English Case Studies

sEcnoN THREE INrERruar- CoNrRol Issuss

those countries, Walmart extended its dperations outside of l{orth America. Within two decades, approximately one-fourth pf the company's sales were produced by its 6,000 retail stores in more than two countries scattered around the globe.

To date, Mexico has easily been Walrfrart's most successful international venture. Walmart quickly seized control of the r$tail industry in that country by taking away large chunks of market share previousfy held by domestic retailers that had oper- ated in the country for decades. By 201\, Walmart's Mexican subsidiary, Walmart de Mexico, was Mexico's largest retailer anfl that nation's largest private employer.

Bribery Allegotions In April 2012, an article published by thQ l"lew York Times, "Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Lev{l Struggle," reported that Walmart had rou- tinely bribed governmental officials to pbtain building permlts and other business licenses required by Mexican law A r Walmart de Mexico officer testified that the bribes allowed the Mexican subsidihry "to build hundreds of new stores so fast that competitors would not have time tolreact."e The Pulitzer Prize-winning article in the Netu York Times, which was the culfnination of an 18-month long investigation, insisted that the bribes violated the Fofeign Corrupt Practices Act of 1977 (FCPA). The article also accused Walmart's senior management of concealing those bribes from U.S. law enforcement authorities,

Walmart's senior executives learned Mexican subsidiary in late 2005 and i mediately launched an investigation. .Wal-

Mart dispatched investigators to Mexic dence of widespread bribery.... They a

City, and within days they unearthed evi- found documents showine that Wal-Mart

de Mexico's top executives not only k about the payments, but had taken steps to conceal them from Wal-Mart's headqua ers in Bentonville, Ark.'a

Following the discovery of the brr , Walmart's senior executives disagreed on York Times article reported that Walmart'show to address the problem. The New

management ultimately decided to ve the matter quietly and internally. That

the bribes being paid by their company's

rt de Mexico executive who had allegedly going investigation of them. The investiga-

goal was achieved by placing the Wal authorized the bribes in charge of the

Mart's leaders as the last word on the m the U.S. Department of Justice that thei after they had learned of the ongoing in

tion ended shortly thereafter. The su ent internal report noted that "There is no clear evidence or clear indication of bri es paid to Mexican government authorities with the purpose of wrongfully securi any licenses or permits."s

The former FBI agent who served as almart's director of corporate investigations found the internal report inadequate. report was nonetheless accepted by Wal-

tter."6 Walmart's senior executives informed company may have violated the FCPA only stigation by the New York Times.

The author of the New York Times a icle charged that Walmart's "relentless pur- suit of growth" had compromised its c mmitment to the "highest moral and ethi- cal standards."T A follow-up article in t New York Times in December 2012, "How

Mexico," described the methods used byWal-Mart Used Payoffs ts Get lts Way i

3. D. Barstow, "Vast Mexico Bribery Case Times (online), 2l April 2012.

4. Ibid.

5. rbid-

6. Ibid.

7. Ibid.

Up by Wal-Mart AfterTop-Level Struggle," Neu York

cAsE 3.9 Walna.q.nr oE MExrco

Walmart del fi4exico to gain an unfair advantage over its co petitors. That article also dismissr:d the suggestion that Walmart was a "victim" of a pt business culture in Mexico that obligated companies to bribe governmental icials.

The liimes' inuestigotion reueals that Wal-Mart de Mexi uictim of a corrupt culture that insisted on bribes as the did it palt bribes merely to speed up routine approuals.

Dotes, op'en debates, tronsparent procedures. It used bribes safeguards that protect Mexi.can citizens from unsafe const outfla'nk ,riuals.8

"reason,ably estimate" the amount of that loss. Neverth the loss would not have a "material adverse effect on

The FCPA: lFrom Wofergote to Wslmortgote Walmart's raddely publicized FCPA problems refocused att

uos on oggressiue and creatiue corrupter, offering lorge 'fs to get what the Iaw otherwise prohibited. It used bribes to subuert democ

was not the reluctant of doing business. Nor ', Wal-Mart de Mexico

tic gouernance-public o circumuent regulatory

;on. It used bribes to

t officials declared thLat, ere or at anv level of the

ess, they expected that u r b u s i n e s s . " T h e y a l s o on on the FCPA investi-

tion on the origins and

After rreporting the potential FCPA violations to the U.S.Department of Justice in use "all resources nec-

