Triton Energy Ltd.:
Case Analysis
Bag-ao, Earl Ryann
Budiongan, Ma. Nor Pia
Table of Contents
A. CASE BRIEF ................................................................................................................................................ 2
Case Abstract ............................................................................................................................................ 2
Auditor’s Dilemma .................................................................................................................................... 2
Auditor’s Question .................................................................................................................................... 2
Research Questions .................................................................................................................................. 2
B. CASE CONTENT.......................................................................................................................................... 3
The Entity .................................................................................................................................................. 3
History ................................................................................................................................................... 3
Business Operations: ............................................................................................................................. 7
Investments and investment activities:................................................................................................. 8
Financing and financing activities: ........................................................................................................ 9
Financial Reporting: .............................................................................................................................. 9
The Industry .............................................................................................................................................. 9
Industry Factors: ................................................................................................................................. 10
The market. ..................................................................................................................................... 10
Pricing.............................................................................................................................................. 11
The competition. ............................................................................................................................. 12
Technology relating to the entity’s products .................................................................................. 13
Regulatory Factors: ............................................................................................................................. 13
Accounting Principles and Industry specific practices. ................................................................... 13
Other regulatory entities and taxation ........................................................................................... 14
Environmental consideration.......................................................................................................... 14
C. ANSWERS TO RESEARCH QUESTIONS: .................................................................................................... 15
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A. CASE BRIEF
Case Abstract
Triton Energy Corporation became one of the 20 significant “independent” oil and gas producers by
1985 because of the oil bust of 1980s. To gain competitive advantage, Triton focused its exploration
efforts overseas. They began establishing close relationships to relevant authorities and government
officials in order to facilitate smooth operations. Rumors have been attacking the business in 90’s
alleging them of bribery towards foreign officials, usage of creative accounting methods and intimations
of other corporate wrongdoings.
The controversy was centered on one of the subsidiaries of Triton Energy, TRITON INDONESIA. SEC
investigations revealed violations of the FCPA. There were fraudulent payments to tax authorities and
third party auditors as bribes in order to evade assessed additional taxes charge to them. Triton
Indonesia also fabricated false documentation and recognized inexistent projects to sanitize the
payments for accounting purposes. Two Triton executives were also discriminated for having tolerated
these unethical acts.
Auditor’s Dilemma
The auditor’s dilemma is whether to perform the audit in accordance to ethical standards and to apply
audit procedures intended to determine whether the client has complied with FCPA or to disclose in the
audit the practice of Triton Indonesia of bribing government officials and falsifying accounting records.
Auditor’s Question
How can the auditor protect itself from threats to integrity and objectivity created by the client and
consider the FCPA in the audit?
Research Questions
• In acceptance of an audit, will the auditor consider the type of strategy and risk involve with the
strategy employed by a company?
• In the conduct of the audit, what safeguards can the auditor apply to prevent threats from integrity
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and objectivity in the form of bribery? And what safeguards Triton Energy could have applied to
minimize the occurrences of the illegal payment to foreign government officials?
• When illegal acts are discovered, what is the responsibility of the auditor and what are the proper
proceedings in the communication of these acts?
• Do the Pertamina and BPKP auditor have a responsibility to apply audit procedures intended to
determine whether the client has complied with the FCPA?
B. CASE CONTENT
The Entity
Triton Energy Limited (formerly known as Triton Energy Corporation prior to March 25, 1996) was
founded in Dallas, Texas by E.R. Wiley in 1962. Triton was one of the largest independent oil and natural
gas exploration and production companies in the United States with total proved reserves of almost 300
million barrels of oil equivalent when Amerada Hess Corporation purchased it in 2001 for $3.2 billion. At
the time, Triton had operations in North and South America, West Africa, Southeast Asia, Europe,
Australia and New Zealand. It is distinguished from its U.S. peers by its emphasis on overseas operations.
Triton's roller coaster ride to success was punctuated by infighting, brushes with bankruptcy, allegations
of fraud, and high-risk ventures.
History
Triton Energy began business in 1962 in much the same way as other wildcatter oil companies of its day.
However, unlike many other U.S. based oil companies, Triton spent much of the 1960s and early 1970s
scouring the globe for large reserves of oil and natural gas. Ignoring potentially low-return domestic
opportunities for higher risk, but much more lucrative overseas exploration, Triton offset its expensive
exploration costs with large finds in Thailand, France and Australia.
By the mid 1980's the entire oil industry was suffering setbacks due to a glutted oil market and plunging
gas prices, and Triton was no exception. Despite increasing revenues and doubling sales, Triton posted
losses of $7.8 million in 1988 and, in an effort to mitigate its oil losses, diversified into other energyrelated industries, including seismic equipment manufacturing, domestic pipeline systems and airport
services operations.
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Finally, in 1991 a major oil discovery in Colombia turned the company's stock around.Despite the new oil
reserve the company continued to post losses each year because the Colombian drilling operations
would not produce a positive cash flow until 1995. Triton reorganized the corporation and in 1992
moved William Lee, who had been president since 1966, to the position of chairman of the board and
replaced him with Thomas G. Finck, a petroleum engineer and industry veteran.Within a year Finck
became chief executive officer and, in 1995 became chairman.
At the same time that Triton's oil and gas reserves were increasing, the company began divesting its
non-oil subsidiaries and reducing its working operations.The company continued to focus its attention
on exploration and development and entered the new millennium posting annual net profits. Triton was
forced to battle an array of allegations in the early 1990s that it had falsified accounting records during
the 1980s. A Triton official confirmed the problem when he acknowledged that the company had made
payoffs to officials in Indonesia that had led to "creative" accounting methods. Company employees
admitted to routinely overstating expenses, altering bookkeeping entries, and bribing auditors. Triton's
accounting firm resigned amidst controversy.
