You received a voicemail from an old friend Jim Smith, who is the General Counsel at BoneFix Inc., a global medical devices firm that sells surgical and non-surgical products used by specialists in orthopedics and sports medicine. BoneFix is U.S. publicly-traded entity that was founded in New Jersey, but that also operates in a number of other countries, including China and Mexico. Outside of the U.S., BoneFix sells the bulk of its products to both government run and private hospitals. In Mexico, BoneFix sells about 60% of its products to IMSS, a government-owned medical service provider. In China, BoneFix sells the majority of its products to individual doctors employed by the government through a Chinese distributor. Jim has reached out to you because BoneFix has just discovered that more than one of its international subsidiaries may have been involved in major bribery schemes.

See the transcript below:

Voicemail Transcript Hey Buddy - I hope you had a restful Christmas and New Year holiday. I’m calling because my firm just received whistleblower reports from executives at our subsidiaries in China and in Mexico that have made some pretty serious accusations. According to one whistleblower report, employees in our Mexican subsidiary have been bribing officials in the IMSS in order to win tenders for an extended period of time. Allegedly, our Mexican executives have been covering up their bribes for years by creating falsified receipts for imaginary expenses, obtaining cash to pay bribes through cash advances to themselves, and, as bribes became larger, putting them on the books as marketing and promotional expenses. It also appears that the distributor that we work with in China has been offering 10-15% “rebates” to government-employed surgeons, hosting elaborate dinners, offering government-employed doctors lavish gifts, like very expensive cigarettes, and in one instance paid for a lavish European vacation in order to convince one publicly-employed doctor to buy our product instead of our competitor’s. At this point, we are starting to launch our own internal investigation of these claims, but we are concerned about whether 1) if true, we will need to self-report to the SEC or DOJ, 2) if the bribery is as serious as alleged, should we be prepared to face prosecution, and 3) if we will ultimately be prosecuted, how should we approach conducting our internal investigation? Will we need to hire an outside party to investigate as well? Are there any law firms with expertise in this area that you might recommend? I remembered that the Foreign Corrupt Practices Act (FCPA) compliance was one of your areas of expertise – clearly our compliance program could use some work. Would it be possible for you and some of your colleagues to sit down with us and discuss what the process should look like moving forward and what steps we can take to enhance our ability to detect and correct these kinds of schemes in the future? Thanks and Have a Great Day, Jim Smith Forensic Accounting Case Study Series – sponsored by Deloitte FAS LLP and the Deloitte Foundation BoneFix Inc. Whistleblower Allegation Case No. 1-1 Copyright © 2014 Deloitte Development LLC. All rights reserved.

Assignment Please provide answers to the following questions as you prepare for a formal in-person meeting with Jim Smith.

Questions

1. What type of fraud occurred at BoneFix?

2. What types of fraud would a company like “BoneFix” be most susceptible to (outside of what happened)?

3. What opportunities for committing fraud might exist at a company like BoneFix?

4. Based on Transparency International rankings, how do the two countries mentioned in Jim’s message rank in terms of the perception of corruption?

5. What ethical issues, conflicts of interest, or breakdowns of corporate governance could have led to the fraud schemes described by Jim Smith?

6. What would have motivated BoneFix’s overseas agents and executives to commit bribery and make corrupt payments to government officials?

7. What investigative skills/fund of knowledge/other technical expertise would be needed to resolve a case like this?

8. What concerns should the client (BoneFix) have about privilege and confidentiality? How can they address this?