United States: United Airlines Settles With SEC For Side-Stepping Its Own Anti-Corruption Controls: Management Override For A Ride Over To South Carolina

Last Updated: December 14 2016
Article by Bret A. Campbell, J. Robert Duncan and Joseph V. Moreno

Most Read Contributor in United States, September 2017

In a settlement highlighting the need for public companies to implement – and adhere to – effective internal controls, United Airlines “United” recently paid a $2.4 million civil penalty to the Securities and Exchange Commission “SEC” for failing to follow its own compliance policies and procedures designed to prevent corrupt payments.1  By allowing management to bypass its internal approval process and authorize a money-losing route from Newark, NJ, to Columbia, SC, in exchange for benefits from a senior official with the Port Authority of New York & New Jersey “Port Authority”, United failed to enact an adequate system of internal controls and, as a result, prepared inaccurate accounting books and records.  Coupled with a criminal Non-Prosecution Agreement with the United States Attorney’s Office for the District of New Jersey whose terms contain a $2.25 million penalty and multiple remedial anti-bribery compliance requirements,2 the case draws parallels to those seen in the Foreign Corrupt Practices Act context 3 and illustrates the need for companies to impose and enforce robust internal controls.

I.          Quid Pro Quo:  Transportation for Expansion

In September 2012, United’s request for approval for a new hangar at its Newark Liberty International Airport hub was under consideration by the Port Authority, a government organization that operates transportation and other facilities in New York and New Jersey.  On several occasions, the then-Chairman of the Board of Commissioners of the Port Authority, David Samson, had communicated through a third-party consultant his desire for United to reinstitute a non-stop flight route from Newark to Columbia, where Samson maintained a vacation home.  Despite United having previously discontinued the route due to poor financial performance, its then-Chief Executive Officer bypassed the standard process for initiating new routes – which included an analysis of financial forecasts and other market data, as well as approval at multiple levels including the Chief Revenue Officer and other senior executives – and unilaterally approved it.  On the very same day, the Port Authority’s Board of Directors signed off on United’s request for a lease on a new hangar in Newark.

In addition to bypassing United’s standard business approvals for new air routes, the Chief Executive Officer ignored a requirement in United’s Code of Business Conduct which called for transactions that benefitted a government official to be approved in writing by the Audit Committee of the Board of Directors and disclosed to the SEC and on United’s public website.  In addition, legacy Ethics and Compliance Guidelines that remained in force from United’s merger with Continental Airlines provided that certain gifts or benefits to government officials required a written exception by the Director of the Ethics and Compliance Program and prompt disclosure of the transaction to the stockholders.  By unilaterally approving the Newark-to-Columbia route, the Chief Executive Officer also disregarded these requirements.

United continued the route from September 2012 until January 2014, when it was ultimately terminated at a total loss of approximately $945,000 (including opportunity costs).  Samson, a former New Jersey Attorney General, pleaded guilty to bribery for using his authority to pressure United to institute the non-profitable route for his personal benefit, and is awaiting sentencing.4  Despite having compliance policies and procedures in place to prevent such a quid pro quo arrangement with a government official, United’s internal controls failed to prevent exactly such an arrangement from being put in place and resulted in a nearly $1 million loss over several years.

II.         Managing Management Override

Even a perfectly designed internal control environment will not operate effectively when management can circumvent or ignore controls intended to prevent fraud or other misconduct.  The American Institute of Certified Public Accountants describes management override of internal control the “Achilles’ heel” of fraud prevention, highlighting the need for a “diligent audit committee [to] evaluate whether oversight mechanisms are in place and functioning that will prevent, deter, or detect management override of internal control.”5  Similarly, the Public Company Accounting Oversight Board requires external auditors to perform specific procedures during every audit to attempt to detect management override, including journal entry testing, the review of account estimates, and evaluating the business rationale for significant unusual transactions.6  This last procedure – reviewing the business rationale for significant unusual transactions – likely would have invited additional inquiry into United’s unprofitable Newark-to-Columbia route.

Management override keeps auditors up at night because most major fraud cases are perpetrated by senior members of management circumventing or overriding internal controls.  Because the internal control environment is designed, implemented and maintained by management, reducing the risk of management override entirely is not a plausible goal.  Nevertheless, proper oversight and continual monitoring by the Board of Directors and the Audit Committee, in particular, is necessary.

III.        Conclusion

Preventing management override of internal controls presents multiple challenges to legal and compliance teams – it is uniquely difficult to make sure the ones charged with creating and maintaining an effective control environment are not abusing their positions and circumventing the controls they oversee.  The SEC’s action against United serves notice that an effective internal control environment requires that all employees follow the rules, and that no one is “above the law” (even in the C-suite).  Not only must public companies have appropriately designed internal controls that are operating effectively, but the Board of Directors and, particularly, the Audit Committee must reasonably and appropriately inquire and monitor for potential management override of the control environment they are entrusted with overseeing.


1  See In the Matter of United Continental Holdings, Inc., SEC File No. 3-17705 (Dec. 2, 2016), available at https://www.sec.gov/litigation/admin/2016/34-79454.pdf.

2  See Agreement between United Continental Holdings, Inc. and the United States Attorney's Office for the District of New Jersey (July 11, 2016), available at https://www.united.com/web/en-US/content/United-NPA-Final-All-Signatures.pdf.

3  Notably, United's settlement with the SEC includes several anti-corruption compliance-related undertakings including mandatory reporting of improper payments to domestic and foreign government officials, live anti-corruption training for employees in government-facing positions, and updated anti-bribery and anti-corruption training relating to interactions with government officials.

4  Department of Justice, Former New Jersey Attorney General And Chairman Of The Port Authority Board of Commissioners Pleads Guilty To Bribery (July 14, 2016), available at https://www.justice.gov/usao-nj/pr/former-new-jersey-attorney-general-and-chairman-port-authority-board-commissioners-pleads.

5  Management Override of Internal Control: The Achilles' Heel of Fraud Prevention, American Institute of Certified Public Accountants (2016), available at http://www.aicpa.org/ForThePublic/AuditCommitteeEffectiveness/DownloadableDocuments/achilles_heel.pdf.

6  Public Company Accounting Oversight Board Release No. 2010-004, Auditing Standards Related to the Auditor's Risk Assessment of and Response to Risk (Aug. 5, 2010), available at https://pcaobus.org/Rulemaking/Docket%20026/Release_2010-004_Risk_Assessment.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.