CASE 3.9
Walmart de Mexico
Sam Walton was born on March 29, 1918, in Kingfisher, Oklahoma,a small town 50 miles northwest of Oklahoma City. Sam’s father, afarmer, struggled to support his family during the GreatDepression. The Walton family hopscotched around the country beforefinally settling in Missouri where Sam graduated from high school.After obtaining a degree in economics from the University ofMissouri, Sam went to work as a management trainee with J.C. PenneyCompany at a monthly salary of $75. Following the outbreak of WorldWar II, Sam enlisted in the U.S. Army and served until 1945.
Upon returning to civilian life, Sam Walton borrowed money fromhis father-in-law to purchase a small retail store in northernArkansas. Walton purchased additional stores in Arkansas, Kansas,and Missouri over the following years. In 1962, Walton opened thefirst store branded as a “Wal-Mart” in Rogers, Arkansas, 10 milesfrom Bentonville, which would become the company’s corporateheadquarters. Walmart expanded its operations across thecontinental United States over the next three decades. In 1992, theyear Sam Walton died, Walmart surpassed Sears to become the largestretailer in the United States.
By 2012, Walmart employed over two million people, making it theworld’s largest private employer. In that same year, four membersof Sam Walton’s family ranked among the top 10 of the Forbes 400,the 400 wealthiest individuals in the United States.1 Thoseindividuals, with a collective wealth of more than $100 billion,included his three surviving children and the widow of his son,John Walton, a former Green Beret who was awarded the Silver Starfor heroism during the Vietnam War.
The Lowest Prices Anytime, Anywhere!
Walmart’s incredible growth was due to the hypercompetitivebusiness model developed by Sam Walton. The central tenet ofWalton’s business plan was the motto that he adopted for hiscompany, “The Lowest Prices Anytime, Anywhere!” Walton reasonedthat if he undercut the prices charged by his competitors, hiscompany would generate sufficient sales volume to realizesignificant economies of scale. The most important of thoseeconomies of scale would be purchasing merchandise in bulkquantities at discounted wholesale prices that were not availableto other retailers.
Walton’s simple business plan worked to perfection as Walmartroutinely dominated the geographical markets that it entered. Theultimate result of Walmart’s alleged “predatory” business model wasto drive large numbers of small retailers, including pharmacies,groceries, and general merchandise stores, out of business. In anop-ed piece written for the New York Times, Robert Reich, formerSecretary of the U.S. Department of Labor, observed that Walmart“Turns main streets into ghost towns by sucking business away fromsmall retailers.”2
In the early 1990s, Walmart became an international company whenit opened retail outlets in Mexico and Canada. After replicatingits successful business model in those countries, Walmart extendedits operations outside of North America. Within two decades,approximately one-fourth of the company’s sales were produced byits 6,000 retail stores in more than two dozen countries scatteredaround the globe.
To date, Mexico has easily been Walmart’s most successfulinternational venture. Walmart quickly seized control of the retailindustry in that country by taking away large chunks of a marketshare previously held by domestic retailers that had operated inthe country for decades. By 2012, Walmart’s Mexican subsidiary,Walmart de Mexico, was Mexico’s largest retailer and that nation’slargest private employer.
Bribery Allegations
In April 2012, an article published by the New York Times, “VastMexico Bribery Case Hushed Up by Wal-Mart After Top-LevelStruggle,” reported that Walmart had routinely bribed governmentofficials to obtain building permits and other business licensesrequired by Mexican law. A former Walmart de Mexico officertestified that the bribes allowed the Mexican subsidiary “to buildhundreds of new stores so fast that competitors would not have timeto react.”3 The Pulitzer Prize-winning article in the New YorkTimes, which was the culmination of an 18-month long investigation,insisted that the bribes violated the Foreign Corrupt Practices Actof 1977 (FCPA). The article also accused Walmart’s seniormanagement of concealing those bribes from U.S. law enforcementauthorities.
