Companies looking to grow through acquisitions in emerging markets may have more risk to discount: the likelihood of prosecution for bribery arising from such deals seems to be growing. And that suggests they need to do more due diligence on such deals or pay less for a target than they would otherwise.

As we reported earlier,  the Department of Justice and SEC initiated 40 Foreign Corrupt Practices Act related actions in 2009, up from 33 in 2008. Criminal and civil corporate fines this year already exceed $400 million, a pace that would exceed the $645 million that companies paid last year.

And according to an analysis by Ernst & Young, a significant portion of those cases has resulted from acquisitions where companies have assumed legal liabilities under the FCPA, although they were unable to quantify this.

E&Y contends that such companies not doing enough to minimize risks of successor liability and subsequent regulatory enforcement actions. All companies should at least try to conduct thorough pre-acquisition due diligence specifically related to fraud and corruption, the accounting firm says.

But the survey found that fully one fifth of North American companies do not do any FCPA due diligence prior to closing. More than 4 in 10 don't do any afterward, eitther. While it's too late then, of course, to price the exposure into the deal, companies would at least be forewarned about it before they get hit by an investigation. However, the acquirer would be in the position of conducting its operations in a criminal manner post-transaction. You can sue the seller, but this can be complicated.  Sometimes companies may find themselves in a situation where they are not able to do business competitively without returning to the way that it was done before the acquisition -- which was fraudulent.

E&Y didn't look at the pricing of such deals to see if companies not doing their homework on emerging market corruption simply discounted the risk.

But the firm insists that even firms that do conduct due diligence are failing to take full account of the risk. "Many companies do not realize the extent of issues they may be acquiring and the risks they may face," Gregory Wolski, a partner in Ernst & Young who specializes in fraud, explained to CFOZone.

At minimum, Wolski says, a company should assess its potential exposure to specific conduct prohibited by the FCPA, which ranges from bribery and kickbacks to financial fraud. And, for most companies, if they can prove that there was a bribe or kickback, then chances are there is probably already a  falsification books and records, which is a violation as well.

Sometimes exhaustive pre-acquisition due diligence is not possible, of course. In such cases, post-acquisition due diligence ought to be considered, even if the price has been discounted for the lack of due diligence, says Wolski. That, he notes, will help identify exposure areas at an earlier stage and help a company take remedial action such as implementing FCPA training, compliance, or changes to the operational structure itself, such as looking closely at the companies they do business with, including their customers and independent contractors.

Even if FCPA issues aren't identified, a compliance training plan should be in place, since should be in place, since you do not know what will happen in the future.

While there is a high cost involved in conducting such an inquiry, the consultant stresses there is probably an even greater cost involved in a FCPA investigation.

To conduct post-acquisition due diligence, Wolski says companies must conduct thorough interviews of departmental personnel and where available, analyze transaction records, especially for use of petty cash. Among potential red flags: Heavy dependence on the use of third parties such as brokers, consultants, agents, etc. and the prevalence of gift giving.