Case Study 28 Forensic Accounting - Fighting International Fraud

case 28 forensic accounting

CASE STUDY 28:

Fighting International Fraud with the FCPA

Priscilla Burnaby, Ph.D., CPA

Bentley University

Susan Hass, MBA, CPA, CGMA

Simmons College

Brigitte W. Muehlmann, Ph.D., MST, CPA, CFM, CVA

Suffolk University

LEARNING OBJECTIVES

After completing and discussing this case, you should be able to

Find financial irregularities in financial statements. Analyze trends in account balances. Perform horizontal, vertical, and trend analysis. Compare financial ratios to industry averages. Gain a better understanding of the accuracy/effort trade off. Analyze the statement of cash flows.

HEWLETT-PACKARD’S CURRENT PROBLEMS WITH INTERNATIONAL KICKBACKS

Andrew and Susie were on a Midwest college campus discussing current events over lunch. Susie found an article about one of the topics they were studying in law and fraud class and brought it to Andrew’s attention, “Andrew I just read in the Wall Street Journal (Crawford, 2012) that the Hewlett-Packard (HP) criminal bribery case we studied in class last semester is finally heating up. Remember the case was about a German branch of HP bribing a Russian official. The ar- ticle says that German prosecutors filed bribery, tax evasion and embezzlement charges against Hilmar Lorenz, a German and former H-P marketing executive in Russia; Ken Willett, a Germany-based American H-P manager; and Pa?ivi Tiippana, a Finn and former manager at the company. Prosecutors also indicted Ralf Krippner, a local German politician and businessman as an accessory.

The indictment alleges that Krippner billed an H-P subsidiary for services that were never performed and helped relay the funds.” Susie noted, “This case

     

200 Case Studies in Forensic Accounting and Fraud Auditing

has not yet been brought to a U.S. court. The Securities and Exchange Com- mission (SEC) is still investigating. If I remember correctly from articles we read (Yannet and Fuhr, 2010), the investigation began in 2007 after a German tax auditor became suspicious of payments totaling €22 million that a German HP subsidiary made to a small computer hardware firm near Leipzig from 2004 to 2006. They suspect Russian officials received €7.5 million in kickbacks for a € 35 million dollar contract to sell computer gear to Russia‘s Prosecutor General Office, the very office responsible to stop bribes. (Crawford, 2012)”

Susie continued, “The HP subsidiary recorded the payments as having been made for services rendered in Moscow. The investigation also identified three payment intermediaries (shell companies in multiple jurisdictions) and a Moscow- based computer supplier with foreign bank accounts as having conspired with HP to perpetrate the alleged bribery scheme. Using HP funds, the intermediaries, based in the former East Germany, allegedly paid fake invoices for equipment to the shell companies. The illicit funds then flowed through bank accounts all over the world, including the U.K., the U.S., New Zealand, the British Virgin Islands, Latvia, Lithuania, Belize, Austria, and Switzerland before making their way to Russia. (Yannet, and Fuhr, 2010)

This story is an international intrigue. The SEC has yet to file charges using the Foreign Corrupt Practices (FCPA) Act of 1977. It amazes me how long it takes to bring these people and companies to justice. And, it seems like the HP employees did not even benefit from the fraud except for getting credit for the sale.1 I am looking forward to studying more international FCPA violations in our fraud and forensics course. It really takes a lot of information gathering and drilling down into the details to be able to bring a case like this to court. Andrew, what I don‘t get is that I thought all these U.S. companies have a code of conduct and policies to prohibit their employees from offering bribes to foreign officials. I thought the FCPA required that U.S. companies have accounting systems with adequate controls to prevent these fraudulent kickbacks. It has been years since the law was passed. How can this still be happening?”

STUDENT ASSIGNMENTS

Individual Assignments

Although the FCPA has been around since 1977, it is not until the last 12 years that the SEC has annually indicted multiple U.S. companies doing business in foreign countries using the FCPA. To gain an understanding of the FCPA, go to the SEC‘s website http://www.sec.gov/spotlight/fcpa.shtml and click on the FCPA (Securities and Exchange Commission, 2012b) hyperlink on the bottom left.

 

Fighting International Fraud with the FCPA 201

Then, answer the following questions.

1. Download the document, A Resource Guide to the U.S. Foreign Corrupt Practices Act (Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission).

1. Read Chapter 1, “Introduction,” which describes the scope of the FCPA, discusses the costs of corruption, and covers the evolution of the law as well as how the SEC partners with the Department of Justice to fine companies and imprison those that break the law. It also provides an introduction to the efforts of the Commerce and State Departments to assist U.S. companies by advancing anti-corruption and good governance initiatives as well as an introduction to the international landscape.

2. Read Chapter 2, “The FCPA: Anti-bribery Provisions,” which explains the anti-bribery provisions.

3. How can a law that was enacted more than 35 years ago still be relevant today?

2. Review the annual list of enforcement actions by calendar year for the past five years. From the SEC website, select a sample of five companies to read about in more detail. What strikes you about the companies you reviewed and their crimes?

Go to www.cbsnews.com/8301-18560_162-4080920.html and view The Price of Bananas video. You will also find the transcript of the video at that

link. Be ready to discuss the video in class.

1. Chiquita Banana was making payments to a militant group. How does this action fall under the FCPA?

2. What would you have done if you were faced with threats of deadly action against those that worked at the Chiquita Banana facilities under your supervision?

3. What has been some of the fallout for Chiquita Banana?

3. Answer the questions in the FCPA Survey in the Appendix. Be ready to defend your choice based on your understanding of the FCPA and your personal beliefs.

4. To learn about codes of conduct, read the article, “Up To Code,” by Paine, L., Deshpande?, R., Margolis, J., and Bettcher, K. (2005). Harvard Business Review, 83 (12), 122-133. Then answer the following questions:

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Case Studies in Forensic Accounting and Fraud Auditing

1. Should a company have a uniform global code of conduct policy? Why or why not?

2. Should these policies be implemented globally, or at a regional, country, or local level?

3. Should companies have specific global policies regarding gifts, gra- tuities, payments, entertainment, conflicts of interest, and related matters? Why?

4. Who should be responsible for communicating, monitoring, and enforcing the company’s policy?