The case of the United States vs. Avon Inc. reveals some factors that affect fraud prevention systems in the United States. This case involves fraudulent activities that took place in a foreign subsidiary of the U.S. Company. Upon detection internally, senior management and attorneys failed to address the issue and stop it from reoccurring. It took external investigating authorities, the Federal Bureau of Investigation, to stop it. The accused company ended up pleading guilty to fraud charges and conspiracy to violate the books. The accused firm was charged $135,013,013 as penalties, disgorgement and prejudgment interest (The United States vs. Avon Products, Inc., 2014). In this case-analysis, several options arise, and they are discussed for preventing such fraud where companies cook the books to disguise illegal payments for receiving preferential treatment.
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The Avon fraud was detected when authorities were auditing accounting books for the company. A review of several years of accounting records revealed the abnormality in payments. Although Avon China executed the fraud, they affected Avon Inc. because it was the parent company, and all books were consolidated. The liability of crime was with Avon Inc., for failing to provide sufficient internal controls in recording of transactions, maintaining accountability for assets, governing access to assets and ensuring that records for assets compared with available assets. Without external auditors, detection of the crime would be impossible. Avon’s internal auditors had insufficient resources in time, money and staffs to conduct a thorough work when scrutinizing Avon China’s books.
The focus on detection of Foreign Corrupt Practices Act (FCPA) violations led to the unearthing of the fraud. A review of the circumstances leading to the fraud resulted in the unearthing of related crimes such as AVON’s failure to take necessary steps to address corruption issues in Avon China after its executives and attorneys learned about illegal provision of cash, meals, gifts, travel and entertainment to government officials.
It is illegal for companies to cook books and hide improper payments. The law punishes them with penalties and sometimes imprisonment. The aim of the law is to ensure that there is order in the business environment. Order arises from fair distribution of opportunities. Bribery and other forms of undercutting in business lead to unfair advantages, and when condoned, they make a particular market less attractive to new investors. They also lead firms to charge more than a fair market price for their goods and services (Office of Public Affairs, 2014).
The best prevention strategy for such crimes is pro-active investigations. Authorities can follow any lead on companies that appear to break the law and then consider other firms that are also likely to use the same loopholes. For example, in this case of Avon, they can also look at other companies with subsidiaries overseas that are likely to offer gifts and other non-business payments in return for favorable treatment by authorities in the marketplace.
A central unit or office within corporations that handles fraud detection is necessary. Currently, for many companies, different departments are working in detached ways to prevent criminal conduct. Organizations should delegate the management of anti-fraud activities to business unit management and then their efforts should be coordinated at the executive level. This will aid in establishing appropriate policies and enforcing them throughout the organization (Bishop, 2004).
Another strategy is to reduce or eliminate inexperience risks and human bias when addressing fraud risks. The fact that fraud at Avon China continued without intervention from Avon Inc. shows that lack of direct exposure to fraud activities can be hampering prevention efforts. It is unlikely that senior managers at any firm will faithfully access the risk to cook books when the risk event involves their actions (Bishop, 2004). Therefore, the approach should start with the development of an appropriate risk assessment that does not have bias loopholes. Independent external assessors can be used. Any identified loophole should then be investigated and sealed even before a particular fraud is detected. Besides, there should be regular checks on the identified gaps to discover any alternative methods that fraudsters may use within a company to cheat the system. Most importantly, collusion with senior managers and the auditing departments must be regularly investigated.
Avon Inc. ended paying the actual cost of the fraud that it had committed, which was $8 million, given as gifts and other inappropriate offerings to government authorities. After pleading guilty to its criminal charges and intentions, it ended up facing a penalty bill of $135,013,013. In addition to reputation damage and other unseen business losses, the firm is paying dearly. If management had been presented with this outcome of this case when it first learned of the crime, it would have taken measures to prevent the high cost of compliance. The case reveals the approach that proactive fraud prevention strategy can adapt to increase compliance with the law. Currently, a major hindrance to fraud prevention is lack of coordination and centralized responsibility for fraudulent activities within organizations.
Bishop, T. J. (2004). Preventing, deterring, and detecting fraud: What works and what doesn’t. Journal of Investment Compliance, 5(2), 120 – 127.
Office of Public Affairs. (2014). Avon China pleads guilty to violating the FCPA by concealing more than $8 Million in gifts to Chinese officials. Web.
United States vs. Avon Products, Inc., 1:14-cr-00828-GBD (2014). Web.