The blow-up over Triton's Indonesian affairs followed on the heels of a more costly problem. Jimmy
Janacek, who worked at Triton from 1981 to 1989 and served as controller, filed suit against Triton for
wrongful termination. Janacek claimed that Triton had fired him for refusing to violate state and federal
securities laws in fulfilling the company's reporting requirements. The jury agreed with Janacek and
elected to award him $124 million--a potentially deathly blow for his former employer. Stunned Triton
officials, who had turned down a $5 million settlement just days before the award, paid $9.4 million
while Triton's insurers paid an unspecified reduced settlement.
As Triton floundered into the 1990s, it experienced increasing pressure from shareholders to start
producing some results. One major investor, in a move that smacked of a takeover threat, actually sent
a letter to Triton executives in 1990 encouraging them to liquidate their major assets. Although Triton
had already begun to restructure, it stepped up its reorganization efforts in an attempt to appease
investors and improve its performance. It cut 25 employees from its Dallas headquarters, announced
plans to dump the majority of its non-oil subsidiaries, and decided to shuck major portions of its
underperforming overseas oil and gas operations.
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Battered by slumping oil prices, a U.S. recession, legal battles, the effects of inconsistent management
practices, and failed attempts at diversification, Triton slouched wearily into 1991. Management
believed that the company was undervalued on the stock market and that its long-term outlook was
generally positive, especially given the fact that oil and gas prices would likely recover in the near future.
Nevertheless, detractors shunned the organization as a sloppy, overweight, unfocused corporation
whose high-risk strategy had finally caved in.
Critics' suspicions were supported by Triton's inability to move some of its holdings--when it tried to sell
its European subsidiary for $200 million, the highest bid came in at $100 million and Triton chose not to
sell. Furthermore, Triton losses had increased to $12.5 million in 1989 and to a whopping $54 million in
1990. Triton's bleak condition was reflected in articles about the company's woes. A Barron's article, for
example, referred to Triton as "a wisp of an oil-exploration firm" that was "burdened by self-dealing and
impropriety."
After a five-year period of torment and suffering, Triton blasted its critics and turned its entire
organization around with a single, momentous breakthrough. In July of 1991, elated Triton executives
confirmed rumors that the company was on the verge of a major oil strike in central Columbia. In the
most meteoric rise of a U.S. energy stock since the 1970s, the price of a Triton share rocketed from a 52week low of $4 to nearly $50 by the end of August. Analysts estimated that the new discovery could
yield three billion barrels or more of oil, making it the most important find in the Americas since
Prudhoe Bay in the Arctic Circle.
Triton had been actively searching for oil in Columbia since the summer of 1981. Convinced that there
was oil to be found, Executive Vice President John Tatum initiated years of fruitless efforts and hefty
capital investments. Finally, in 1987, Triton and its partner, British Petroleum (BPX), found an area that
they believed might produce oil. In an extremely risky venture, Triton and BPX began drilling in one of
the most geographically and socially challenging regions of the world. To reach the jungle-covered oil,
they had to drill holes two miles deep at a cost of $27 million per hole; each hole required six to ten
months to drill.
Worse yet, the region in which they were drilling was brimming with danger. Three separate groups of
Marxist guerrillas, organized criminals seeking to protect their interests in nearby emerald mines, and
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other violent elements combined to produce a murder rate averaging 80 per day--ten times the U.S.
per-capita average. Bullet proof vests could not protect the drillers from the equally distressing threat of
kidnapping, a relatively common practice in Columbia.
Triton's assumption of risk reaped major rewards in the early 1990s. Although the company's losses
continued to mount, its stock price soared as enthusiastic investors sought a piece of the action. Triton's
losses were attributable primarily to its investments in the Columbian drilling operation, which would
not begin to produce positive cash flow until at least 1995. Triton's losses swelled to $94 million in 1992
and to about $90 million in 1993.
Triton's revenues also plummeted. Indeed, when the magic bullet that Triton managers had hoped for
finally arrived, they began a rapid reorganization plan that emphasized development of the Columbian
drilling operations. After all, in just one year the percentage of Triton's proved reserves (the amount of
oil still underground to which it had rights) represented by its Columbian division rocketed from zero to
68, making the importance of its holdings in all other regions of the globe comparatively negligible. To
carry the company into a new era of profitability, Triton moved William Lee, who had served as
president since 1966, to the position of chairman of the board. Lee was succeeded as president by
Thomas G. Finck, an engineer and industry veteran.
As a result of its new focus, Triton decided to shed all of its non-oil subsidiaries, liquidate its U.S. and
Canadian oil and gas reserves, and "reassess" its development prospects in France. Its reduction of
working operations contributed to a decline in sales from $209 million in 1991 to $125 million in 1992
and $110 million in 1993. At the same time, however, the company's total proved reserves increased
from 83 million net equivalent barrels (a measure that incorporates both oil and natural gas reserves) to
130 million, boding well for Triton's future.
As though the sun was finally breaking through the clouds that had darkened Triton's balance sheet
during the late 1980s and early 1990s, recovering gas and oil prices accelerated in 1994 and were
expected to rise through at least 1995. Estimates that the Columbian operations would be producing
150,000 barrels per day by the end of 1995 and 900,000 barrels per day by the end of the decade
suggested potentially enormous profits for Triton. Furthermore, Triton's ongoing exploration in other
regions, such as Argentina, could yield more surprise additions to the company's reserves.