A corripliance" not only in Mexico but worldwide.s The audit committee hired G and a maior law firm to assist in the forensic investigation.l0 Walmart's board created a network of internatjLonial "FCPA compliance directors" that would re rt to a Bentonville-based "Global FCPA Compliance Officer." In an April 2012 press ease that addressed the bribery allegations made by the New York Times, Walma

Decemtrer 2011, Walmart instructed its audit committee essary" to "aggressively" investigate the company's "FC

"We will not tolerate noncompliance with the FCPA anyw company."ll

W a l m a r t i n c l u d e d a n i n t e r i m r e p o r t o f t h e o n g o i n g PA investigation in its Form 10-K for the fiscal year ending 3l January 2013. Co pany officials reported

matters" but could notit was "prolbable" Walmart would "incur a loss from thes

disclosed that the company had already spent $157 mill gation. Irinally, the interim rbport revealed that addition tions" had been uncovered within the company's operati

I "potential FCPA viola- ns in Brazil, China, and

India. There was widespread speculation in the business presslconcerning the ultimate

outcomel of the joint SEC and U.S. Deparrtment of Justice i{vestigation of Walmart's alleged FCFA violations. Much of that speculation focusedlon the magnitude of the monetary fines the federal agencies might levy on Walmart.lMany observers believed that those fines could surpass the $450 million in FCPA-r German engineering and electronics firm Siemens AG in

fines imposed on the

nature c,f that federal statute. The FCPA was a by-produ t of the scandal-ridden Watergalle €)ra of the 1970s. During the Watergate investi tions, the Office of the Special Prosecutor uncovered large bribes, kickbacks, and U.S. corporations to officials of foreign governments to init

her payments made by

relationships. Widespread public disapproval compelled or maintain business

ress to pass the FCPA,

8. D. Barstow and A. Xanic von Bertrab, "How Wal-Mart Used Payoffs to New York',Times (online), 17 December 2012.

9, Walmart.com, News release issued 24 April2012. 10. Ernst & Young was Walmart's audit firm at the time.

11. Walmart.com, News release issued 24 Aprrl2012.

t lts Wav in llexico."

SECTIoN THREE INTSRNII. CoNrnoI IssuEs

which criminalizes most such paymen maintain internal corntrol systems that

paid to governmental officials, while faciiitating made to lower-ranking governmental officials to

.12 The F'CPA also requires U.S. companies to rovide reasonable assurance of discovering

atute. Generally, bribes are significant amounts "grease" payments are modest or nominal payments pedite or "facilitate" an already authorized or con-

improper foreign payments. In a 1997 the Securities and Exchange Commi

ounting and Auditing Enforcement Release, ion (SEC) highlighted the importance and

need for the accounting and internal c trol requirements embedded in the FCPA.

The accounting prouisions [of the FC. I were enacted by Congress along with the antibribery proDisions because Cong concluded that almost all bribery of foreign

ouered up in the corporations' books and and adequate internal controls would deter

officials by American companies wos that the requirement for accurate briberv.ls

In the two decades following the pa ge of the FCPA, the SEC seldom charged U.S. companies with violating its provisi ns. In fact, in 1997 when the SEC filed FCPA- related charges against Triton Energy d., an international oil and gas exploration company, more than 10 years had ela case. At the time. the SEC conceded tha

d since the federal agency's prior FCPA

Energy was intended to send a "messa the filing of the FCPA charges against Triton " to U.S. companies that "it's not O.K. to pay 14 At the same time, an SEC spokespersonbribes as long as yor.r don't get caught

predicted that his agenay would be fil future.15

ng considerably more FCPA charges in the

The SEC was true to its word. While i igating the suspected FCPA violations by Walmart in2072, the federal agency reflorted that it was also investigating potential violations of that federal statute by morelthan 70 other public companies. Those com- panies included such prominent firms [s Alcoa, Goldman Sachs, Hewlett-Packard, and Pfizer. The World Bank has reinforcpd the need for the SEC and other global law enforcement agencies to rein in co te bribery since it estimates that more than $1 trillion in bribes are paid annually to [overnment officials worldwide.lo

