Case 3.4 Triton Energy Ltd.

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CASE 3.4

TRITON ENERGY LTD.

Synopsis
When Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977, corporate
accountants and independent auditors feared that the new law would add significantly to their
litigation problems. 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,
growing concern that U.S. multinational companies were routinely paying bribes and kickbacks to
officials of foreign governments refocused the SECs attention on the FCPA. In 1997, the SEC
issued a series of enforcement releases involving Triton Energy Ltd., a Dallas-based oil
exploration company with operations scattered across the globe. These releases sanctioned the
company and several of its executives for making numerous illicit payments to officials of foreign
countries. Representatives of the SEC noted that the Triton case was intended to send a
message to corporate executives. The federal agency pledged to prosecute many more FCPArelated cases in the future. This case raises internal control, auditing, and ethical issues stemming
from Tritons illegal activities that were documented in the SEC enforcement releases. Specific
issues raised in the case questions include, among others, factors complicating the audits of
multinational companies and auditors responsibility to detect and report illegal acts.

146 Case 3.4 Triton Energy Ltd.

Triton Energy Ltd.Key Facts
1. The FCPA of 1977 prohibits U.S. firms from making bribes, kickbacks and similar payments to
officials of foreign governments to initiate or maintain business relationships and requires U.S.
firms to maintain internal control systems that provide reasonable assurance of discovering such
payments.
2. Triton Energys executives employed aggressive strategies to contend with much larger and
better financed competitors, including fostering close relationships with officials of foreign
countries in which their company had operations.
3.
Throughout 1989 and 1990, Triton Indonesia made numerous unlawful payments to
Indonesian governmental officials, each of which was sanitized by the units accounting staff.
4. When he was informed of the unlawful payments, Triton Energys president told a Triton
Indonesia officer that such payments had to be done in certain countries.
5. After being fired for refusing to sign Triton Energys 1989 10-K, the companys former
controller revealed the illicit payments that Triton had made to officials of foreign governments.
6. Two former Triton accountants, an internal audit director and an accountant with Triton
Indonesia, corroborated the allegations made by Triton Energys former controller.
7. During the planning phase of the 1991 Triton audit, a Peat Marwick auditor learned of an
internal audit memo that supposedly documented the unlawful activities of Triton Indonesia.
8. Triton officials told Peat Marwick representatives that all copies of the internal audit memo
had been destroyed and then refuted the principal allegations reportedly included in that memo.
9. The SEC eventually charged Triton and six of its executives with violating the FCPAs
antibribery, accounting, and control provisions and fined the company and two Triton Indonesia
executives.
10. The SEC announced that the penalties imposed in the Triton case were intended to send a
message to corporate executives that violations of the FCPA would not be tolerated.

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Instructional Objectives
1. To acquaint students with accounting and control issues posed by the Foreign Corrupt
Practices
Act.
2. To make students aware that client executives may take extremeand illegalmeasures to
sidestep governmental regulations.
3. To examine auditors responsibility to detect and report illegal acts by a client.
4. To illustrate the need for auditors to thoroughly investigate questionable transactions
discovered during an audit.
5. To illustrate the serious implications that the absence of an adequate degree of control
consciousness in a company's culture can have for the reliability of its financial records.
6. To identify key challenges posed by audits of multinational companies.
Suggestions for Use
In my auditing courses, I integrate this case with coverage of internal control issues. This case
focuses principally on violations of the Foreign Corrupt Practices Act (FCPA) of 1977 by
executives of Triton Energy and its wholly-owned subsidiary, Triton Indonesia. The FCPA
prohibits U.S. firms from making illicit payments (bribes, kickbacks, etc.) to officials of foreign
governments to either establish or maintain business relationships. This federal statute also
requires all U.S. firms to establish internal controls that provide reasonable assurance of detecting
such payments. The increasing trend toward multinational operations by U.S. firms mandates that
accountants and auditors be aware of the important accounting, control, and ethical issues posed
by such operations. This case provides students with such an awareness.
Multinational companies often face a difficult dilemma: either pay up or pack up. Triton
management chose to pay up and to conceal its illicit payments to officials of the Indonesian
government. I believe that eye-opening cases such as this can dissolve students natural tendency
to be naive when it comes to expectations of financial statement fraud. By discussing these types
of cases in class, students should be better prepared to cope with comparable situations later in
their own careers.
An effective method of initiating class discussion of this case is to have students role-play key
events within the case. For example, I have had students role-play the interaction between Triton
Indonesias controller and a senior Triton Indonesia executive who has just been informed of his
units tax deficiencies by the Indonesian auditors. The senior executive wants to contact the
companys liaison, Roland Siouffi, and instruct him to make the appropriate arrangements to
resolve the matter. The controllers responsibility is to dissuade the senior executive from
handling the matter in that unethical and illegal manner. Instructors can also develop a roleplaying exercise
involving Triton Energys controller and Triton Energys president. As noted in this case, the
controller was fired by the companys senior managementapparently Triton Energys president

