You are the audit committee chair for a large construction c

You are the audit committee chair for a large construction company. A year ago you purchased a development company in Europe for approximately $100 million. This company has already lined up a number of large projects in Italy, Germany, and other European countries that take advantage of government incentives and subsidies. You just received a tip (not anonymous) from a female attorney working for the European subsidiary who alleges that the CEO of the European subsidiary is paying bribes to key governmental officials to get favorable treatment on major projects. The tip is quite specific in that it names (1) the government officials who have been paid bribes, (2) the nature of the payments (they have been labeled consulting fees but you have been told they lack any legitimate documentation), and (3) the amounts that have been paid Answer the following questions regarding this tip 1. Which law(s) are you concerned that the company may be violating and what are the consequences of violating this (these) law(s)? 2. As audit committee chair, what action should you take to investigate the tip? 3. If you find through whatever initiatives you take that the allegations are true, what should you do and what are the pros and cons of self-reporting of the government?

Solution

1. Bribing the government officials in order to take the advantage of government incentives and subsidies is against the criminal law. It may be treated as a crime and there can be various consequences for the same as mentioned below:

- Company may be charged with the penalties due to violation of law.

- Imprisonment and monetary penalty of the CEO of the European subsidiary and others involved

- Company may be asked to shut down due to unethical practices

- All the previous incentives and subsidies provided can be taken back along with interest and additional tax liability payable

- The ongoing projects will be called off and given to other competitors

- The goodwill of the company will be lost and future projects will be negatively effected.

2. Tip is not considered to be an actual fraud. But it does raises an alarm and the company takes appropriate action to look into the matter and decide of the tip is genuine or not. Following actions needs to be taken:

- Find out the actual evidences of the tip to identify if it is a real case of fraud or unjustified.

- Look into the financial statements with supporting documents especially for all the consultation fees.

- Undertanding what motivated the femal attorney to provide the tip in the first instance. It may be due to personal grudges with the company or the CEO or any other valid reason to harm the company.

- No action should be taken against the female attorney until proved guilty.

3. If the allegations are true, following actions must be taken:

- self report to the government for furthur investigation

- terminate the CEO involved in the mal-practices and ask for all illegal money paid out of the company to government officials

- audit of all other subsidiaries and parent company wherever the government subsidies and incentive benefits received.

- mail of appreciation and meeting with the female attorny for the informing about the unethical practices going within the organization bravely.

Pros of self reporting -

- the new management will come into the good books of the government.

- the goodwill of the company might be restored by not encouraging any illegal and unethical practices.

- government would like to work with new management bacause of their truthfulness and might provide subsidies and incentives for future legal projects.

- government might reduce the penalty against the company and try to recover most of it from the guilty CEO.

Cons of self reporting:

- government might not restore the level of confidence on the company any more.

- future incentives and subsidies will take more time as the government might set up more stringent regulations and may have to pass through more layers than before

- share prices will be negatively impacted due to bad behaviour of CEO

- it might get difficult for the company to raise more monry from the market.

- the competitors will get an edge to get more projects