Walmart’s senior executives learned of the bribes being paid bytheir company’s Mexican subsidiary in late 2005 and immediatelylaunched an investigation. “Wal- Mart dispatched investigators toMexico City, and within days they unearthed evidence of widespreadbribery. . . . They also found documents showing that Wal-Mart deMexico’s top executives not only knew about the payments but hadtaken steps to conceal them from Wal-Mart’s headquarters inBentonville, Ark.”4
Following the discovery of the bribes, Walmart’s seniorexecutives disagreed on how to address the problem. The New YorkTimes article reported that Walmart’s management ultimately decidedto resolve the matter quietly and internally. That goal wasachieved by placing the Walmart de Mexico executive who hadallegedly authorized the bribes in charge of the ongoinginvestigation of them. The investigation ended shortly thereafter.The subsequent internal report noted that “There is no clearevidence or clear indication of bribes paid to Mexican governmentauthorities with the purpose of wrongfully securing any licenses orpermits.”5
The former FBI agent who served as Walmart’s director ofcorporate investigations found the internal report inadequate. “Thereport was nonetheless accepted by Wal- Mart’s leaders as the lastword on the matter.”6 Walmart’s senior executives informed the U.S.Department of Justice that their company may have violated the FCPAonly after they had learned of the ongoing investigation by the NewYork Times.
The author of the New York Times article charged that Walmart’s“relentless pursuit of growth” had compromised its commitment tothe “highest moral and ethical standards.”7 A follow-up article inthe New York Times in December 2012, “How Wal-Mart Used Payoffs toGet Its Way in Mexico,” described the methods used by
Walmart de Mexico to gain an unfair advantage over itscompetitors. That article also dismissed the suggestion thatWalmart was a “victim” of a corrupt business culture in Mexico thatobligated companies to bribe governmental officials.
The Times’ investigation reveals that Wal-Mart de Mexico was notthe reluctant victim of a corrupt culture that insisted on bribesas the cost of doing business. Nor did it pay bribes merely tospeed up routine approvals. Rather, Wal-Mart de Mexico was anaggressive and creative corrupter, offering large payoffs to getwhat the law other-wise prohibited. It used bribes to subvertdemocratic governance—public votes, open debates, transparentprocedures. It used bribes to circumvent regulatory safeguards thatprotect Mexican citizens from unsafe construction. It used bribesto outflank rivals. 8
After reporting the potential FCPA violations to the U.S.Department of Justice in December 2011, Walmart instructed itsaudit committee to use “all resources necessary” to “aggressively”investigate the company’s “FCPA compliance” not only in Mexico butworldwide. The audit committee hired KPMG and a major law firm toassist in the forensic investigation.10 Walmart’s board alsocreated a network of international “FCPA compliance directors” thatwould report to a Bentonville-based “Global FCPA ComplianceOfficer.” In an April 2012 press release that addressed the briberyallegations made by the New York Times, Walmart officials declaredthat “We will not tolerate non-compliance with the FCPA anywhere orat any level of the company.”11
Since 2012, Walmart officials have discussed the status of theongoing internal and external FCPA investigations in theircompany’s periodic registration statements filed with the SEC.Those disclosures have consistently warned the investing andlending community that it is “probable” that Walmart willeventually incur a loss stemming from the alleged FCPA violationsbut that the amount of the loss can- not be “reasonably estimated.”Nevertheless, company management reports that the expected loss isunlikely to have a “material adverse” effect on Walmart’soperations. The company also regularly discloses the cumulativecost that it has incurred in connection with its internal FCPAinvestigation. By early 2016, that figure had topped $600 million.Finally, the company’s interim reports on the FCPA matter revealthat potential FCPA violations have been uncovered within thecompany’s operations in countries other than Mexico, includingBrazil, China, and India.
There has been widespread speculation in the business pressconcerning the ultimate outcome of the joint SEC and U.S.Department of Justice investigation of Walmart’s alleged FCPAviolations. Much of that speculation has focused on the magnitudeof the monetary fines the federal agencies might levy on Walmart.Many observers believe that those fines could surpass the $450million in FCPA-related fines imposed on the German engineering andelectronics firm Siemens AG in 2008.
The FCPA: From Watergate to Walmartgate
Walmart’s widely publicized FCPA problems refocused attention onthe origins and nature of that federal statute. The FCPA was aby-product of the scandal-ridden Watergate era of the 1970s. Duringthe Watergate investigations, the Office of the Special Prosecutoruncovered large bribes, kickbacks, and other payments made by U.S.corporations to officials of foreign governments to initiate ormaintain business relationships.
