Biogencyte, a company based in Landover, Utah, is the vanguard of cancer research. Recently, the company has been developing state-of-art antibiotics that potentially cure cancer completely. The drugs are designated to attack cancer cells without causing side effects. Initially, it was widely considered a promising technology that could revolutionize cancer treatment, and numerous medical research groups and schools funded this project. However, due to the impact of the economic recession, funding for the project started to dry up. Management decided to restructure the company to ensure its survival through the recession. In the process of restructuring, auditors found $30 million worth of assets with questionable cash flows. As part of their quarterly review, they suggested to management that the assets should be tested for impairment. Management told the auditors that the assets were still generating enough cash flows and that an impairment test was not needed. The auditors eventually hired a prominent valuation expert to advise them on the matter. After a thorough analysis, the expert's report suggested that the assets were not impaired and should be kept at their book value. The auditors could not believe the report after watching the assets collecting dust, and they knew there must be something they were overlooking.
Steve Fulbrecht, a particularly astute auditor with a background in fraud investigation, decided to investigate further. While examining the background of top management at the client and valuation firm, he discovered that the expert the firm had hired and the CFO of the client went to school together. The auditors, who were now very curious about the questionable valuation result and relationship between the expert and CFO, decided to dig deeper. Further investigation revealed that that the company had a few suspicious expenses in an account named "Business Relationship Expenses" with a $200,000 balance. Steve Fulbrecht decided to question top management regarding these expenses, and thought it best to start with the controller who had recently joined the company four months ago. During the interview, the controller revealed this expense account represented payments to FDA employees and other officials who helped them obtain the approvals necessary to bring their new cancer drug to market. He indicated that he felt uncomfortable with these expenses when he first joined the company, but the CEO and CFO had assured him that such expenses were normal and expected in the pharmaceutical industry.
Upon hearing the new information gathered by Steve Fulbrecht, the partner in charge of the Biogencyte engagement met with the audit committee to inform them of the findings. The audit committee subsequently replaced the CEO and CFO and initiated an internal investigation into the company's relationship with outside officials. If fraud is occurring in this organization, what kind of fraud is it and how could this type of fraud be eliminated?