The FCPA is not without its critics. Mbny corporate executives have complained that the federal statute places U.S. multifrational companies at a significant competi- tive disadvantage to multinational firm$ based in countries tlrat have do not have a comparable law. Those same executiv$s also find the recent "overzealousness" in prosecuting alleged FCPA violators inappropriate. "We are seeing companies getting scooped up in aggressive enforcement fctions and investigations. A culture of over- zealousness has grabbed the Justice D(partment. The last time I checked, we were not living in a police state."17 In respon$e to that complaint, a representative of the U.S. Department of Justice observed, "Tfris is not the time for the United States to be

12. The FCPA was initially unclear regarding her or not so-called "facilitating payments" qualified as bribes and thus were illeqal under that federal

summated transaction. In 198{1. the FCPA was am ded to address that isstre. As amended. facilitatinp payments made to encourage "routine govern tal action" are not covered by the FCPA.

13. Securities and Exchange Commission,,4 27 February 1997.

ting and Audtttng Enforcement Release No. 889,

14. L. Eaton, "Triton Energy Settles Indonesia Br 1997. D2.

ry Case for $300,000," Neu) York Times,28 February

15. Securities Regulation and Law Report,.SEC O Vol.29, No. 18 (2 May 1997), 607.

icial Predicts More FCPA Cases in Near Future,"

16. L. Wayne, "Hits, and Misses, in a War on Br t7. Ibid.

ry," Neu Yark Times (online), 10 March 2012,

cAsE 3.9 Waluanr os Msxrco

condoning corruption. We are a world leader and we want sure that business is less corrupt, not more."18

do everything to make

To datr:, tlhe FCPA has not had a signilficant impact on t trants. An audit firm has been named in only one FCPA com

e auditors of SEC regis- aint filed by the SEC. In

that caser, a representative of KPMG's lndonesian affiliate w s charged with paying a lient. The KPMG affiliatebribe to a qovernmental official to reduce the tax bill of its

settled tLre charge by agreeing to a cease and desist order b t was not fined.le As the Reuters internatiorLal

almart's longtime audi-

In fact, thr: FCPA has created a new revenue stream for th major accounting firms , Deloitte's website lists rvice that it provides to

Our Foretgn Corrupt Practices Act (FCPA) Consulting ice helps orgoniza- tions nau,igate FCPA risk ond respond to patential uiolation Utilizing the network

of Del'citt<z member firms ond their affiliates including their ensic resources in the

Unitecl St,stes, Canada, Europe, Russia, Africa, Latin Ame and Asia, we haue woirked on o uoriety of FCPA engogements i.ncluding inuesti, tions. acquisition due

diligence, and compliance progrom implementation and cointries for some of the world's leading cor'npanies.zl

sments in ouer fifty

Questions 1. Idenltify control activities that Walmart could have impl ented for Walmart de

Mexico and its other foreign subsidiaries to minimize th likelihood of illegal

FCPA complaint against Walmart unfolded, a reporter for news servic,e noted that it was unlikely that lErnst & Young, tor, would become a target of that investigatiion.zO

that serv,e as the auditors of most SEC registrants. For exam "Foreign Corrupt Practices Act Consulting" as an ancillary public companies.

4. If the cit[izens of certain foreign countries believe that t is an acceptable business practice, is it appropriate for

payments to government officials. Woultl these control cost-ef felctive?

2. What responsibility, if any, does an accountant of a pu ic company have when

he or she discovers that the client has vi,olated a law? H does the accountanrt's positionL on the company's employment hierarchy affec that responsibility, if at

all? \Mhat responsibility does an auditor of a public c nv have if he or she

ctivities have been

discovers illegal acts by the client? Does the auditor's p

employment hierarchy af fect this resp onsibility?

3. Does arr audit firm of an SEC registrant have a responsi ility to apply audit procedures intended to determine wlhether the client FCPI\? Defend your answer.

complied with the

payment of bribes

ition on his or her firm's

.S. companies to tries? Defend your

1 8 .

19. 2 0 21.

challenge that belief when doing business in those cou ansvver.

securjities and Exchange commission, Litigation Release No. 17127,1September 2001.

N. Byrnes, "Wal-Mart Auditor Unlikely to Suffer in Bribery Case,"

Deloitte, "Foreign Corrupt Practices Act Consulting," www.deloitte'

.com,4May 2012