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In keeping with its long-time strategy of engaging in high-risk, long-term international exploration and
development ventures, Triton entered the mid-1990s determined to sustain its search for new reserves.
"As our future lies in creating value through exploration, management must look beyond the current
development projects to the future," stated Finck in the company's 1993 annual report. "Large-scale,
high-potential international exploration projects take many years to develop. Triton must identify and
pursue attractive opportunities."
However, in July 2001, Amerada Hess Corporation and Triton announced an agreement under which
Hess would purchase all outstanding ordinary shares of Triton for $45.00 per share; 50% over Triton's
closing stock price the day before. According to press releases, the purchase would greatly increase
Hess's production growth and exploration potential and would make Hess one of the world's largest
independent energy exploration and production companies
Business Operations:
As mentioned, Triton Energy Corporation is an oil and gas exploration firm. Revenue is obtained from
pumping oil and gas from large oil fields and distributing it to buyers. Because of the tight competition
among the domestic U.S. oil firms, Triton decided that in order to achieve a much greater profit, they
need to venture to overseas exploration activities. Because of this, most of Triton’s operations shifted to
scavenging untapped reserves of oil and natural gas throughout the globe. One of the earliest oversea
discoveries was a large oil and gas field in the Gulf of Thailand that promised as much as 29 million cubic
feet of natural gas per day. This became one of the Triton’s major find. However, recurring
disagreements and confrontations with the Thai government hindered Triton from developing that field
more than 10 years. This experience gave Triton an insight on how to be successful in their foreign
country operations- to foster good relationships with key governmental officials in those countries.
Overseas ventures were viewed by most of the other domestic oil and gas exploration firms as high-risk
endeavors. Despite this, Triton continued to deal with these ventures for it viewed domestic
opportunities as offering relatively low returns. Because of this, Triton became known as a savvy
industry maverick with a knack for scouting out and exploiting international profit opportunities. Triton
also teamed up with several foreign private and government-owned firms in its exploration ventures.
Some of these alliances were required by the foreign government. One example is the agreement of
Triton and the Indonesian government that in order for the firm to perform its operations in Indonesia’s
Enim Field, the firm must partner with the nation’s state-owned oil company which will facilitate the
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transport of oil through its pipelines. By the mid-1980s, Triton was producing oil or owned reserves in
France, Australia, New Zealand, Colombia, Thailand, Great Britain, West Africa, the United States,
Canada, and the North Sea. Triton also was producing oil in some other countries and their operations
became geographically dispersed. Due to the industry crisis that happened during the 1980s, Triton
began operating in other related businesses. This action was taken to eliminate the unfavorable effects
on Triton’s financial aspect of the crisis. However, as they took the step on diversification of its business
operations Triton exacerbate its problems. Being unable to generate profit from its devalued oil and gas
reserves or its sinking subsidiaries, the company was unable to generate enough cash to finance its
aggressive expansion and exploration activities. Other than this, allegations of bribery and use of
“creative” accounting method by one of its subsidiaries, Triton Indonesia, Inc. worsened the company’s
problem and image. Controversies circled into Triton’s name as it was forced to battle an array of
allegations. Illegal payments to foreign officials and auditors which the company failed to disclose,
subsequently affirmed by Triton’s previously fire controller. They had employed creative accounting
methods to conceal such payments.
Investments and investment activities:
Triton focused most of its investment in the foreign exploration ventures. In fact, by the mid-1980s,
Triton was producing oil or owned reserves in France, Australia, New Zealand, Colombia, Thailand, Great
Britain, West Africa, the United States, Canada, and the North Sea. Furthermore, it was planning to drill
new wells in Nepal, Gabon, and several new regions in the countries in which it was already active.
These investments proved very profitable for Triton's assets had ballooned to about $200 million by
1985. Likewise, revenues jumped 100 percent during fiscal 1985 (ending in June) to roughly $50 million.
Profits jumped similarly. Furthermore, Triton management expected sales in 1986 to surge to nearly $90
million. However, during the latter half of 1980s, Triton began to experience financial setbacks. The
entire oil industry, in fact, began to spiral into a down cycle in 1986 as the oil market became glutted
and oil and gas prices plunged. Triton's sales continued to grow, but slimming profit margins were
diminishing the concern's ability to fund expansion or to even remain profitable. So in order to alleviate
the negative influence of oil and gas prices on its bottom line, triton began investing in relating
businesses. The company was engaged on supplying aviation fuels and services that lead them on
purchasing two airport service operations in 1988, one in Texas and one in Oklahoma. The two 1988
acquisitions, along with smaller purchases, quickly propelled Triton to the status of major player in the
aviation services industry. In addition, it has also invested on major ownership share of Input/Output,
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Inc. a Houston-based manufacturer of seismic equipment, and bolstered investments on its domestic
pipeline system.
Financing and financing activities:
Triton had a difficulty in finding access to deep-pocketed financiers to support the company’s
exploitation of its oil and gas properties. Triton is only a small size company before their foreign
ventures, that is why even if they have discovered large oil and gas deposits in several remote sites
scattered around the globe, they find it hard to succeed in exploiting it because of financial problems.
They tried asking major oil firms, large metropolitan banks, and other well-heeled investors to support
their planned operation, but they refused to participate. Why? They were unnerved by Bill Lee’s
reputation as a gun-and-run, devil-may-care “wildcatter”. Because of this, triton resorted to less
conventional strategies to achieve his firm’s financial objectives. They formed an alliance with the stateowned petroleum firm in France in order to finance their exploration projects. After some successful
discoveries, Triton began financing its activities through the profits obtained from its operations.
Although some of its exploration projects were failures still it was able to manage and continue its risky
ventures because of huge returns provided by its other successful operations.
Financial Reporting:
Triton is a U.S. based company so its financial reporting is based on U.S. standards. The consolidation of
their financial statements must be based on appropriate accounting policies set forth by the U.S.
standards. Because Triton is performing operations overseas, their actions were subject to the Foreign
Corrupt Practices Act of 1977(FCPA). The FCPA criminalizes the payments of U.S. Corporations of bribes,
kickbacks and other payments to officials of foreign government in order to initiate or maintain business
relationships. The FCPA also required U.S. companies to maintain internal control systems that provide
reasonable assurance of discovering improper foreign payments.
The Industry
Oil and gas exploration and production industry
The oil and gas exploration and production industry(Petroleum Industry) includes the global processes
of exploration, extraction, refining, transporting (often by oil tankers and pipelines), and marketing
petroleumproducts. The major products of the industry are fuel oil and gasoline. Other than that,
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Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents,
fertilizers, pesticides, and plastics. Usually the industry is divided into three components, Upstream,
Midstream and Downstream. Oil exploration represents the very first piece of the long petroleum value
chain that ultimately brings gasoline to the gas station at which you fill your Ford Explorer. Exploration
and production are often referred to as the "upstream" pieces of the value chain, as compared to
refining, distribution, and marketing, which are typically considered downstream activities. The process
of oil exploration looks a lot like the stylized example above. A company identifies a potentially
attractive area to drill, either onshore (i.e., on land) or offshore (i.e., in the ocean). This area could be
attractive because it’s near another major discovery, or because it used to be an operating well that has
now dried up, or because government has released some data that suggest the presence of
hydrocarbons (i.e., gas and oil). After the discovery, the development of the oil field is then performed.
Industry Factors:
The market.The main purpose of the gas and oil and exploration industry is to exploit gas and oil
properties and distribute the oil and gas to the market. The oil and gas is then distributed to users all
over the globe. In fact, oil accounts for a large percentage of the world’s energy consumption, ranging
from a low of 32% for Europe and Asia, up to a high of 53% for the Middle East. Other geographic
regions’ consumption patterns are as follows: South and Central America (44%), Africa (41%), and North
America (40%). The world consumes 30 billion barrels (4.8 km³) of oil per year, with developed nations
being the largest consumers. The United States consumed 25% of the oil produced in 2007.[2] The
production, distribution, refining, and retailing of oil and gas taken as a whole represents the world's
largest industry in terms of dollar value. To be specific with oil and gas exploration, high oil prices and a
seeming decline in the number of "major" oil discoveries has created a market for much smaller
"independents," which independently scour the planet for oil, but typically are not involved in refining
and distributing the finished product. The market demand for oil had been rising drastically and is
expected to increase more in the next years. The world primary energy consumption in 1994 stood at
nearly 8000 million tons of oil equivalents. In a study by the Organization of Petroleum Exporting
Countries (OPEC), it was said that based on OPEC’s World Energy Model, “OWEM”, the early decades of
the 21st century are expected to see fossil fuels account predominantly for increases in world energy
demand, with oil continuing to maintain its major role. Global oil demand is projected to rise by 38
million barrels a day to 115 mb/d by 2025 — annual average growth of 1.6 mb/d, or 1.7 per cent, over
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the years 2002–25. OECD countries will continue to account for the largest share of oil demand.
However, almost three-quarters of the increase in demand up to 2025 will come from developing
countries, whose consumption will almost double. Asian countries will remain the key source of demand
increase in the developing world, with China and India central to this growth. At the global level, the
transportation sector accounts for about 60 per cent of the rise in demand in 2000–25. This will amount
to nearly all the growth in transition economies, almost four-fifths of it in the OECD and close to half in
developing countries. The growing demand is fueled by a burgeoning population that will increase about
20 percent in the next 20 years, with most of that growth in countries with emerging economies, such as
China and India. Rising energy demand from economic output and improved standards of living will put
added pressure on energy supplies. For example, in China alone, increasingly prosperous citizens are
projected to purchase more than 100 million new vehicles before 2020. The industrial and
household/commercial/agriculture sectors will also be important sources of growth in the developing
world. Demand for gas has also been expected to increase. As stated in the study by OPEC, demand for
gas is forecast to rise faster than that of oil, although from a lower base. It is the source of commercial
energy that is most favored by environmentalists, as well as being a reliable and highly efficient source
of power generation. Production costs are coming down too.
Pricing.The price of any commodity goes up if supply falls short of demand, and conversely falls if
demand exceeds supply. Crude oil prices behave no differently. Political events, weather, and other
factors affect the supply-demand balance. The two largest spikes in oil prices in Figure 1—1974 and
1980—were both caused by political events disrupting oil supplies: the Arab oil embargo following the
Yom Kippur war fought between Israel and a coalition of Arab forces in October 1973, and the Iranian
revolution which began in 1978 and which resulted in a reduction of 3.9 million barrels a day of crude
production by 1981. A very important determinant of world prices unique to the oil industry is the policy
of the Organization of Petroleum Exporting Countries (OPEC). Formed in 1960, OPEC today consists of 12
large oil producers: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates, and Venezuela. They account for about 40 percent of world oil production and
hold two-thirds of proven reserves. Since 1982, OPEC has been setting oil production quotas for its
members in an attempt to ensure that oil prices do not fall too low from overproduction, or rise too high
from under-production. If oil prices rise too high, high energy costs could cause a worldwide recession,
which in turn would reduce demand and potentially lead to an oil price collapse. Although OPEC
members produce less than half of global oil, it holds the majority of the world’s spare capacity. This
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means that only OPEC can increase or decrease production at will. OPEC’s united production policy
through quotas (even if compliance is an issue), ability to adjust supply, and relatively high share of
global oil production give it an enormous ability to affect world oil prices.
