Please answer all the questions
ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 28, No. 3 DOI: 10.2308/iace-50470 2013 pp. 599–615
Nature’s Sunshine Products: Anatomy of an FCPA Failure
Heather M. Hermanson and Audrey A. Gramling
ABSTRACT: Recently, Walmart and several other large corporations have faced allegations of Foreign Corrupt Practices Act (FCPA) violations, subjecting the companies to large fines and stock price declines. This instructional assignment introduces students to the FCPA and provides an illustration of FCPA compliance problems at Nature’s Sunshine Products (Nature’s). Students will (1) discuss the development, requirements, and importance of the FCPA; and (2) identify red flags at Nature’s suggestive of FCPA noncompliance. This instructional assignment also includes a supplemental requirement whereby students are asked to identify ways that internal auditors could have assisted Nature’s in achieving FCPA compliance. This instructional resource, which could be used in undergraduate or graduate external or internal auditing courses or in managerial or forensics courses, provides instructors with a resource for integrating real-world problems involving international business issues into the course curriculum.
Keywords: bribery; compliance; Foreign Corrupt Practices Act (FCPA); internal audit; international business issues; risk.
CASE
Nature’s Sunshine has always maintained the highest ethical standards in the way we
conduct our business, just as we are committed to the highest quality in the products we
make and sell.
—Douglas Faggioli, President and CEO of Nature’s Sunshine Products, Inc.
M r. Faggioli made these remarks as he accepted a 2004 ‘‘100 Best Corporate Citizens’’
award from Business Ethics magazine. Nature’s Sunshine Products (Nature’s) received the ethics award four years straight: 2003–2006. During this period, Nature’s discovered
its Brazilian subsidiary (Nature’s Brazil) was involved in a bribery scheme that exposed Nature’s to
enforcement under the Foreign Corrupt Practices Act (FCPA). Just two years after lauding his
company’s ethics, Mr. Faggioli and Nature’s CFO, Craig Huff, along with Nature’s, were named
Heather M. Hermanson is a Professor at Kennesaw State University, and Audrey A. Gramling is a Professor at Bellarmine University.
We acknowledge the helpful comments of James Rebele, Rich Clune, Cami Cotuna, Dana Hermanson, David Stout, our graduate forensic accounting and auditing students, the editor, associate editor, and two anonymous reviewers.
Published Online: April 2013
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plaintiffs in a class action lawsuit. How did Nature’s go from winning repeated ethics awards to being subjected to Securities and Exchange Commission (SEC) enforcement violations?
By completing this assignment you will examine the history and reporting requirements of the FCPA and its impact on operations at Nature’s. In particular, you will focus on the impact of Nature’s operating in a ‘‘risky’’ region and industry, and having a decentralized operating structure on Nature’s overall FCPA risk. Also, you will examine the personal implications of serving in a supervisory capacity and signing documents as an officer of a reporting entity.
As presented in the following sections, it appears that Nature’s failed to implement a strategy for dealing with all three aspects of the FCPA: (1) ensuring that its employees knew that bribery is illegal, (2) requiring sufficient and accurate documentation for all transactions processed in the accounting system, and (3) developing a system of controls to detect or prevent bribery (and cover up) from occurring.
COMPANY BACKGROUND
Nature’s evolved from the kitchen table of Eugene and Kristine Hughes into a multi-million- dollar corporation in less than a decade. Eugene Hughes, an elementary school teacher suffering from a bleeding stomach ulcer, took a neighbor’s advice and found cayenne pepper powder to be a successful herbal treatment for his ulcer. Kristine suggested that Eugene encapsulate the powder, making it easier and more palatable to consume, and a new family business emerged.
1
The Hughes couple started selling their herbal ulcer treatment at a local health food store. Soon they added other herbal remedies to their products and recruited a large number of door-to-door salespeople. Through training and appearances at large sales conventions, the independent sales staff grew, and so did the company. Nature’s focused on achieving record sales targets. In 1978, the couple took the company public. They expanded the product offerings by adding water purifiers and personal care products to the mix of existing herbal products. By the end of its first decade, the company had annual sales of $25 million. The following decade, the company continued to grow, with over 300 products and 25,000 distributors. By 1987, Nature’s was the U.S.’s largest producer of encapsulated herbs. The focus then turned to growing sales beyond the U.S.