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after he refused to sign off on the companys 1989 10-K because it failed to disclosed the unlawful
foreign payments made by the company. Finally, another role-playing scenario I have used
involves Tritons independent audit firm, Peat Marwick, and officers of Triton Indonesia. In this
scenario, a Peat Marwick auditor questions Triton Indonesia officers regarding the internal audit
memo that documented the fraudulent payments made by Triton to government officials. If you
have used role-playing exercises in your classes, you realize that they provide an excellent
opportunity to inject students into a real-world atmosphere in which they have to wrestle directly
with important technical and ethical issues. These exercises tend to provide students with a much
better appreciation of the types of pressures and challenges that auditors and accountants face in
their work environments.
There are two facets of this case that I hope arise each time it is discussed. (If students do not
raise these items, I try to subtlety direct their attention to them.) The first of these items is the
statement by Triton Energys president that illicit payments to officials of foreign governments
had to be done in certain environments. I believe students need to recognize that at least some
corporate executives adopt that fatalistic attitude toward doing business in foreign countries.
Such an attitude has a pervasive and negative impact on a given companys control environment.
The other facet of the case that I want students to explicitly address is the effort of three
accountants to do the right thing. Triton Energys controller, its internal audit director, and a
Triton Indonesia accountant each stood their ground when tested. Each of these individuals
either resigned or was fired. Hopefully, this case helps convince students that losing a job is a
small price to pay for refusing to behave unethically and/or illegally.
Suggested Solutions to Case Questions
1. Listed next are key factors that pose challenging problems on audits of multinational
companies.
a. Auditors will likely encounter different accounting and financial reporting treatments for
similar transactions and accounts. If consolidated financial statements are to be prepared
for the given entity, auditors must ensure that the home countrys accounting and
financial reporting standards are properly applied to the clients consolidated financial
statement data.
b. A related problem is the need to audit the conversion of transaction and account balance
data from one or more currencies to the currency of the home country.
c. The audit of a multinational client is also more difficult to administer and control. For
example, the audit of a large multinational client may require several teams of auditors
assigned to different operating units of the client scattered across several countries. Even
with the help of e-mail and other Internet resources, coordinating widely dispersed teams
of auditors can be a challenging task.
d. Quite often, the most challenging feature of multinational audits is the differences in
cultural norms across the countries in which a clients operations are located. Cultural and
communication barriers between auditors and client personnel can complicate even the
simplest audit tasks. Assigning auditors from a local affiliate or a local office of the given
audit firm can sometimes eliminate or at least significantly reduce the problems posed by
language and cultural differences.
2. In retrospect, the most important control policy Triton Energy could have established for its

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foreign subsidiaries would have been to inform employees that the payment of bribes was strictly
prohibited and that anyone who violated that policy would be fired immediately. Triton Energys
executives did not instruct their subordinates to make unlawful payments to Indonesian
authorities. However, because the executives apparently did not explicitly discourage such
payments, they created an environment in which these payments were more likely to occur. Triton
Energys executives also should have insisted that each subsidiarys disbursements be made by
check, supported by appropriate documentation, and authorized by the appropriate level of
management. To reinforce this control policy, Triton Energy should have required periodic tests
of disbursements by internal auditors. Deviations from operating policies and procedures
discovered by the internal auditors should have been dealt with decisively and appropriately by
Triton Energys management. [Recognize that Triton Indonesia did vouch disbursements with
supporting documentation and that the entitys disbursements and other transactions were
regularly tested by internal auditors. However, these control activities were ineffective, as
documented in the case, principally because of the poor control environment within the company.]
The cost-effectiveness of control activities is difficult to assess. Complicating such an
assessment is the fact that many of the costs and benefits associated with specific control activities
cannot be measured strictly in dollars. For example, one of the costs incurred by Triton Energy
as a result of its foreign payments scandal was a loss of credibility. No doubt, the scandal
deterred many parties from loaning funds to, or investing in, Triton Energy. On the other hand, an
opportunity cost associated with having a strict policy against illicit payments to officials of
foreign governments is lost business revenues and relationships in those countries. Hopefully,
corporate executives recognize that, over the long run, the benefits of controls intended to deter
and detect illegal activities almost certainly far outweigh the related costs of those controls.
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. That section of the
professional auditing standards distinguishes between an auditor's responsibility to detect illegal
acts that have a "direct and material" effect on a client's financial statements and illegal acts that
have a "material indirect" effect on a client's financial statements.
Auditors generally have much less responsibility to detect illegal acts that have a material
indirect effect on a clients financial statements. AU Section 317.06 observes that an auditor
ordinarily does not have sufficient basis for recognizing such violations by clients. Later this
section adds: If specific information comes to the auditors attention that provides evidence
concerning the existence of possible illegal acts that could have a material indirect effect on the
financial statements, the auditor should apply audit procedures specifically directed to ascertaining
whether an illegal act has occurred.
AU 317.05 notes that an auditors 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. In turn, AU Section 110.02 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. Technical standards define inherent risk as the susceptibility of a relevant assertion to a
misstatement that could be material, either individually or when aggregated with other
misstatements, assuming that there are no related controls. [AU 312.21] The fact that a client

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employs a high-risk business strategy does not necessarily increase the inherent risk component of
audit risk posed by that company. However, the aggressive management practices employed by
Triton Energy often left the company living on the edge, that is, fighting to survive. No doubt,
company executives faced with the need to ensure the survival of their firm over the short-term
face more temptations to cut corners in their accounting system and financial reports than the
executives of financially healthy companies. This tendency clearly increases the risk that
misrepresentations will be introduced into such a companys financial statements.
Control risk is defined as the risk that a misstatement that could occur in a relevant assertion
and that could be material, either individually or when aggregated with other misstatements, will
not be prevented or detected on a timely basis by the entitys internal control. [AU 312.21] Here
again, the high-risk business strategies employed by Triton Energys executives did not necessarily
increase the control risk component of audit risk posed by the company. Nevertheless, if a
companys management invokes a devil-may-care approach to its basic operating policies,
wouldnt you expect that same attitude to adversely influence the control policies those managers
establish?
5. The accountants 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
accountants 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 external legal counsel if the situation so warrants. (The accountant should seriously
consider this alternative when he or she is directly or indirectly linked to the illegal act.) External
legal counsel could identify the employees specific legal responsibilities given the specific
circumstances. Another possibility would be to inform the companys legal counsel and/or outside
members of the board of directors of the matter. In most cases, the least preferred alternative
would be doing absolutely nothing, that is, completely shirking any responsibility for disclosing
the illegal act.
Certainly, the responsibility of an accountant to address an illegal act perpetrated by his or her
company increases the higher that individuals position on the firms employment hierarchy. For
example, a controller or chief financial officer of a public company assumes more responsibility
for taking appropriate action to deal with an illegal act perpetrated by the company than does an
assistant controller or a low-level accounting clerk. In this particular case, Triton Energys
controller clearly made the correct decision by refusing to sign off on the companys 1989 10-K
although that decision cost him his job. Again, when an illegal act has severe or pervasive
consequences for a given company, an accountant of that company who is aware of the illegal act
would generally be well advised to seek external legal counsel.
Except in unusual circumstances, the primary responsibility of an auditor of a public company
who discovers that the client has violated a law is simply to report the infraction to his or her
immediate superior. If the superior or the other higher-ranking individuals on the audit
engagement team do not deal with the matter properly, the auditor is faced with several alternative
courses of action, including: 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

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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 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 auditors inquiries regarding the client, in response to a subpoena, or to
certain funding agencies or other government agency when the client receives financial assistance
from a government agency.
6. 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 upholding those laws and responsibilities, U.S. companies and their employees are
not challenging the business practices deemed acceptable in other countries. In most
circumstances, U.S. companies and citizens can uphold the laws of their country while still
respecting the laws, cultural norms, and business practices of foreign countries. (Granted, if
business practices in a foreign country routinely violate U.S. laws, U.S. companies should likely
consider suspending operations in that country.)