The competition.The majority of current oil reserves are controlled by a handful of politically unstable
countries, especially those in the international energy oligopoly, OPEC. OPEC's control over the market
allows it to control how much oil enters the market, and the fact that the majority of OPEC countries
constantly contend with terrorism adds an added element of unpredictability to the international oil
price mechanism. Oil companies have a major incentive to explore in order to diversify their reserve
holdings and hedge against unforeseen issues in any one unstable part of the world. Drivers of
companies to enter in this industry include the following:
Price of oil - The backdrop to all conversations about oil exploration is both the price, and the current
worldwide proven reserves, of oil. Taken together, these determine whether a specific exploration
project will be economically attractive. In particular, the higher the price of oil, the more expensive it
can be to draw oil out of the ground and still make a profit. This makes smaller fields, more remote
fields, and oil that require more processing all the more viable.
Availability of oil field services - The availability of equipment and qualified professionals to service it
represents a genuine bottleneck in oil exploration. The price of "oilfield services," which includes all the
ancillary requirements for drilling and operating a well, rose 20% in 2006. Lack of availability of drill rigs
(for drilling oil), skilled petroleum services professionals, seismic trucks, etc., can be a constraint in oil
exploration. Note especially the increase in drill rig rental rates experienced around the world (chart on
left).
Weather - Difficult weather, especially hurricanes and tropical storms, can create a challenging
environment offer a double whammy for oil & gas companies. Not only do they disrupt current supply
chains (making tanker deliveries difficult, for example, or disrupting refining processes), but also they
may disrupt or disable offshore drill rigs. This disruption ultimately feeds through to the oil field services
pricing, as discussed above. And, of course, leads to further difficult conversations about the impact of
climate change on extreme weather patterns.
Technology- As one might imagine, the availability of computers and advances in seismic technology
have drastically improved the process of oil exploration, which was once little more than drilling a well
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and crossing your fingers. Advances have pushed the envelope of what is feasible, both in terms of
finding where oil is and figuring out how to extract it once a company has identified where it is. General
Electric Company (GE), for example, offers "Intelligent Drilling" technology, while a variety of
engineering and seismic services firms offer the latest in technology to find oil (e.g., 3D seismic
mapping).
Technology relating to the entity’s products.While oil and gas production has undergone a number of
rebirths in its more than 100-year history, theelements of the process remain relatively constant. Oil is
found in reservoirs deep underground or beneath the ocean floor, and is extracted vertically through
relatively small-diameter, high-pressure tubing. The process extracts oil, water, and mixed gases (simple
hydrocarbons, CO2, and H2S, possibly also small quantities of N2 and inert gases) from the rock
formations. A sketch of a typical oil field gathering system is shown in figure 5. Once at the surface, the
production stream runs through a control wellhead into horizontal flow lines, normally of larger
diameter and running at lower pressures. The flow lines carry the three phases into a separator vessel in
which the gas phase flashes to the upper portion. The oil occupies the middle portion and the water
drops to the bottom. Gas from the top may be reinjected into the reservoir, refined and marketed, or
flared. Water is normally reinjected into the reservoir, and the oil is sent to a pipeline for delivery to a
refinery, tanker terminal, or transmission pipeline system. Other oil field processes include gas
processing and reinjection, seawater injection, and natural gas liquid (NGL) stripping and blending.
Another technology needed is a reliable, cost-effective communications tools. With drilling sites
frequently situated in the middle of the ocean, desert or other equally inaccessible location, a well
thought out satellite telecommunications infrastructure can be the answer where more traditional
methods of communication are either too costly or inadequate.
Regulatory Factors:
Accounting Principles and Industry specific practices.The financial reporting of U.S. firms in this industry
is based on the United States of America Generally Accepted Accounting Principles. However, most nonAmerican firms are following the International Financial Reporting Standards. In understanding the
industry, one must know first which among the two standards a firm is using. Information in financial
reporting are provided mainly in the form of a balance sheet, a profit and loss account, a statement of
changes in equity, a cash flow statement and disclosures. There are several accounting issues that must
be taken into consideration in carrying out an evaluation or comparative studies of the companies in the
sector. One issue is the use of the accounting principles. Among these is the consideration of capital and
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operating cost. According to current usage, the term capital costs is used during the exploration and
development phase and the term operating costs during the production phase. The U.S accounting
standards SFAS 19 provides for two methods of treating the exploration and development cost: the
successful efforts method and the full cost method. Another is the reserves and the taxation/contractual
basis. The concept of reserves as understood by a petroleum accountant is very different from the
physical reality of volumes of hydrocarbons discovered. First consideration with this is the concept of
probable or possible reserves which usually appears too uncertain for the accountant. Another
consideration is the tax system applied to the production of the reserves in question in order to
determine the amount of the reserves which will be disclosed in the financial statements. Another
principle is the provision for decommissioning and site rehabilitation which relate to the estimated costs
of dismantling and removing the equipment and rehabilitating the site less the value of any materials
recovered.