The Hughes couple hired Alan Kennedy, a direct-marketing leader formerly at Avon, to take the company to the next level. Kennedy expanded the sales force to 100,000 independent sales representatives, and expanded operations into Mexico, Costa Rica, Venezuela, Colombia, and Brazil. By the early 1990s, sales exceeded $125 million (Grant 1996 ).
As the global market for natural remedies grew during the 1990s, sales of encapsulated herbs dominated Nature’s. In 1994, Nature’s created a subsidiary in Brazil (Nature’s Brazil), which became its biggest foreign market. During 1999–2000, the Brazilian government reclassified certain herbal products as medicines. This reclassification required Nature’s Brazil to register many of its products as medicines. Nature’s Brazil was unable to register a large number of its products, so sales declined dramatically. This put pressure on Nature’s to get the products into Brazil. As a result, Nature’s Brazil made undocumented cash payments to customs brokers (some of which were ultimately received by customs officials) that allowed unregistered products to be imported and sold in Brazil. Essentially, Nature’s Brazil employees funneled bribes to officials through customs brokers, so the officials would allow the products to be sold in Brazil. Because bribery violates the FCPA, the company had to ‘‘hide’’ these payments through a series of journal entries designed to make the bribes appear to be legitimate expenditures (SEC 2009).
1 The company was initially formed as Hughes Development Corporation and then Amtec Industries Incorporated before the 1982 change to Nature’s Sunshine Products. Company history is adapted from the International Directory of Company Histories (Grant 1996 ) and SEC filings.
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FOREIGN CORRUPT PRACTICES ACT
The Foreign Corrupt Practices Act, enacted in 1977, contains three distinct provisions:
1. It is illegal to bribe foreign officials to obtain/retain business.
2. Companies must keep books and records that accurately reflect their transactions.
3. Companies must maintain adequate internal controls.
The FCPA stems from Watergate-era investigations into illegal contributions to President Nixon’s reelection campaign. What started as concern about illegal corporate campaign contributions gave way to broader concerns about the way U.S. corporations operated abroad. An investigation by the Securities and Exchange Commission (SEC 1976 ) documented that at least 400 companies spent in excess of $300 million bribing foreign officials to obtain favorable business status. Examples of the types of bribery documented by the SEC (1976) include:
! United Brands Company (Chiquita Bananas) bribed the president of Honduras to lower the export tax on bananas.
! Lockheed Aircraft Company bribed the prime minister of Japan to help sell jets to a Japanese airline.
! Exxon Oil Corporation bribed Italian officials to obtain a natural gas contract.
While many corporate leaders argued that bribery was the only means of securing business in many countries overseas, Congress and President Jimmy Carter pushed through the FCPA, arguing that bribery has grave repercussions for foreign policy and free markets. Corrupt business practices had sullied the reputation of American business and capitalism in general. The FCPA was intended to restore confidence in our markets.
FCPA enforcement falls across two governmental agencies: the SEC (civil enforcement) and Department of Justice (DOJ) (civil and criminal enforcement). Exhibit 1 highlights the five required elements for an FCPA violation, and some important terms and rules related to the FCPA.
In 1977, the U.S. was the only country to criminalize bribery of foreign officials. In fact, some European countries treated bribery of foreign officials as tax deductible. U.S. multinationals faced a competitive disadvantage in markets where bribery was an accepted practice for other participants. To level the playing field, the U.S. lobbied heavily to engage other countries in enacting similar legislation. It took another 20 years until a consensus of other major countries adopted something similar to the FCPA—the Organization for Economic Cooperation and Development (OECD) Anti- Bribery Convention. For over two decades following the FCPA enactment, the U.S. government and corporations largely ignored enforcement of the FCPA.2
It took the financial fiascos of the early 2000s and the creation of the Sarbanes-Oxley Act (SOX) in 2002 to rejuvenate interest in the FCPA. Since the passage of SOX, the DOJ and SEC have pursued FCPA cases with vigor. In fact, the SEC recently created a special FCPA unit within its enforcement division. Since 2004, SEC and DOJ enforcement cases have gone from a combined total of five in 2004 to 74 in 2010 (Gibson, Dunn & Crutcher 2011). Recent SEC FCPA enforcement actions include General Electric, Johnson & Johnson, Siemens, and Tyson Foods. After a New York Times investigative article in 2012, Walmart publicly announced an internal investigation into possible violations in Mexico, where it is alleged to have engaged in bribes totaling more than $24 million (Barstow 2012).
2 Currently, 38 countries have adopted the OECD Anti-Bribery Convention. However, China, India, Russia, and numerous other significant South American, African, and Asian countries have failed to participate in the anti- bribery initiative.
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FCPA noncompliance can be very costly. A study examining the total costs of FCPA internal investigations and legal fees estimates the cost to be approximately 1.13 percent of the company’s total market value (Karpoff et al. 2012). Based on this analysis and Walmart’s approximate market value of $212 billion prior to the FCPA allegations, Walmart may incur as much as $2.4 billion in incremental costs to investigate and defend the FCPA violation allegations. Karpoff et al. (2012) caution that the real costs relate not to the bribery itself, but to the actions taken to cover up the bribery. Firms that misrepresent their financial statements to hide bribery face much larger losses (e.g., based on a small sample in their study, total FCPA losses that included fraud allegations were
EXHIBIT 1
Key FCPA Terms and Rulesa
Panel A: Five Required Elements for an FCPA Violation
1 Who Any individual, firm, director, employee, or agent of a firm who is either U.S. based or has U.S. registered securities. As long as the company is U.S. based or registered, the fact that the bribe occurs in another country does not protect against prosecution.
2 Corrupt Intent Whether it succeeds or not, if the intent of the payment is to influence a foreign official to use his/her power to affect a business decision, then corrupt intent is met.
3 Payment Paying, promising to pay, or offering anything of value is prohibited.
4 Recipient Foreign officials include any officer or employee of a foreign government, a public international organization, or any person operating in an official capacity.
5 Business Purpose Test Payments made in order to obtain or retain business or direct business to any person are prohibited. The business does not have to be with the foreign government.
Panel B: Intermediaries/Third Parties (e.g., Customs Brokers)
It is illegal to make payments to an intermediary knowing that a portion of the money will be paid directly or indirectly to foreign officials. The Department of Justice defines knowing as conscious disregard or deliberate ignorance.
Panel C: Facilitating Payments
Payments made to expedite a routine government action (e.g., obtaining permits, licenses, processing visas, providing power and water, protecting perishable goods, and scheduling inspections) are allowed. Facilitating payments do not include officials awarding new business or continuing with previous contracts.
Panel D: Criminal and Civil Penalties
Criminal fines for corporations may be up to $2,000,000, and $100,000 for individuals (officers, directors, employees, agents). Individuals may receive prison terms of up to five years (the average is about two years).
Civil fines may be brought by either the DOJ or the SEC in amounts ranging up to $500,000.
a Adapted from the Department of Justice FCPA Lay-Person’s Guide (DOJ 2011).
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51.58 percent of market value, a substantial reputational loss). In addition, individuals face being sentenced to prison, with the average FCPA sentence being about two years (FCPA Blog 2012).3
FCPA COMPLIANCE PROBLEMS AT NATURE’S
Exhibit 2 shows the pattern of sales of Nature’s Brazil before and after the requirement to register many of its products as medicines and includes commentary from the company’s annual report. The exhibit highlights the impact of the new registration requirements on Nature’s Brazil’s sales. According to the SEC’s case against Nature’s, Nature’s Brazil made an attempt to bypass the new import restrictions by making cash payments to aid the import of unregistered products into Brazil. Payments to customs brokers totaling over $1 million were made between 2000 and 2001, and some of this money ultimately was paid to customs officials as bribes. To hide the nature of these payments, Nature’s Brazil classified them as ‘‘importation advances,’’ a legitimate import expense.
Nature’s Brazil did not have supporting documentation (e.g., detailed invoices from legitimate vendors) for as many as 80 cash payments (since they were bribes), so Nature’s Brazil purchased fictitious documentation for these payments in order to make it appear that the bribes were legitimate expenses. None of this activity was disclosed in its 10-K filed with the SEC. At this point, two of the three provisions of the FCPA were violated. Nature’s Brazil was (1) bribing public officials, and (2) failing to keep books and records that accurately reflected its transactions. One could argue that the third FCPA provision also was violated because it does not appear that Nature’s system of internal controls prevented or detected the problem such that it was brought to the attention of corporate management. Once Nature’s Brazil engaged in the ‘‘cover up’’ of its bribery, it exposed itself to fraud charges (e.g., willful financial misrepresentation).
Around this time, two controllers from Nature’s (headquarters) visited Nature’s Brazil and discussed the declining sales situation with Nature’s Brazil’s operations manager. The operations manager indicated that in order to find a customs broker willing to facilitate the importation of unregistered products, Nature’s Brazil had to pay fees representing 25 percent of the value of its products (SEC 2009). The operations manager told the controllers from Nature’s that months of inventory were sitting in port because customs brokers were not willing to risk facilitating unregistered products (e.g., it was difficult to find anyone willing to bribe the necessary officials to let the products into Brazil). Also, some products that Nature’s Brazil did manage to get into the country were sold illegally. The operations manager explained that he had reported the situation to the Nature’s Brazil general manager, but that the general manager stated that Nature’s (headquarters) knew about the problems in Brazil. At the very least, the two controllers from headquarters now knew about the problem. These controllers had responsibility for Nature’s books and records and for preparing financial reports that included the results of Nature’s Brazil.
Risks of FCPA Noncompliance at Nature’s
As part of its system of internal controls, Nature’s should have had a process for assessing the risk of exposure to FCPA and for implementing appropriate controls such that (1) bribery would be prevented/detected, and (2) the accounting records provided enough detail to substantiate legitimate transactions and record them in the appropriate accounts. It appears that Nature’s failed to focus on its risk of FCPA noncompliance, including geographic risk, industry risk, and organizational risk.
3 The FCPA Blog (2012) reports that the FCPA sentencing range is huge and unpredictable.
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Geographic Risk
Nature’s could have considered the corruption risk of the countries in which it operates.
Transparency International (TI) rates the relative corruption of different countries (see http://www.
transparency.org). TI defines corruption as ‘‘the abuse of entrusted power for private gain.’’ TI distinguishes between two types of corruption: according to the rule and against the rule. According to the rule is where a bribe is paid to receive preferential treatment (e.g., the bribe receiver is required by law to perform the task for which the bribe is given). An example of this
might be a facilitating payment to an official to speed up the processing of a license.4 Against the
EXHIBIT 2
Nature’s Brazil Sales Data (in Millions) as Reported in Annual Form 10-K
Excerpts from Management’s Discussion & Analysis
FY 1999 Report:
During 1999 and 1998, the Company’s sales revenue was negatively impacted by foreign currency devaluation in the majority of its international markets, most notably Brazil, and increased competition in the Company’s domestic market. Eliminating the adverse effect of foreign currency devaluation, sales revenue for the year ended December 31, 1999, would have increased approximately 3 percent.
FY 2000 Report:
No separate mention of Brazil was made in the MD&A of this report.
FY 2001 Report:
During 2001, the Company’s operation in Brazil experienced a 57 percent decrease in sales revenue to $9.6 million, compared to $22.1 million in 2000. The decrease in sales revenue was due to import regulations imposed by the Brazilian government. The Company expects these new regulations to continue to adversely impact sales revenue and operating results during 2002.
FY 2002 Report:
Sales revenue for 2002, 2001, and 2000 in our operations in Brazil was $5.2 million, $9.6 million, and $22.1 million, respectively. The decrease in sales revenue was due to import regulations imposed by the Brazilian government. We expect these new regulations to continue to adversely impact sales revenue and operating results during 2003.
FY 2003 Report:
Net sales revenue for 2003, 2002, and 2001 in our operations in Brazil was $2.6 million, $4.9 million, and $9.1 million, respectively. The decrease in net sales revenue was due to import regulations imposed by the Brazilian government. We expect these new regulations to continue to adversely impact net sales revenue and operating results during 2004. [Note: It is unclear why 2002 and 2001 Brazil sales changed in this report.]
4 Under the FCPA, facilitating payments to expedite processing (e.g., obtaining permits, licenses, processing visas, providing power and water, protecting perishable goods, and scheduling inspections) are allowed.
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rule is where a bribe is paid to someone who provides services illegally. For instance, the company is not legally entitled to a foreign license, but with a bribe to the right official, is able to attain one.
In 1995, TI launched its first Corruption Perceptions Index (CPI). Using surveys of business people, academics, and country analysts, TI compiles an annual score for rated countries where 10 is a perfect score (low perception of corruption). CPI scores of less than 5 suggest high levels of perceived corruption in government and public administration (TI 2011). This tool is useful in evaluating the bribery risks in various countries where U.S. firms operate. The lower the CPI score, the higher the risk of bribery. In general, Scandinavian countries score high and many African nations score low. TI also created a Bribe Payers Index (BPI). This index rates countries by the likelihood of their companies to bribe abroad. In 2008, TI considered 22 countries whose combined exports of goods/services represented 75 percent of the world total in 2006. Belgium and Canada were ranked least likely to pay bribes abroad, while Russia, China, Mexico, and India were most likely.5 TI observes that while 38 countries are party to the OECD Anti-Bribery Convention, many corporate executives in those countries appear to lack familiarity with the OECD ban. Thus, U.S. companies may continue to face an unlevel playing field.
Industry Risk
Nature’s should have been aware of the bribery risk associated with the industry in which it operated. Companies operating in certain industries are more exposed to bribery risk. For example, companies that must register their products, get government approval for access to resources, or operate under other governmental regulations face greater FCPA risk because they must interact in some fashion with foreign officials. In addition, foreign officials may determine whether the company can operate in any capacity within the country. The combination of governmental power with a company’s need for access can create bribery conditions, particularly in nations without strict corruption standards. Both the DOJ and TI have reviewed cases involving FCPA violations, identifying certain industries as high risk. Some industries considered to be high risk include: drugs and health care; oil and gas production and services; food products; aerospace; airlines and air services; construction, real estate, and property development; and chemicals.
Organizational Risk
Nature’s officials may have failed to consider the implications of using contractors, like customs brokers, to represent them in business dealings outside the U.S. One key feature of the FCPA is companies that use contractors (third parties) in foreign countries can be held accountable for illegal payments made by these third parties. Companies must ensure that they have controls in place to adequately monitor the activities of their contractors. In addition, officers of the company can be held accountable for FCPA violations that they did not personally commit. Employees with supervisory responsibility acting as ‘‘control persons’’ who supervise personnel to make and keep books and records that accurately reflect transactions and who are responsible for maintaining a system of internal controls can be found at fault even when they did not directly pay bribes or even know of any bribery.
xFCPA risk is heightened when companies fail to make their employees and third-party contractors aware of the law. A corporate culture that emphasizes honesty and transparency in reporting, along with FCPA compliance, greatly reduces the risk of FCPA violations. Nature’s should have had an FCPA compliance policy, and employees should have had appropriate training.
5 Of the lowest-rated countries listed on the BPI, only Mexico is a member of the OECD Anti-Bribery Convention. It appears that countries that have ‘‘opted out’’ of the OECD Convention continue the bribery tradition.
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Further, FCPA compliance may be aided by the company’s organizational structure. Companies with centralized organizational structures may be more adept at identifying noncompliance quickly and fixing problems before they get out of hand. In more decentralized organizations, there is a greater chance that third-party contractors may not be apprised of the company’s FCPA policy, causing violations that are slow to come to management’s attention.
Impact of FCPA Noncompliance on Nature’s
So what did Nature’s know and when? Based on various SEC filings, it appears that Nature’s commenced a special internal investigation in the fall of 2005 (almost five years after the Nature’s controllers were notified of the Nature’s Brazil bribery scheme). An 8-K filed with the SEC on November 10, 2005, indicates that Nature’s was reviewing selected financial information at certain foreign operations.6 On March 18, 2006, Nature’s filed an 8-K with the SEC indicating that users should not rely on its previously issued filings (for 10-Q and 10-K filings dating from 2002 through 2005, and for Management’s Report on Internal Control for Fiscal Year 2004). The company failed to issue a 10-Q for Fourth Quarter 2005 and a 10-K for Fiscal Year 2005. On March 27, 2006, Craig Huff, executive vice president and CFO of Nature’s, resigned ‘‘to pursue other interests.’’
Less than two weeks later, on March 31, 2006, Nature’s auditor, KPMG, resigned. In the 8-K filing, KPMG noted that the internal investigation found electronic evidence suggesting that Douglas Faggioli ( president and CEO of Nature’s) knew of the ‘‘alleged fraud’’ in the international operations (e.g., the cover up of the bribery in the accounting records), yet Mr. Faggioli still signed two management representation letters to KPMG.7 If Mr. Faggioli was aware of the bribery and the related falsification of the accounting records, then he should not have signed a representation letter without disclosing the Nature’s Brazil bribery problems. In addition, KPMG noted that the chair of Nature’s Audit Committee, Franz Cristiani, also knew of the alleged fraud, but did not correct any of the disclosures made to KPMG. Despite KPMG’s recommendation that the company terminate Mr. Faggioli and Mr. Cristiani, Nature’s did not remove either of them. In fact, Nature’s indicated to KPMG that it would not terminate Mr. Faggioli. Instead an executive committee took over his position, and he was moved to a different role within the company. Mr. Faggioli returned to his president and CEO position on August 21, 2006, and remained employed by Nature’s until stepping down on June 30, 2010.
Nature’s stock was delisted from the NASDAQ exchange on April 5, 2006, for the company’s failure to file its required reports. Nature’s did not engage its replacement auditors, Deloitte & Touche LLP, until February 2007. It was not until October 2008 that Nature’s filed audited financial statements with the SEC. During the period from Fall 2005 until late 2008, no audited information was provided, and previously audited financial filings (2002–2005) had been recalled.
In July 2009, Nature’s settled its charges with the SEC, neither admitting nor denying guilt. It agreed to a civil fine of $600,000, and both Mr. Faggioli and Mr. Huff agreed to pay $25,000 each for their roles as ‘‘control persons.’’ The DOJ did not press further criminal charges.
6 An 8-K filing is used to publicly report material events not previously reported in scheduled SEC filings. 7 A management representation letter serves as audit evidence for the verbal representations made by management
to the auditor. It is essentially a signed ‘‘promise’’ from management to the auditor that the listed management representations are true. An important item on the letter is that all of the financial information was provided to the auditor, and that the information is correct and not fraudulent. Further, the letter would contain a representation indicating whether management was aware of any violations, or possible violations, of laws and regulations, including the FCPA.
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In November 2009, Nature’s settled its class action lawsuit for $6 million, not admitting guilt.8
The lawsuit accused Nature’s officers of profiting from inaccurate disclosures by selling company stock at artificially inflated prices. Exhibit 3 provides a timeline of the key events for Nature’s from 1972 to 2009.
Nature’s seems to have survived this chapter in its history. On October 12, 2009, Nature’s common stock began trading on the NASDAQ exchange. During 2010, Nature’s ceased its
operations in Brazil as a result of declining sales and increased regulatory restrictions (which had made it difficult for the company to register and sell key products in that market). As of its fiscal year-end in 2011, Nature’s still retained Deloitte & Touche as its auditors and received unqualified audit opinions on its financial statements and its internal control over financial reporting.
QUESTIONS
1. Consider the issues related to FCPA compliance and be prepared to address the following questions during an in-class discussion. You may need to do some additional research.
a. Why is bribery often encountered when U.S. companies try to execute business in an international setting? (Consider the social, cultural, structural, legal, and ethical challenges.)
b. Why do many nations, including the U.S., consider bribery wrong?
c. What are the costs of bribery to: (1) the company doing the bribery, (2) the country
where the bribery takes place, and (3) capital markets?
d. What factors and conditions gave rise to the need for the FCPA and OECD Anti- Bribery Convention?
e. What are the accounting and internal control requirements of the FCPA?
2. Reflect on the risk factors that might have alerted Nature’s management, its audit committee, or its internal or external auditors to the heightened risk of FCPA violations, and be prepared to address the following questions during an in-class discussion. You will need
to do some additional research.
a. Use Transparency International’s CPI to identify the level of bribery risk that Nature’s
faced with its Nature’s Brazil unit. Did Brazil’s corruption problems improve over the decade? See http://www.transparency.org/policy_research/surveys_indices/cpi
b. Nature’s used customs brokers in Brazil. What are customs brokers and why should Nature’s have been more concerned about its relationship with them?
c. How might Nature’s Brazil employees have rationalized the bribery scheme? Would
Nature’s Brazil employees be successful in arguing that their payments were ‘‘facilitating’’ payments allowed under FCPA?
d. Discuss the ethical decision-making process of the two controllers from Nature’s headquarters who visited Brazil. What should they have done when they learned of the problems? Who might they have asked for guidance? Which stakeholders should they
have considered? While we do not know exactly what the controllers did when they returned to headquarters, we do know that it was almost five years before an internal investigation was launched. What would you have done in a similar situation?
