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

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions