Case 1: Oxalite Inc.

A Cautionary Tale

1 A. The first internal control deficiency that stood out as I read Case 1 is that promotions should never
be merited on loyalty; they should be appropriately tied to an executive’s ability to improve company
performance in the long run. In addition, employees should not feel deterred from whistleblowing if
they happen to become aware of fraudulent activity. Employers should provide employee with an
avenue for reporting any activity that is deemed suspicious and that may or may not be fraudulent.
Discouraging the reporting of fraudulent activity or not fostering an environment for safe reporting are
grounds for fraud activity to be taking place.

While it is important for executives to publicly share the companies code of conduct it is equally
important for executives to share this code with employees of the company. After “looking behind the
curtain” it is evident that executives from the Asian offices committed fraud due to attributes that make
up the fraud triangle: perceived need (pressure), perceived opportunity, and rationalization. Lastly, if at
Board Meeting two-way discussion are not encouraged or if time runs out to cover topics such as ethics,
and compliance it gives no chance for the discovery of fraud.

B. According to Principle 1 a fraud risk management program should be in place. Without a written
guidance for the required performance of top executives or without explicitly stating the consequences
if fraudulent actions are taken to meet performance goals, then there are no metrics to discourage
fraudulent activity from taking place. To be in alliance with principle 2 corporations should promote
gatherings outside of regular meetings that bring together to executives, senior management, and line
managers to inform, promote, and create was of discouraging fraudulent activity. Finally, to be in
accordance with the fifth principle there need to be a system of reporting fraud by anyone from inside
or outside the organization.

2. External auditors could have alleviated fraudulent activity by encourage senior management to
establish a fraud risk management program. Furthermore, external auditors might have seen some of
the red flags taking place early on and could have recommend corrective action for management to
take. By seeing fraud activity early on and being able to react in a corrective manner gives rise to helping
implement preventative measure that Oxalite Inc could have abided by to lessen the amount of
fraudulent activity.

3. The internal audit function with senior management could have help create a “tone” staring with top
level management to discourage fraudulent activity. Internal auditors could have helped with spreading
the word across the company to make employees at every level aware of a risk management program
that encourages the reporting of fraud. Also the internal auditors might have been able to become
aware of red flags early on and relay to management recommendations on a course of action against
the individuals committing fraud.

4. The quote “poor culture leads to organizational disaster” highlights everything that is wrong with
Oxalite Inc fraudulent preventative measures throughout the organization. By not fostering a
comfortable environment for the reporting of fraud it also does not aid in discouraging the action from
taking place. Some employees might fall back on the rationalization aspect of the fraud triangle to justify
any wrong doing within the company, since there is no program in place to help reduce fraud. Without
top management feeling the need to personally communicate the company code of conduct to
employees though the help of management, supervisors, or other heads of authority employees are
disconnected with the responsibility of acting according to company standards. Thus Oxalite Inc should
start with senior management to develop a way of establishing a presence of safety that encourages
reporting on fraudulent activity.