Avon S Case [PDF]

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1. The Improper payments made by the APC occurred during the time frame that Andrea Jung served as Avon’s CEO. Was she “responsible” for those payments even if she was unaware of them? Why or why not?



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In my opinion the CEO, Andrea Jung, should be responsible for those expenses even if she was unaware of them. Both of Jung’s parents were born and raised in China, and I am sure Jung is very aware of the culture and how they do business in that country. As said, she is a smart woman, especially when it comes to marketing and international business. Going into this market diffusion strategy for China, she understood Avon is a direct selling business and in 1998 the Chinese government had outlawed the “direct selling” of stocks. It seems as if her unfairness and personal ties to the Chinese culture got in the way of her ethics. She knew that this market wasn’t going to be successful for Avon since they ban what their whole company is based on, yet she decided to go ahead with the strategy. In the case study, it states Jung was willing and convinced to do anything to maximize their sales in China, even if it means to regain direct selling in the country. Jung created a “Direct Selling Task Force” for Avon Products China (APC), which she became very attached to. Jung became personally involved in Avon’s goal of convincing the Chinese government to lift its ban on direct selling. She even travelled to China to personally meet with high-ranking Chinese government officials to discuss the issue with them. So, while she says she had no clue, Jung was aware of the cultural ways and how bribes were a custom. She was very involved and therefore knew what was going on. Therefore, I believe she is responsible, as her actions speak themselves. . 2. Identify the role and responsibilities that an internal audit staff typically assumes in a company’s internal control system.



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An internal audit staff accepts some important parts and responsibilities. They can be found in audit section 322. The section lists the responsibilities of “providing analyses, evaluations, assurances, recommendations, and other information to the entity’s management and board of directors.” One significant responsibility the section discusses is the monitoring of an entity’s controls. Watching a business's controls take place is one of the most dependable ways to confirm that they are working properly. This will also give the auditor a better understanding of the internal controls and how they work. They will then review the efficiency of the internal control system. If the system is not efficient, they can make approvals on how to improve the internal controls. One significant responsibility that would have gone a long way in the Avon case is to make sure the company is obeying with all relevant laws and regulations. It is up to the internal auditor to make sure the company is not breaking any laws. 3. The IMA Statement of Ethical Professional Practice identifies four ethical standards, three of which are competence, confidentiality, and integrity (see “Ethics Center” on IMA website). Relying on those three ethical standards, evaluate the conduct of Avon’s internal



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audit staff during the company’s initial investigation of the questionable payments made by APC.



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The first ethical standard the IMA identifies is competence. The IMA defines this as maintaining professional leadership and expertise, performing duties in accordance with relevant laws, and providing accurate decision support information. There were some instances where Avon failed to meet the competence standard. Part of the competence standard states that the internal auditor must provide decision support information and recommendations. During the investigation the case does state that remedial measures were discussed and recommended, but they were never implemented. It should have been on the internal auditors to give detailed recommendations. The case also mentions that they failed to devote adequate funding, staffing and resources to Avon China. This is a huge lack of competence and shows poor professional leadership. The next ethical standard the IMA lists is Confidentiality. The IMA defines this as keeping information confidential except when disclosure is required, informing all relevant parties appropriate use of confidential information, and not using confidential information in an unethical or illegal way. The internal auditors at multiple times discovered that there were questionable payments occurring. These payments continued and the internal auditors new that they were continuing. They were instructed to keep this information and not inform the required parties. The CEO at the time Andrea Jung did not end up hearing about this until a year later. The third ethical standard mentioned is integrity. The IMA defines integrity as mitigating conflicts of interests, communicating with business associates to avoid conflicts of interest, refraining from conduct that would be unethical or discredit the profession, and contribute a positive ethical culture. One problem found in this case involving the integrity of the internal auditors was their response to the legal staff. The internal auditors should have known that the legal staff was trying to cover up the questionable payments that were occurring. This can easily fall under supporting an activity that could discredit their profession. They blindly followed the legal department’s conclusion that the FCPA is not under the scope of internal audit.