Other regulatory entities and taxation.Because, leading international companies are quoted in the New
York Stock Exchange, they are therefore bound by the requirements of the Securities and Exchange
Commission. For taxation, the United States government provides a large subsidy to oil companies, with
major tax breaks at virtually every stage of oil exploration and extraction. Capital expenses, including the
costs of oil field leases and drilling equipment, are taxed at an effective rate of nine percent, which is a
much lower rate than the 25% rate for general business taxes and lower than the taxes of virtually any
other industry, according to a 2005 study by the non-partisan Congressional Budget Office.
Environmental consideration.The exploitation of oil and gas reserves has not always been without side
effects. Potential environmental impacts of oil and gas exploration activities are human, socio-economic
and culture impacts (changes in land use patterns), atmospheric impacts (flaring, venting and purging
gases), aquatic impacts (sewerage, sanitary and domestic wastes thrown to bodies of waters), terrestrial
impacts (physical disturbance as a result to construction) and ecosystem impacts(plants and animals
affected by change in air, water and soil/sediment quality). It is because of this that the oil and gas
exploration industry is subject to international, regional and national environmental frameworks. Global
and regional treaties and conventions are in principle binding in the first instance on national
governments, which are obliged to implement such arrangements through national legislation. Some
important International environment conventions include the Basel Convention, Biodiversity
Convention, MARPOL, and others. Environmental regulations may also be found under a variety of
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national laws. Examples of this common legislation that may apply to oil operations are Petroleum Laws,
Clean Air and Water Acts, Marine Pollution and others.
C. ANSWERS TO RESEARCH QUESTIONS:
A. In acceptance of an audit, will the auditor consider the type of strategy and risk involve with the
strategy employed by a company?
Yes, the auditor must consider the type of strategy and risk involve with the strategy employed by the
company because:
First, according to paragraph 28 of PSQC 1, firm should establish policies and procedures for the
acceptance and continuance of client relationships and specific engagements, designed to provide it
with reasonable assurance that it will only undertake or continue relationships and engagements where
it has considered the integrity of the client and does not have information that would lead it to conclude
that the client lacksintegrity.In Triton’s case, its integrity has been deemed questionable due to
questionable practices it was engaged and indications that the company was involved into use of
creative accounting methods in order to conceal its illegal activities and so as to evade taxes. Moreover,
firm should also obtain other information such as the firm’s competence to perform the engagement,
availability of resources and time as to whether the firm can comply with the ethical requirements. This
information are considered necessary in the circumstances before accepting an engagement with a new
client, when deciding whether to continue an existing engagement, and when considering acceptance of
a new engagement with an existing client. When issues have been identified, the firm decides to accept
or continue the client relationship or a specific engagement. The firm should also document how the
issues were resolved.
Second, according to PSA 315, this is one way of understanding the entity and its environment. As stated
by PSA 315, the entity conducts its business in the context of industry, regulatory and other internal and
external factors. To respond to these factors the entity’s management or those charged with
governance define objectives, which are the overall plans for the entity. Strategies are the approaches
by which management intends to achieve its objectives. Strategies are then important actions that
would affect the transactions undergone by the entity. In the case of Triton Indonesia, knowing that
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foreign operations may at times require the fostering of good relationship with key governmental
officials and that this could lead to unethical behavior like bribery, the auditors should have undertaken
necessary procedures in evaluating the acceptance of its audit.They should have obtained a thorough
understanding of the past approaches of Triton with foreign operations and they should have evaluated
the risk associated with this approaches.
Thirdly, again according to paragraph A26 of PSA 315, strategies employed by an entity are related to
several business risks. Business risk is part of what is known as Engagement risk. Engagement risk
represents the overall risk associated with an audit engagement. It encompasses risks borne by both the
auditor and the client entity risk. It has three components: client's business risk (also referred to as
entity's business risk), audit risk, and auditor's business risk. The client’s business risk is the one referred
to in paragraph A26 of PSA 315. An entity's business risk is the risk associated with the entity's survival
and profitability. An understanding of the business risks facing the entity increases the likelihood of
identifying risks of material misstatements, since most business risks will eventually have financial
consequences and, therefore an effect on the financial statements. In the case of Triton Indonesia, one
of the matters that the auditors should have considered was the fact that Triton is engaging in a high risk
international venture and that the entity is employing a rough-and-tumble strategy. They should have
considered the type of strategy employed by Triton and the risk that is involved by the strategy in the
acceptance of the audit. PSA 315 also stated that whether a business risk may result in a risk of material
misstatement is, therefore, considered in light of the entity’s circumstances. In the case of Triton, the
auditor should also have considered the circumstance of Triton during that time. Because Triton was
competing for a great market share and for a greater profit, the auditor should have considered the
possibility of unethical behavior during Triton’s venture in foreign countries. They should have
considered that because foreign country venture would require agreements with foreign country
governments, bribery of foreign officials may be one of Triton’s choices in having a successful venture.
B. In the conduct of the audit, what safeguards can the auditor apply to prevent threats to
independence set forth by the audit client in the form of bribery?
