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 countrywhere 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 Natures 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 Internationals CPI to identify the level of bribery risk that Naturesfaced with its Natures Brazil unit. Did Brazils corruption problems improve over the decade? See http://www.transparency.org/policy_research/surveys_indices/cpi

b. Natures used customs brokers in Brazil. What are customs brokers and why shouldNatures have been more concerned about its relationship with them?

c. How might Natures Brazil employees have rationalized the bribery scheme? WouldNatures 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 Naturesheadquarters 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?

e. 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 Natures faced?

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 Natures. 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?

As the global market for natural remedies grew during the 1990s, sales of encapsulated herbs dominated Natures. In 1994, Natures created a subsidiary in Brazil (Natures Brazil), which became its biggest foreign market. During 19992000, the Brazilian government reclassified certain herbal products as medicines. This reclassification required Natures Brazil to register many of its products as medicines. Natures Brazil was unable to register a large number of its products, so sales declined dramatically. This put pressure on Natures to get the products into Brazil. As a result, Natures 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, Natures 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

Exhibit 2 shows the pattern of sales of Natures Brazil before and after the requirement to register many of its products as medicines and includes commentary from the companys annual report. The exhibit highlights the impact of the new registration requirements on Natures Brazils sales. According to the SECs case against Natures, Natures 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, Natures Brazil classified them as importation advances, a legitimate import expense.

Natures 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 Natures 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. Natures 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 Natures system of internal controls prevented or detected the problem such that it was brought to the attention of corporate management. Once Natures 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 Natures (headquarters) visited Natures Brazil and discussed the declining sales situation with Natures Brazils operations manager. The operations manager indicated that in order to find a customs broker willing to facilitate the importation of unregistered products, Natures Brazil had to pay fees representing 25 percent of the value of its products (SEC 2009). The operations manager told the controllers from Natures 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 Natures Brazil did manage to get into the country were sold illegally. The operations manager explained that he had reported the situation to the Natures Brazil general manager, but that the general manager stated that Natures (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 Natures books and records and for preparing financial reports that included the results of Natures Brazil.