This week we learned about the Foreign Corrupt Practices Act (FCPA). In that learning we saw that a key to reducing the penalty is through keeping books and records that are clean and transparent. Consider this case:

A USA public company doing business in Freedonia (a made up name from another Marx Brothers movie!) is compelled to bribe local officials in order to be the first to receive a business license for a certain type of industry there. The competition is fierce, but local government officials have unabashedly spread the word that under the table bribery payments to them from the USA company can seal the deal and that's why the USA company is feeling the pressure to participate in the bribe. This would be a violation of the FCPA.

The USA company participates in the fraud, bribing the government officials sufficiently to get the license first, before their competition. The payments are on the books, but hidden, so to speak, in order to get the tax deduction. The payments are cleverly disguised in the expense accounts to appear as normal expenditures.

You are the USA government investigator searching for the fraud after the US government has been tipped off that the fraud happened in Freedonia.

1. What income statement expense accounts would you research for evidence of bribery payments being made even though not so indicated as bribery payments?
2. What type of evidence would you be looking to gather to prove the case?
3. Company officials of the USA company did not want to have all the bribery expenditures traceable directly to them. How else could they disguise the actual payments from the company?
4. Given from your answers above, that the financial statements are obviously misstated, why it is that we don't often see public companies reissue their financials when these FCPA frauds are caught or admitted to?
5. The USA company hires you to institute policies and procedures to prevent the company and its employees from participating in bribery/corruption schemes in the future. Describe what you advise the company to do.