CASE 3.9
WAL-MART DE MEXICO
Synopsis
When Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977, corporate accountants
and independent auditors feared that the new law would create major headaches for them. That fear
was unwarranted . . . at least for several years. During the first two decades that the FCPA was in
effect, the Securities and Exchange Commission (SEC) initiated only a handful of enforcement cases
related to that federal statute. During the mid-1990s, however, growing concern that U.S.
multinational companies were routinely paying bribes and kickbacks to officials of foreign
governments refocused the SEC’s attention on the FCPA.
Wal-Mart de Mexico executive who had allegedly authorized the bribes was placed in charge of the
investigation. A Pulitzer Prize-winning article in The New York Times published in April 2012
accused Wal-Mart executives of concealing the bribery. A year earlier, those executives had re–
opened their investigation of the bribery allegations after learning of the ongoing independent
investigation of them by the prominent newspaper.
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Wal-Mart de Mexico—Key Facts
1. Under the leadership of Sam Walton, Wal-Mart became the largest retailer in the United States
2. In the early 1990s, Wal-Mart became an international company when it moved into Canada and
3. A Pulitzer Prize-winning article published in 2012 by The New York Times alleged that Wal-
4. The New York Times article, and a follow-up article published later in 2012, alleged that the
5. The FCPA prohibits U.S. firms from making bribes, kickbacks and similar payments to officials
6. After learning of the ongoing investigation by The New York Times in 2011, Wal-Mart officials
re-opened their investigation of the alleged bribery payments by Wal-Mart de Mexico.
7. Shortly after the publication of the initial article in The New York Times that reported the bribery
8. To date, several parties have speculated that if the bribery allegations are proven, the fines
9. During the first two decades after the passage of the FCPA, the SEC rarely filed charges against
U.S. companies under that federal statute; the federal agency became much more aggressive in
pursuing FCPA violators in the late 1990s.
10. In 2012, when the SEC was investigating the alleged FCPA violations by Wal-Mart, the federal
agency reported that it had more than 70 FCPA investigations under way.
Case 3.9 Wal-Mart de Mexico 223
Instructional Objectives
1. To acquaint students with accounting and control issues relevant to the Foreign Corrupt Practices
Act.
2. To make students aware that client executives may take extreme—and illegal—measures to
Suggestions for Use
In my auditing courses, I integrate this case with coverage of internal control issues. The FCPA
prohibits SEC registrants from making illicit payments (bribes, kickbacks, etc.) to officials of foreign
governments to either establish or maintain business relationships. This federal statute also requires
SEC registrants to establish internal control systems that provide reasonable assurance of detecting
such payments. The increasing trend toward multinational operations by U.S. firms and the SEC’s
commitment to pursing alleged violators of the FCPA mandate that accountants and auditors be
Suggested Solutions to Case Questions
1. In retrospect, the most important control policy Wal-Mart could have established for its foreign
subsidiaries would have been to inform those subsidiaries’ executives and employees that the
payment of bribes was strictly prohibited and that anyone who violated that policy would be fired
immediately. Reports to date suggest that Wal-Mart’s top management was initially unaware that
their Wal-Mart de Mexico subordinates were making unlawful payments to Mexican governmental
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Another control policy or activity that Wal-Mart could have implemented when it began moving
into international markets was the control policy that it ultimately adopted in 2012 after the initial
bribery allegations were reported by The New York Times. That policy involved the creation of a
FCPA compliance office in the company’s corporate headquarters. The establishment of this office
and the accompanying network of international FCPA compliance directors signaled that Wal-Mart’s
top management took their FCPA-related responsibilities very seriously. If this control mechanism
had been in place during the development of Wal-Mart de Mexico, the management team of that
subsidiary would have been less inclined to engage in activities that violated the FCPA.
2. The accountant’s first responsibility is to report the illegal act to his or her superior. Hopefully,
that superior will then take the proper steps to ensure that the situation is dealt with correctly.
However, what if the superior does not take appropriate action? Alternatively, what if the
accountant does not feel “comfortable” informing his or her superior of the matter? Possibly, the
accountant’s discomfort stems from the involvement or potential involvement of his or her superior
in the illegal act. Depending upon the severity of the illegal act, the accountant should probably
consider several alternative courses of action. Clearly, one of these alternatives would be obtaining
Case 3.9 Wal-Mart de Mexico 225
action, such as, doing nothing (probably the least preferable option), discussing the matter with an
audit partner not assigned to the engagement, or discussing the matter with external legal counsel.
Similar to private accountants, the employment rank of independent auditors impacts the degree
of responsibility they assume for dealing with illegal acts perpetrated by a client. The suggested
solution to Question 3 discusses auditors’ general responsibility for detecting illegal acts by a client.
For any given audit, the ultimate responsibility in that context rests with the audit engagement
partner. Recognize that in certain cases an audit engagement partner and/or his or her proxy may be
required to disclose the illegal act to the Securities and Exchange Commission. Finally, AU 317.23
of the PCAOB’s Interim Standards identifies four other situations in which an auditor may be
required to divulge an illegal act by a client to a third party: in an 8-K statement reporting an auditor
change, in response to a successor auditor’s inquiries regarding the client, in response to a subpoena,
or to a government agency from which the client receives financial assistance.
“Specifically, the answer does not address an auditor’s duties to make disclosure to the SEC
under Section 10A of the Securities Exchange Act of 1934. Section 10A(b) requires an audit
firm that detects or otherwise becomes aware that an illegal act has, or may have, occurred to
determine whether the company has taken appropriate remedial measures and, if not, to report to
the SEC in certain situations.”
3. Violations of the FCPA would likely qualify as “illegal acts” by an audit client. The degree of
responsibility that an auditor assumes for detecting illegal acts by a client depends upon the nature of
those acts as discussed by AU Section 317, “Illegal Acts by Clients,” of the PCAOB’s Interim
Standards. That section distinguishes between an auditor’s responsibility to detect illegal acts that
AU 317.05 notes that an auditor’s responsibility to detect and report “misstatements resulting
from illegal acts having a direct and material effect on the determination of financial statement
amounts is the same as that for misstatements caused by error or fraud as described in Section 110.”
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In turn, AU Section 110.02 of the PCAOB’s Interim Standards notes that an auditor “has a
responsibility to plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether caused by error or fraud.”
4. Even when doing business in other countries, U.S. companies and employees of those companies
must uphold U.S. laws and the legal responsibilities imposed on them by U.S. citizenship. By