Do you know the importance of having strong internal controls within an organization?
Every year, businesses collectively lose 5% of their revenue because of fraud. With fraud being so widespread, companies need strong internal controls, such as audit departments and employee fraud training.
Here at Gusto, we aim to empower accountants with the latest information and technology in the accounting industry. That’s why we, along with our partners at CPA Academy, delivered a presentation all about recent fraud cases. Our webinar, “Fraud: Wirecard’s Missing $2 Billion and Airbus’s Massive Bribes,” featured the founder of Comedy CPE, Greg Kyte, and Gusto’s own Editor-at-Large, Caleb Newquist. You can watch the entire presentation here.
In this article, we’ll share informative highlights from Greg and Caleb’s presentation, including details of the Airbus fraud, deferred prosecution agreements, types of corruption, and the importance of having robust internal controls.
Airbus fraud and deferred prosecution agreement
In the 2000s and 2010s, the European aerospace company Airbus bribed public officials in numerous countries. They turned themselves in for their crimes in January 2020, and they faced significant financial penalties to avoid prosecution:
“Airbus … has to pay $3.9 billion in penalties as part of the settlement, which is the largest bribery fine in world history. That happened in 2020. … Part of the bribery settlement allows Airbus to avoid criminal charges.”– Greg Kyte
Airbus entered into a deferred prosecution agreement, meaning that they didn’t undergo prosecution in exchange for a penalty, but they’re experiencing a probation period:
“[Airbus] entered into … [a] deferred prosecution agreement, which is effectively [a] probation for corporations where they pay a big fine and say, ‘Yeah, we’re going to be good from now on,’ and the [Department of Justice] says, ‘Okay, but if you’re bad during this time, then we’re going to go back and charge you with all this criminal stuff.’”– Caleb Newquist
Airbus’s internal audit department discovered the bribes. After the audit department reported it to the board of directors, the company turned itself in and prompted an investigation.
“Airbus turned itself in to the French authorities. … They were like, ‘Hey, our internal audit [department] thinks that we’re sending some bribes out, so can you do an investigation to see if they were right and then deal with us appropriately?’ … [Turning themselves in] saved them about $4 billion. They were estimating that the penalties would have been closer to $8 billion had they not turned themselves in.”– Greg Kyte
In addition to the penalties, their CEO, Tom Andrews, resigned. He wasn’t involved in the bribery, but, according to Andrews, he felt obligated to step down because the bribery occurred while he was the company’s chief executive officer.
Authorities found that the culprits in the bribery scandal were middle management employees rather than executives. Airbus employees used third-party hires to mediate the bribes:
“They went on for like eight or nine years, and there were … 16 countries in which bribes have been found to have occurred from Airbus. … They hired third-party bribery agents. … Somewhere in the middle of this company, people are going, ‘Hey, we need you to grease some wheels. How much is your contract … to go make the sale happen?’ … That contract would be paid as a bribe to the people that Airbus wanted to bribe.”– Greg Kyte
Mid-level employees in Airbus would utilize shell companies to remove themselves from being directly attached to the bribe, and they would pay third parties to bribe officials:
“Airbus [would] hire a company and say, ‘Hey, can you make some sales in Jakarta?’ [for example]. [The third-party company goes], … ‘I can make some sales in Jakarta. Here’s my price.’ [Airbus says], ‘That’s kind of steep, but if you can make it happen, we’re going to pay that.’ … Airbus was very aware of the fact that some of the money they were paying to these third parties [was] going to be going to bribes.”– Greg Kyte
Employees within Airbus clearly engaged in corruption and consciously bribed public officials, but the company was able to mitigate financial losses and avoid prosecution by coming forward with their crimes.
Corruption and bribery
The Airbus fraud case is a fascinating case study because it illustrates large-scale corruption. The Association of Certified Fraud Examiners (ACFE) notes that there are four different forms of corruption: conflicts of interest, illegal gratuities, economic extortion, and bribery. The ACFE stated that 42% of fraud cases involve some form of corruption.
