CASE STUDY 28: Fighting International Fraud With the FCPA Priscilla Burnaby , Ph. D. CPA LEARNING OBJECTIVES After completing and discussing this case, you should be able to: . find financial irregularities in financial statements. . Analyze trende in account balance. . Performe 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 tropics 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 the studied in class last semester is finally heating up. Remember the case was about a Germain branch of HP bribing a Russian official. The article 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 Willard , a Germany based American H-P Manager, and Paivi Tiippana, a Finn and former manager at the company. Prosecutors also indicted ralf Krippner, local German politician and businessman as an accessory. . The indictment alleges that Kripper billed and H-P subsidiary for services that were never performed and helped relay the funds,"Susie noted", This case has not yet been brought to a U.S court . The Securities and Exchange Commission (SEC) is still investigating. If I remember correctly from articles we read (Yanner 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 payment as having been made for services rendered in Moscow. The investigation also identified three payment intermediaries9Shell companion multiple jurisdictions) and a Moscow based computer supplier with foreign bank account as having conspired with HP to perpetrate the alleged bribery scheme. Using HP funds, the intermediaries, based in the former East German, allegedly paid fake invoices for equipment to the Shell companies, The Illicit funds then flowed through bank accounts all over the Wor, 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 charge 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 Expect for getting credit for the sale. 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 the 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? 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 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. 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). A. 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 landscap