Widespread public disapproval compelled Congress to pass theFCPA, which criminalizes most such payments.12 The FCPA alsorequires U.S. companies to maintain internal control systems thatprovide reasonable assurance of discovering improper foreignpayments. In a 1997 Accounting and Auditing Enforcement Release,the Securities and Exchange Commission (SEC) highlighted theimportance and need for the accounting and internal controlrequirements embedded in the FCPA.
The accounting provisions [of the FCPA] were enacted by Congressalong with the anti-bribery provisions because Congress concludedthat almost all bribery of foreign officials by American companieswas covered up in the corporations’ books and that the requirementfor accurate records and adequate internal controls would deterbribery.13
In the two decades following the passage of the FCPA, the SECseldom charged U.S. companies with violating its provisions. Infact, in 1997 when the SEC filed FCPA- related charges againstTriton Energy Ltd., an international oil and gas explorationcompany, more than 10 years had elapsed since the federal agency’sprior FCPA case. At the time, the SEC conceded that the filing ofthe FCPA charges against Triton Energy was intended to send a“message” to U.S. companies that “it’s not O.K. to pay bribes aslong as you don’t get caught.”14 At the same time, an SECspokesperson predicted that his agency would be filing considerablymore FCPA charges in the future.15
The SEC was true to its word. By 2015, the SEC was investigatingpotential FCPA violations by 74 public companies. Those companiesincluded such prominent firms as Bristol-Myers Squibb, CiscoSystems, Halliburton, United Technologies, and Wynn Resorts. TheWorld Bank has reinforced the need for the SEC and other global lawenforcement agencies to rein in corporate bribery since itestimates that more than $1 trillion in bribes are paid annually inthe U.S. alone.16
The FCPA is not without its critics. Many corporate executiveshave complained that the federal statute places U.S. multinationalcompanies at a significant competitive disadvantage tomultinational firms based in countries that have do not have acomparable law. Those same executives also find the recent“overzealousness” in prosecuting alleged FCPA violatorsinappropriate. “We are seeing companies getting scooped up inaggressive enforcement actions and investigations. A culture ofoverzealousness has grabbed the Justice Department. The last time Ichecked, we were not living in a police state.”17 In response tothat complaint, a representative of the U.S. Department of Justiceobserved, “This is not the time for the United States to becondoning corruption. We are a world leader and we want to doeverything to make sure that business is less corrupt, notmore.”18
To date, the FCPA has not had a significant impact on theauditors of SEC registrants. An audit firm has been named in onlyone FCPA complaint filed by the SEC. In that case, a representativeof KPMG’s Indonesian affiliate was charged with paying a bribe to agovernmental official to reduce the tax bill of its client. TheKPMG affiliate settled the charge by agreeing to a cease and desistorder but was not fined.19 As the FCPA complaint against Walmartunfolded, a reporter for the Reuters international news servicenoted that it was unlikely that Ernst & Young, Walmart’slongtime auditor, would become a target of that investigation.
In fact, the FCPA has created a new revenue stream for the majoraccounting firms that serve as the auditors of most SECregistrants. For example, Deloitte’s website lists “Foreign CorruptPractices Act Consulting” as an ancillary service that it providesto public companies.
Our Foreign Corrupt Practices Act (FCPA) Consulting practicehelps organizations navigate FCPA risk and respond to potentialviolations. Utilizing the network of Deloitte member firms andtheir affiliates including their forensic resources in the UnitedStates, Canada, Europe, Russia, Africa, Latin America, and Asia, wehave worked on a variety of FCPA engagements includinginvestigations, acquisition due diligence, and compliance programimplementation and assessments in over fifty countries for some ofthe world's leading companies
Identify control activities that Walmart could have implementedfor Walmart de Mexico and its other foreign subsidiaries tominimize the likelihood of illegal payments to governmentofficials. Would these control activities have beencost-effective?
What responsibility, if any, does an accountant of a publiccompany have when he or she discovers that the client has violateda law? How does the accountant’s position on the company’semployment hierarchy affect that responsibility, if at all? Whatresponsibility does an auditor of a public company have if he orshe discovers illegal acts by the client? Does the auditor’sposition on his or her firm’s employment hierarchy affect thisresponsibility?
Does an audit firm of an SEC registrant have a responsibility toapply audit procedures intended to determine whether the client hascomplied with the FCPA? Defend your answer.
If the citizens of certain foreign countries believe that thepayment of bribes is an acceptable business practice, is itappropriate for U.S. companies to challenge that belief when doingbusiness in those countries? Defend your answer.