Conflicts of interest involve someone brokering deals for a company in which they stand to benefit:
“The best way to think about [conflicts of interest] is if you own a company and [your] company … [buys] a vendor, … [and your] company pays a whole lot more for the [vendor’s] stuff because it’s coming from your company and you approve that contract, that’s corruption.”– Greg Kyte
If you’re working for or own a company and you approve a sale from a vendor in which you stand to profit, you are engaged in corruption. You don’t have the company’s best interest at heart—you’re approving a sale out of self-interest.
Illegal gratuities occur when a company rewards the actions or non-action of a public official. For example, if a company “gifted” a gold watch to a public official after they pushed legislation that benefits the company, that would be an illegal gratuity.
Economic extortion occurs when a person or company threatens or intimidates another party to receive money.
Bribery occurs when you offer money or non-monetary compensation in exchange for a specific outcome. Airbus committed bribery by paying officials through a third party, and they also bribed people through other forms of compensation:
“Airbus paid $50 million to sponsor a sports team that was owned by an airline executive in order to win a contract for 180 planes. That’s a lot of planes that they sold, and it just cost them $50 million to sponsor [the] sports team. Airbus also paid the wife of an airline executive as a consultant on an aircraft contract despite her having no experience in aviation.”– Greg Kyte
Airbus engaged in bribery in order to receive specific outcomes from officials and airline executives. Fortunately, Airbus was able to mitigate the severity of its financial losses because of its internal audit department.
Internal audit departments and fraud training
A significant percentage of corporate fraud cases are uncovered through businesses’ internal audit departments. Internal audit departments are critical for reducing the severity of financial losses:
“[According to the ACFE], 15% of fraud cases are detected by [an] internal audit, and having an internal audit department reduces fraud losses by 50%. … If you have an internal audit department, it’s not going to make it so that you don’t have frauds, but … if you do have fraud [within your company], your loss from that fraud is going to be a whole lot smaller than if you didn’t have it.”– Greg Kyte
Businesses can further reduce the severity of fraud cases by implementing additional internal controls. The ACFE stated that a third of all fraud cases result from poor internal controls. A critical internal control accounting firms and other businesses can implement is fraud training.
“If you have fraud training for employees, that reduces your fraud losses by 33%, which is super important when it comes to corruption.”– Greg Kyte
Although some employees within Airbus were conscious of their bribery tactics, many people don’t realize what qualifies as bribery. Greg discussed how he didn’t know what qualified as corruption and bribery before becoming an accountant. He asked an accounting friend if she received gifts in exchange for auditing an outdoor equipment company:
“She was like, ‘We can’t take any kind of things from our clients.’ … I didn’t know that was against the rules, and there’s a lot of rank-and-file people who work at companies [who] don’t know [what qualifies as bribery]. … Train your people on what that is, and then you’re going to reduce your fraud losses by 33%.”– Greg Kyte
Encourage your accounting firm to implement fraud training to decrease the likelihood of becoming embroiled in a fraud scandal. Additionally, if you advise businesses, you can encourage them to implement anti-fraud policies and fraud training for themselves.
Learn more about fraud
The Airbus bribery scandal demonstrates the importance of a business’s internal controls. If their internal audit department hadn’t discovered the bribery, Airbus’ losses would have been around $8 billion. Fortunately, the company came forward to French authorities and encouraged an investigation. You can decrease the likelihood of your firm and your business clients committing fraud by implementing strong internal controls, such as an internal audit department and fraud training. Also, be sure to look into Part One of this webinar article series.
If you’re looking for more ways to improve your accounting firm, consider partnering with Gusto. When you become a Gusto partner, you get exclusive access to tools and resources to support your clients into the future. Streamline payroll and benefits, and start advising your clients in valuable new ways. Join Gusto’s Partner Program today.
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