Deferred Prosecution Agreements (D/NPAs) have become a central U.S. legal tool. Read more about Experimental Actions. Since their introduction in the early 1990s, they’ve been used more than 600 times. Under certain conditions, these agreements allow corporations to escape prosecution. Their star rose quickly following the demise of auditing behemoth Arthur Andersen in 2002. The resulting study, published recently in Contemporary Accounting Research, investigates what happens behind the scenes in these agreements and their implications. It showcases their power while uncovering the caveats and trade-offs that are at play among them.
The U.S. Department of Justice issued additional guidance on D/NPAs in 2003, further embedding this tool within the corporate legal landscape. Research conducted by Gus De Franco, Aida Wahid, and Christopher Small further analyzed almost 300 D/NPAs and plea deal cases between 2000 and 2019. Their deep-dive analysis provided a revealing look at the current state of corporate prosecutions and corporate compliance.
Increasing Use After High-Profile Cases
Use of Deferred Prosecution Agreements experienced a significant spike following the very public prosecution of Arthur Andersen. This case forged a path that established the most impactful precedent for how regulatory agencies should fight corporate malfeasance. In the wake of such high-stakes collapses, regulators sought alternative measures to address corporate malfeasance without resorting to full-scale prosecutions that could have widespread economic repercussions.
The study offers one very good piece of news. Firms awarded D/NPAs are 13.2% more likely to face subsequent violations compared to firms that chose plea agreements. This alarming statistic leads to the question of whether or not D/NPAs are an effective deterrent to prevent corporate wrongdoing. Environmental advocates argue these settlements would allow companies to escape the full consequences of their wrongdoing. This risks undermining the legal system’s role and its capacity to enforce accountability.
Among many important findings, the study shows that large parent companies are more frequently awarded D/NPAs than their subsidiaries. It means that their size and influence can help determine who receives this leniency. Companies that operate in highly regulated spaces like financial services and utilities tend to get these agreements even more often. This deeply troubling and dangerous trend raises profound concerns of fairness and equal treatment under the law.
Economic Implications of D/NPAs
Deferred Prosecution Agreements have consequences beyond the corporations found guilty. They have dire economic effects on workers, vendors, and retail investors. When a formal prosecution leads to a conviction, the ripple effects can devastate not only the company but its broader ecosystem of stakeholders. The threat of job loss and erosion of investor confidence makes these agreements more complicated than any other.
The rollout of D/NPAs with SNC-Lavalin in 2019 was the beginning of a new era in corporate governance in Canada. This seemingly innocuous move became the basis for a devastating political scandal that crippled the then Liberal government. It exposed the volatile political atmosphere surrounding such agreements, including outside the U.S. The Canadian experience highlights the need for governments to strike a careful balance between providing an incentive for corporate compliance and upholding the tenets of public accountability.
The study’s authors note that D/NPAs allow for corporate redemption. They caution that these deals can foster an environment where accountability is undermined. This duality thus presents profound ethical dilemmas. It is heartening because it provides a big stick to challenge recalcitrant regulatory agencies to enforce justice in corporate governance.
Future Considerations
As corporate crime develops, so must the approaches used by prosecutors and other legal authorities to combat it. Our research findings point to key considerations for state, federal and regulatory policymakers and regulators. They need to be vigilant in charting a course through corporate governance’s murky waters. D/NPAs need to be smarter, serving their intended purpose better. This is so important to ensure accountability and protect public confidence in the regulatory process.
The full study’s DOI is 10.1111/1911-3846.13039. This comparative link takes curious readers to in‐depth findings and analysis on this emerging and crucial topic. Now that we have new data on the long-term effects of D/NPAs, stakeholders need to come together to have a frank discussion. These conversations will zero in on best practices and needed reforms to enhance their effectiveness.