8 A class action lawsuit is one where a number of parties come forward to sue for the same reason. A ‘‘class’’ is formed where the case is tried on behalf of the entire group, and the group agrees to abide by the outcome. Nature’s class was made up of shareholders.
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http://www.transparency.org/policy_research/surveys_indices/cpi
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e. Exhibit 4 is an FCPA risk factor questionnaire. Firms use questionnaires to help ensure
that they have incorporated all of the relevant information into a risk evaluation.
Complete the questionnaire using the Nature’s case facts. Had management used a
similar questionnaire annually, do you think they may have been alerted to FCPA risk?
Which risk factor(s) is/are most revealing of the FCPA risk that Nature’s faced?
EXHIBIT 4
Risk Factor Questionnairea
a Adapted from Crowe Horwath (2011).
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f. Is it fair to hold management responsible (as ‘‘control persons’’) for the bribery actions of company employees? What is the purpose of this rule?
Supplemental Question
3. Assume that you are the head of the internal audit function at Nature’s. You have been asked by the chair of the audit committee to recommend ways that internal auditors can help the organization achieve FCPA compliance. What recommendations would you make?
REFERENCES
Barstow, D. 2012. Vast Mexico bribery case hushed up by Walmart after top-level struggle. New York Times (April 21). Available at: http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico- a-bribe-inquiry-silenced.html?pagewanted¼all&_r¼0
Crowe Horwath. 2011. Red flags that may indicate you are at risk of violating FCPA. Available at: http:// www.crowehorwath.com/ContentDetails.aspx?id¼933
FCPA Blog. 2012. A survey of FCPA sentences. Available at: http://www.fcpablog.com/blog/2012/2/28/ a-survey-of-fcpa-sentences.html
Gibson, Dunn & Crutcher. 2011. 2010 year-end FCPA update. Available at: http://www.gibsondunn.com/ publications/pages/2010Year-EndFCPAUpdate.aspx
Grant, T. 1996. Nature’s Sunshine Products, Inc. In International Directory of Company Histories, 15th edition, 317–319. Chicago, IL: St. James Press.
Karpoff, J. M., D. S. Lee, and G. S. Martin. 2012. The impact of anti-bribery enforcement actions on targeted firms. Available at: http://ssrn.com/abstract¼1573222
Securities and Exchange Commission (SEC). 1976. Report of the Securities and Exchange Commission on Questionable and Illegal Corporate Payments and Practices. Washington, D.C.: SEC.
Securities and Exchange Commission (SEC). 2009. Complaint 2:09–cv-00672-BSJ. Available at: http:// www.sec.gov/litigation/complaints/2009/comp21162.pdf
Transparency International (TI). 2011. Corruption Perceptions Index. Available at: http://www. transparency.org/policy_research/surveys_indices/cpi
U.S. Department of Justice (DOJ). 2011. FCPA Lay-Person’s Guide. Washington, D.C.: DOJ.
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http://www.crowehorwath.com/ContentDetails.aspx?id=933
http://www.fcpablog.com/blog/2012/2/28/a-survey-of-fcpa-sentences.html
http://www.gibsondunn.com/publications/pages/2010Year-EndFCPAUpdate.aspx
http://ssrn.com/abstract=1573222
http://www.sec.gov/litigation/complaints/2009/comp21162.pdf
http://www.sec.gov/litigation/complaints/2009/comp21162.pdf
http://www.transparency.org/policy_research/surveys_indices/cpi
http://www.crowehorwath.com/ContentDetails.aspx?id=933
http://www.fcpablog.com/blog/2012/2/28/a-survey-of-fcpa-sentences.html
http://www.gibsondunn.com/publications/pages/2010Year-EndFCPAUpdate.aspx
http://www.transparency.org/policy_research/surveys_indices/cpi
