When the fraud at PepsiCo occurred, the company had five somewhat diverse groups of divisions: food products, such as Frito-Lay, Inc.; transportation, such as North American Van Lines, Inc.; sporting goods, such as Wilson Sporting Goods Co.; food service, such as Pizza Hut, Inc., and Taco Bell; and its primary business, beverages. The beverage group included United Beverages International (UBI), a company that bottled soft drinks in 11 foreign countries.
The fraud was committed by employees in the UBI subsidiary in two countries: Mexico and the Philippines. These employees used numerous techniques to falsify income, including keeping inventories of broken or unusable bottles on the books, failing to write off uncollectible accounts receivable, writing up the value of bottle inventory above cost, and falsifying expense accounts.
These activities required extensive collusion. In the Philippines, employees kept more than $45 million of obsolete bottles on the books to satisfy the country’s debt-to-equity requirements. (Writing off the bottle inventory would have reduced both assets and equity, thus creating a problem with the country’s debt-to-equity requirements.)
PepsiCo’s net income was overstated by a total of approximately $92 million over a five-year period from these fraudulent activities. At its highest, the overstatement was $36 million, which was 12 percent of PepsiCo’s net income from all five of its main groups.
Consistent with its management style of granting considerable autonomy to division managers, PepsiCo’s Internal Audit Department acted less like a watchdog and more like a management consultant. For example, at PepsiCo, the Internal Audit Department did not conduct surprise audits but notified division managers in advance of its visits to ensure that key employees were present.
Despite their role as consultants, PepsiCo’s internal auditors uncovered the fraudulent activities at PepsiCo’s Mexico and Philippines operations. After discovering the fraud, the Internal Audit Department at PepsiCo became less consulting-oriented and started conducting surprise audits.
Some people in the company believe that the reorientation of internal audit away from consulting was a major negative repercussion of the fraud.
During the period in which the fraud was committed, PepsiCo portrayed itself as an aggressive, high-performance, results-oriented company. Prior to the fraud, PepsiCo prided itself on the company’s morale and sense of community. Its policy of decentralization supported the notion that the company had aggressive, hard-working, and trustworthy employees. After the fraud was discovered, PepsiCo’s top management was distressed about the conspiracy among those trusted employees who committed the fraud.
In all, the Securities and Exchange Commission fi led formal complaints against 12 employees in the two countries. PepsiCo terminated the people involved, as well as the U.S.-based manager of the bottling unit of UBI.

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What factors contributed to the fraud at PepsiCo?