to ensure appropriate risk assessments and integration plans are developed for newly acquired entities
In a statement, Quad/Graphics said it had voluntarily told authorities about the alleged misconduct, which it described as “inconsistent” with its values and policies and limited to a few former employees. It also said the U.S. Department of Justice decided not to pursue its own charges. 
Joseph McCafferty is Editor & Publisher of Internal Audit 360°.
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