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ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 28, No. 3 DOI: 10.2308/iace-50470 2013 pp. 599–615 Nature’s Sunshine Products: Anatomy of an FCPA Failure Heather M. Hermanson and Audrey A. Gramling ABSTRACT: Recently, Walmart and several other large corporations have faced allegations of Foreign Corrupt Practices Act (FCPA) violations, subjecting the companies to large fines and stock price declines. This instructional assignment introduces students to the FCPA and provides an illustration of FCPA compliance problems at Nature’s Sunshine Products (Nature’s). Students will (1) discuss the development, requirements, and importance of the FCPA; and (2) identify red flags at Nature’s suggestive of FCPA noncompliance. This instructional assignment also includes a supplemental requirement whereby students are asked to identify ways that internal auditors could have assisted Nature’s in achieving FCPA compliance. This instructional resource, which could be used in undergraduate or graduate external or internal auditing courses or in managerial or forensics courses, provides instructors with a resource for integrating real-world problems involving international business issues into the course curriculum. Keywords: bribery; compliance; Foreign Corrupt Practices Act (FCPA); internal audit; international business issues; risk. CASE Nature’s Sunshine has always maintained the highest ethical standards in the way we conduct our business, just as we are committed to the highest quality in the products we make and sell. —Douglas Faggioli, President and CEO of Nature’s Sunshine Products, Inc. M r. Faggioli made these remarks as he accepted a 2004 ‘‘ 100 Best Corporate Citizens ’’ award from Business Ethics magazine. Nature’s Sunshine Products (Nature’s) received the ethics award four years straight: 2003–2006. During this period, Nature’s discovered its Brazilian subsidiary (Nature’s Brazil) was involved in a bribery scheme that exposed Nature’s to enforcement under the Foreign Corrupt Practices Act (FCPA). Just two years after lauding his company’s ethics, Mr. Faggioli and Nature’s CFO, Craig Huff, along with Nature’s, were named Heather M. Hermanson is a Professor at Kennesaw State University, and Audrey A. Gramling is a Professor at Bellarmine University . We acknowledge the helpful comments of James Rebele, Rich Clune, Cami Cotuna, Dana Hermanson, David Stout, our graduate forensic accounting and auditing students, the editor, associate editor, and two anonymous reviewers. Published Online: April 2013 599
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plaintiffs in a class action lawsuit. How did Nature’s go from winning repeated ethics awards to being subjected to Securities and Exchange Commission (SEC) enforcement violations? By completing this assignment you will examine the history and reporting requirements of the FCPA and its impact on operations at Nature’s. In particular, you will focus on the impact of Nature’s operating in a ‘‘ risky ’’ region and industry, and having a decentralized operating structure on Nature’s overall FCPA risk. Also, you will examine the personal implications of serving in a supervisory capacity and signing documents as an officer of a reporting entity. As presented in the following sections, it appears that Nature’s failed to implement a strategy for dealing with all three aspects of the FCPA: (1) ensuring that its employees knew that bribery is illegal, (2) requiring sufficient and accurate documentation for all transactions processed in the accounting system, and (3) developing a system of controls to detect or prevent bribery (and cover up) from occurring. COMPANY BACKGROUND Nature’s evolved from the kitchen table of Eugene and Kristine Hughes into a multi-million- dollar corporation in less than a decade. Eugene Hughes, an elementary school teacher suffering from a bleeding stomach ulcer, took a neighbor’s advice and found cayenne pepper powder to be a successful herbal treatment for his ulcer. Kristine suggested that Eugene encapsulate the powder, making it easier and more palatable to consume, and a new family business emerged. 1 The Hughes couple started selling their herbal ulcer treatment at a local health food store. Soon they added other herbal remedies to their products and recruited a large number of door-to-door salespeople. Through training and appearances at large sales conventions, the independent sales staff grew, and so did the company. Nature’s focused on achieving record sales targets. In 1978, the couple took the company public. They expanded the product offerings by adding water purifiers and personal care products to the mix of existing herbal products. By the end of its first decade, the company had annual sales of $25 million. The following decade, the company continued to grow, with over 300 products and 25,000 distributors. By 1987, Nature’s was the U.S.’s largest producer of encapsulated herbs. The focus then turned to growing sales beyond the U.S. The Hughes couple hired Alan Kennedy, a direct-marketing leader formerly at Avon, to take the company to the next level. Kennedy expanded the sales force to 100,000 independent sales representatives, and expanded operations into Mexico, Costa Rica, Venezuela, Colombia, and Brazil. By the early 1990s, sales exceeded $125 million (Grant 1996). As the global market for natural remedies grew during the 1990s, sales of encapsulated herbs dominated Nature’s. In 1994, Nature’s created a subsidiary in Brazil (Nature’s Brazil), which became its biggest foreign market. During 1999–2000, the Brazilian government reclassified certain herbal products as medicines. This reclassification required Nature’s Brazil to register many of its products as medicines. Nature’s Brazil was unable to register a large number of its products, so sales declined dramatically. This put pressure on Nature’s to get the products into Brazil. As a result, Nature’s Brazil made undocumented cash payments to customs brokers (some of which were ultimately received by customs officials) that allowed unregistered products to be imported and sold in Brazil. Essentially, Nature’s Brazil employees funneled bribes to officials through customs brokers, so the officials would allow the products to be sold in Brazil. Because bribery violates the FCPA, the company had to ‘‘ hide ’’ these payments through a series of journal entries designed to make the bribes appear to be legitimate expenditures (SEC 2009). 1 The company was initially formed as Hughes Development Corporation and then Amtec Industries Incorporated before the 1982 change to Nature’s Sunshine Products. Company history is adapted from the International Directory of Company Histories (Grant 1996) and SEC filings. 600 Hermanson and Gramling Issues in Accounting Education Volume 28, No. 3, 2013
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Review the case study and provide responses to Questions 1, 2 and 3 in a word document. Please list the work citations and have 4 pages for answer. Times New Romance 12, double space Please be serious to my work, thank you.
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