Deferred prosecution agreements in corporate crime cases show trade-offs, says research

Price-fixing, bribery, and fraud are leading forms of corporate crime. Since the early 2000s, deferred or non-prosecution agreements (D/NPAs) have increasingly been used in the U.S. and elsewhere to deal with some of these cases, not without controversy.

Charges are withheld so long as a company follows a set of negotiated conditions for a set period, which frequently includes a hefty fine and a compliance program. The idea is to discipline the firm while protecting innocent parties from potential economic fallout posed by traditional prosecution. But since prosecutors don’t have to explain their reasoning in opting for a D/NPA, a team of accounting researchers decided to draw back the curtain by examining characteristics of past agreements to see if D/NPAs were being used as intended.

Mostly, they were, according to court records and other data for nearly 300 U.S. D/NPA and plea deal cases between 2000 and 2019. The study appears in Contemporary Accounting Research.

Companies were more likely to get a D/NPA over a plea deal if they were American, were a large parent company versus a subsidiary, and were in regulated industries such as financial services or utilities, all factors that could amplify domestic economic fallout for employees, suppliers and individual investors in the event of a formal prosecution and conviction.

But there was a trade-off. Companies granted D/NPAs were 13.2% likelier to be accused of another violation in future, compared to companies that went through plea deals.

“If we know that D/NPA firms tend to be repeat offenders, then it has implications for how we view these firms and the trust in this form of a disciplining mechanism in restoring the credibility of such firms in the eyes of investors and other stakeholders,” said researcher Aida Wahid, an associate professor of accounting at the University of Toronto Scarborough and the Rotman School of Management. She co-authored the research with Gus De Franco of Purdue University and Christopher Small at the University of Houston.

The researchers also found that D/NPAs were associated with situations where it would be harder to prove and win a case, such as foreign corruption and bribery or financial fraud allegations. Plea deals, on the other hand, were more frequent in cases of environmental violations, where it’s easier to see evidence of wrongdoing, and where a company exhibited strong financials, giving it the means to withstand a prosecution without significant fallout for stakeholders.

The use of D/NPAs has grown across countries even as critics have complained that the practice is too lenient and undermines basic legal principles. Canada’s first use of a D/NPA in 2019, with construction firm SNC-Lavalin, blew up into a serious political scandal for the Liberal government of the time. In the U.S. more than 600 D/NPAs have been used since 2000 and the researchers’ work showed they began to take off in usage following the 2002 prosecution and collapse of auditing giant Arthur Andersen and the issuing of additional guidance on D/NPAs in 2003 by the U.S. Department of Justice.

Even though D/NPAs have been around since the early 1990s, the researchers believe theirs is among the first studies to systematically and empirically show the pros and cons of the mechanism in practice.

And while the researchers were also curious about potential political interference in the choice to use a D/NPA, “we did not find political connections to feature significantly in the decision to discipline the firm this way,” Prof. Wahid said.