Threats to the independence of the auditor may come in different forms. In the case of Triton Energy,
one of these threats is identified that is bribery. When threats are identified, other than those that are
clearly insignificant, appropriate safeguards should be identified and applied to eliminate the threats or
reduce them to an acceptable level. The nature of the safeguards to be applied will vary depending upon
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the circumstances. The consideration will be affected by matters such as the significance of the threat,
the nature of the assurance engagement, the intended users of the assurance report and the structure
of the firm. Safeguards typically fall into three categories: safeguards created by the profession,
legislation or regulation, safeguards within the assurance client and safeguards within the firm’s own
systems and procedures. The answer to this question is governed by safeguards within the firm’s own
systems and procedures. According to the Philippine Code of Ethics of Certified Public Accountants, the
safeguards within the firm’s own systems and procedures are classified into two: firm wide safeguards
and engagement specific safeguards. And these safeguards are enumerated as follows:
I. Safeguards within the firm’s own systems and procedures may include firm-wide safeguards such as
the following:
(a) Firm leadership that stresses the importance of independence and the expectation that members of
assurance teams will act in the public interest;
(b) Policies and procedures to implement and monitor quality control of assurance engagements;
(c) Documented independence policies regarding the identification of threats to independence, the
evaluation of the significance of these threats and the identification and application of safeguards to
eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level;
(d) Internal policies and procedures to monitor compliance with firm policies and procedures as they
relate to independence;
(e) Policies and procedures that will enable the identification of interests or relationships between the
firm or members of the assurance team and assurance clients;
(f) Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from
a single assurance client;
(g) Using different partners and teams with separate reporting lines for the provision of non-assurance
services to an assurance client;
(h) Policies and procedures to prohibit individuals who are not members of the assurance team from
influencing the outcome of the assurance engagement;
(i) Timely communication of a firm’s policies and procedures, and any changes thereto, to all partners
and professional staff, including appropriate training and education thereon;
(j) Designating a member of senior management as responsible for overseeing the adequate functioning
of the safeguarding system;
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(k) Means of advising partners and professional staff of those assurance clients and related entities from
which they must be independent;
(l) A disciplinary mechanism to promote compliance with policies and procedures; and
(m) Policies and procedures to empower staff to communicate to senior levels within the firm any issue
of independence and objectivity that concerns them; this includes informing staff of the procedures
open to them.
II. Safeguards within the firm’s own systems and procedures may include engagement specific
safeguards such as the following:
(a) Involving an additional professional accountant to review the work done or otherwise advise as
necessary. This individual could be someone from outside the firm or network firm, or someone within
the firm or network firm who was not otherwise associated with the assurance team;
(b) Consulting a third party, such as a committee of independent directors, a professional regulatory
body or another professional accountant;
(c) Rotation of senior personnel;
(d) Discussing independence issues with the audit committee or others charged with governance;
(e) Disclosing to the audit committee, or others charged with governance, the nature of services
provided and extent of fees charged;
(f) Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client;
(g) Involving another firm to perform or re-perform part of the assurance engagement;
(h) Involving another firm to re-perform the non-assurance service to the extent necessary to enable it
to take responsibility for that service; and
(i) Removing an individual from the assurance team, when that individual’s financial interest or
relationships create a threat to independence.
In consonance with the enumerated above, the following activities should have been applied by the
BPKP and Pertamina auditors in the conduct of their audit with Triton Indonesia. The following could
also be applied by auditors to safeguard themselves from threats to independence set forth by clients in
the form of bribery.
1. Pertamina and BPKP firm should have firm leadership who stresses the importance of independence
in the conduct of the audit. If only the leaders of the Pertamina and BPKP firms were strong in their
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promulgation of independence policies to their members, some of their members would not have been
tempted to accept the bribes of Triton Indonesia executives. Strong and ethical leaders in the Pertamina
and BPKP firms would have reduced the threat to independence set forth by Triton Indonesia.
2. Pertamina and BPKP auditors should performed continued monitoring of compliance with firm
policies and procedures as they relate to independence. The firm should establish policies and
procedures designed to provide it with reasonable assurance that the policies and procedures relating to
the system of quality control are relevant, adequate, operating effectively and complied with in practice.
Such policies and procedures should include an ongoing consideration and evaluation of the firm’s
system of quality control, including a periodic inspection of a selection of completed engagements.
3. Pertamina and BPKP auditors should have applied policies and procedures that would prevent other
individuals who are not members of the audit team from interfering in the engagement The firm must
ensure that engagement team is complying with the quality controls prescribed by the auditing
standards and that the engagement team members are in compliance with the ethical requirements in
order to avoid possible threats to independence. Code of ethics for professional ethics also added that
members of the assurance team should observe safeguards in order to avoid possible threats to
independence that would have an effect on the outcome of the audit. In the case of Triton Energy the
prescence of Roland Siouffi, a consultant had affected the audit engagement performed by the
Pertamina and BPKP auditors. The channeling of payments from Triton Indonesia to these two auditing
firms had impaired their independence from Triton Indonesia. Pertamina and BPKP auditors should
have created safeguards that would prevent the actions of Roland Siouffi in influencing the conduct of
the audit.
4. Implementation of policies and procedures that encourage proper communication between
staffs and partners within the firm for any issues of threats to independence and objectivity should have
been observed. The firm should strictly comply on the quality controls regarding consultation in
accordance with PSQC 1. The firm should stress that engagement partner shall take responsibility for the
engagement team undertaking appropriate consultation on difficult or contentious matters. Be satisfied
that members of the engagement team have undertaken appropriate consultation during the course of
the engagement, both within the engagement team and between the engagement team and others at
the appropriate level within or outside the firm.
5. Pertamina and BPKP auditors should have applied policies and procedures to ensure adherence to
professional standards, regulatory and legal requirements for example, the Foreign Corrupt Practices Act
of 1977.According to PSA 250, it is necessary that in the audit of financial statements there must be
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consideration of laws and regulations. This should have been considered by the Pertamina and BPKP
auditors during their audit with Triton Indonesia. If only they had considered this, the possibility that
they would be bribed by Triton Indonesia would be reduced.
