Synopsis

During the mid-1880s, David McConnell sold books door-to-door.To entice prospective customers, nearly all of whom were housewives, McConnell gave them samples of rose-scented perfume.After realizing that housewives were much more enamored with his homemade perfume than his books, McConnell dropped the books and began peddling his fragrance products.By the end of the twentieth century, McConnell's company, Avon Products, had more than three million sales representatives and nearly one billion customers in 140 countries worldwide.

In 1999, Andrea Jung became Avon's first female CEO.Over the first five years of her tenure as CEO, Jung gave Avon a makeover that involved several key strategic initiatives.Those initiatives included giving Avon a sleeker, more "hip" image to make its products appealing to younger women and expanding the company's operations in several large and relatively untapped markets, principal among them China.Jung, the daughter of Chinese immigrants, took a personal interest in developing the Chinese market and, in doing so, providing employment opportunities to large numbers of Chinese women.

A key stumbling block to the success of Jung's Chinese initiative was a ban on direct selling adopted by China in 1998door-to-door or direct selling was the principal method Avon used to market its products.For several years, Jung and several of her subordinates lobbied the Chinese government to lift the ban on direct selling.In 2005 when the ban was finally lifted, Avon was granted the first direct selling license in the nation.More than a year passed before other foreign companies received direct selling licenses.

In 2008, Jung received a letter from a former executive of Avon's Chinese subsidiary.The former executive claimed that the Chinese subsidiary had effectively "bought" its direct selling license from Chinese government officials.After notifying the SEC and U.S. Department of Justice (USDOJ) of the allegations, Jung launched an internal investigation.That investigation and parallel investigations by the SEC and USDOJ revealed that executives of the Chinese subsidiary had violated the Foreign Corrupt Practices Act (FCPA) by giving gifts and cash totaling $8 million to Chinese government officials.The fines ultimately levied against Avon totaled almost $135 million. During the course of the investigations, four Avon executives were dismissed and Jung was replaced as CEO by Avon's board.This instructional case and the accompanying case questions focus on the ethical, accounting, and internal control issues posed by the Avon FCPA scandal.

Avon Products, Inc.--Key Facts

1.Direct or door-to-door selling was the key element of Avon Products' business model that made the company a highly successful, global merchandising company.

2.In 1999, Andrea Jung, whose parents immigrated to the United States from China, became Avon's first female CEO.

3.Among Jung's key initiatives for Avon was significantly expanding the company's presence in several large and relatively untapped markets, principal among them China.

4.Jung's China initiative faced an enormous roadblock, namely, that nation's ban on direct selling.

5.For several years, Jung and Avon's Chinese subsidiary, Avon Products China (APC), lobbied Chinese government officials to lift the ban on direct selling and grant APC a direct selling license in the country.

6.In 2005, the direct selling ban was lifted and Avon was granted the first direct selling license in China; more than a year would pass before other foreign companies received such a license.

7.In 2008, a former APC executive wrote a letter to Jung in which he alleged that APC had spent large sums in an effort to influence the decisions of Chinese government officials involved in the direct selling controversy.

8.After Jung forwarded the whistleblower's letter to Avon's corporate audit committee, it launched an investigation of the potential FCPA violations; the USDOJ and SEC initiated their own parallel investigations after Jung informed them of the allegations.

9.Avon's investigation and the parallel investigations by the USDOJ and SEC determined that APC had made expenditures of approximately $8 million to improperly influence Chinese government officials; those expenditures violated the Foreign Corrupt Practices Act (FCPA).

10.Avon paid fines totaling nearly $135 million to settle the FCPA charges leveled against it by the USDOJ and SEC; in addition, the company spent $350 million on its internal FCPA investigation.

11.Three APC executives and one Avon executive were dismissed as a result of the FCPA scandal.

12.Avon's board announced that it was replacing Jung in 2011; the decision to dismiss Jung was reportedly due to both the enormous FCPA scandal and Avon's poor operating results over the final few years of her tenure with the company.

Questions

1.What are the responsibilities imposed on SEC registrants and their executives by the Foreign Corrupt Practices Act?

2.Illustrate the serious implications that the absence of an adequate degree of control consciousness can have on a company. Include examples relating to this case.

3.What are the ethical and internal control-related responsibilities of internal auditors?

4.What are the impacts that cultural factors may have on a multinational company's ability to establish and maintain proper internal controls over its operations?

5.How would auditors identify material weaknesses in internal control?