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4. Do you agree with Avon’s corporate legal staff that the potential FCPA violations were a legal issue and not and internal audit issue? Explain



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I don’t agree with Avon’s legal staff when they say that this is a strictly legal issue. Even though it’s a legal issue since Avon’s actions violated the FCPA, it’s also an internal audit issue because the internal audit team should have recognized that the money was being paid out. In a sense, this all stopped from the internal audit team ignoring notices and warnings that there was potential FCPA violations happening in their Chinese companies. If they had reported it right away, it would have not only been the right thing to do, but also could have eased the risks of it becoming a large legal issue. The internal audit team is responsible for failing to report such issues.



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5. The COSO internal control framework identifies five components of an entity’s internal control. Which, if any, of those five components of Avon’s internal control were flawed? Explain. If there were multiple flaws in Avon’s internal control, identify which one you believe was most serious and defend your choice.



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Information & Communication: This area of Avon’s internal control was flawed because after uncovering that they payments were in fact being made to Chinese government officials in 2005, Avon’s global internal audit staff thought about offering training to employees regarding the provisions of the FCPA, but it was never implemented due to budgetary limitations. Thus, Avon knew what was going on and they never took measures to inform their employees that their practices might be acceptable in their home country, however working for a U.S. Company, those bribes were not allowed. Monitoring: In December 2006, Avon’s global internal audit staff completed some follow-up work regarding this matter and discovered that the same questionable activity was still taking place. There was no monitoring or evaluations that the deficiencies within the internal control were changed to legal practices. Control environment: A major feature of this component is demonstrating a commitment to integrity and ethical values. This is this most serious flaw in Avon’s internal control because this encompasses all the above internal control flaws. Avon discovered that there were illegal bribes being paid to Chinese government officials, thought about informing their employees that is was unacceptable but then chose not to, and finally was surprised when the bribes continued for another year. Nowhere in this situation was integrity expressed as they let their employees continue illegal practices, they had no clue violated FCPA. Ethics were also completely disregarded after the company willingly allowed for the bribes to continue after discovering they were happening on two separate occasions.



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6. Avons independent audit firm did not report any material weaknesses in Avons internal control during the course of the FCPA scandal. Define a “material weakness” in internal control and explain whether or not you believe Avon had one or more material weaknesses in internal control during the course of the FCPA scandal



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According to Auditing Standard No. 5, a material weakness is “a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis”. This means that a material weakness is defined as an internal control or controls that doesn’t detect or prevent an exaggeration in which would have an influence on the company’s financial statements in a timely manner. Avon had more than just one material weakness within their internal controls throughout the FCPA scandal. One major weakness involved the lack of efforts Avon took to inform Chinese employees about the expectations in terms of bribes. Avon’s internal audit team discovered the “discretionary payments” made by the Corporate Affairs Department twice and still never took



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measures to properly train Chinese on American rules and regulations. Another material weakness involves the imbalance in power between the global internal audit team and the legal department. The internal audit staff were instructed by the legal team to hand over their findings, in which they took their report and decided that it was under their jurisdiction. However, who gave the power to legal to make that decision? Internal audit shouldn’t have to answer to legal. 7. If the citizens of certain foreign countries believe that the payment of bribes is an acceptable business practice, is it appropriate for U.S companies to challenge that belief when doing business in those countries?



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Due to performs and expectations within the United States, any American company with subsidiaries in foreign countries are likely to take by the rules and regulations of the FCPA. Therefore, it is proper for the United States companies to challenge those beliefs and implement trainings to inform foreign employees what the expectations are for working in a U.S. company even in a foreign country. Every business is permitted to do business their way in their country, as it is their norm. However, when doing business outside their countries, they should stick to their rules, cultural norms, and regulations. They shouldn’t practice other countries business rules, rather they should stick to their own. Ethics is a local practice and should remain even if a country goes outside their territory.



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