C. What control activities Triton Energy could have applied to minimize the occurrences of the illegal
payment to foreign government officials?
The Philippine Code of Ethics for Certified Public Accountants as stated in the previous question had also
enumerated safeguards that the assurance client can employ to minimize the threats to independence
that they can give to the auditors. The following are those safeguards:
Safeguards within the assurance client, include the following:
(a) When the assurance client’s management appoints the firm, persons other than management ratify
or approve the appointment;
(b) The assurance client has competent employees to make managerial decisions;
(c) Policies and procedures that emphasize the assurance client’s commitment to fair financial reporting;
(d) Internal procedures that ensure objective choices in commissioning non-assurance engagements;
and
(e) A corporate governance structure, such as an audit committee, that provides appropriate oversight
and communications regarding a firm’s services.
In light with what has been mentioned, Triton Energy should have applied the following procedures to
minimize the existence of bribery in the conduct of foreign operations:
1. The appointment of the auditing firm to be engaged must be approved not only by the management
but also by those charged with governance or those in the higher position. This is to ensure that
management does not appoint those firms that he/she can control or those firms that may impair
independence because of threats imposed by the management. In the case of Triton Indonesia, the
appointment of the BPKP and Pertamina auditors should have been known to all the Triton Energy Corp.
executives. The problem with the case is that Triton Indonesia made known the transaction with the
Pertamina and BPKP auditors only with few of the Triton executives who also agreed to it and the
payment of bribes. The further payment of bribes may have been prevented if the other executives had
been informed about it.
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2. The assurance client must employ procedures in the selection and evaluation of persons to employ in
the company. Senior level, middle level and lower level of management’s competence, honesty and
objectivity to make managerial decisions.They must see to it that the employees are of good moral
values and of enough competence so that managerial decisions would not involve incorrect and
unethical actions. In the case of Triton Energy Ltd., they should hire employees that would help attain
the objectives of the company without sacrificing the integrity and also the image of the company. One
mistake of Triton is the continuous employment of Bill Lee, he may have the competence to manage the
entire company, but his record of being a run-and-gun, devil may-care wildcatter should have been a
warning to the company of the unethical things that he could do to succeed. Other executives also in
Triton were charged for having consented to the practice of bribery and treated them as a cost of doing
business in a foreign jurisdiction.
3. The assurance client should implement policies and procedures that facilitate the compliance of the
entity with the financial reporting framework it applies. It should also implement policies and
procedures that would ensure that employees would be committed in presenting a fair representation
of transactions. In the case of Triton, one of the deficiencies of the entity was the weak internal control
in Triton Indonesia. It was stated that there was inadequate segregation of key accounting and control
responsibilities which created an environment in which individuals can easily perpetrate and then
conceal fraudulent transactions. It was also pointed out that the subsidiary’s records were so misleading
that it was impossible to tell a real transaction from one that has been faked. This kind of environment
could have been prevented if Triton had implemented strictly the policies and procedures that could
strengthen the internal control of the subsidiary.
4. There should have been effective oversight by those charged with governance. According to the
Manual of Corporate Governance, a company shall have an audit committee which is composed of at
least 3 members of the board, one of whom shall be an independent director. Having an audit
committee on part of those charged with governance represents its active participation on fraud
detection and correction. Triton has not created an audit committee that would regularly provide
oversight over the Triton Indonesia activities. With that inconsistency, Triton (Parent) was not been able
to detect Triton Indonesia’s illegal activities dragging the company’s name into disrepute and intrigues.
5. Triton Energy should have created an effective internal audit function. Having effective internal audit
on part of the Triton’s management reduces the possibility of occurrence of fraudulent transaction.
With its scope and objectives such as monitoring of internal controls, examination of financial and
operating information, review of operating activities, review of compliance with laws and regulations,
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risk management, and governance assessment this provides the board, senior management and
stockholders reasonable assurance that organizational and procedural controls are effective,
appropriate and complied with. On Triton’s case they only send one person to review and report the
activities of Triton Indonesia. This could also have not happened if the former controller of Triton
Indonesia did not sue the company in 1991. This means that an internal audit review was not regularly
conducted by Triton (parent) on its Triton Indonesia subsidiary during the years before the lawsuit. If
only an effective internal audit function was created to regularly review Triton Indonesia operations, the
possibility of bribery would have been minimized.
D. When illegal acts are discovered, what is the responsibility of the auditor and what are the proper
proceedings in the communication of these acts?
The illegal acts associated with the Triton case were of two natures: the bribery of government officials
and the falsification of accounting records. We consider these acts as part of noncompliance to laws and
regulations. According to PSA 250, noncompliance refers to acts of omission or commission by the entity
being audited, either intentional or unintentional, which are contrary to the prevailing laws or
regulations. The acts of bribery and falsification of accounting records are within the provisions set forth
by the Foreign Corrupt Practices Act of 1977. It is because of this that we consider those acts as
noncompliance to laws and regulations. However, these acts can also be within the definition of fraud.
According to PSA 240, fraud is an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of deception to obtain an unjust
or illegal advantage. Clearly, the objective of Triton Indonesia in committing those illegal and unethical
acts was to create an advantage in the conduct of their operations in Indonesia. In light with what has
been mentioned, we could say that the illegal acts performed by Triton Indonesia falls into two different
categories. Despite these different categories, the responsibility of the auditor with these matters
remains the same, and that is the communication of these matters to appropriate governing bodies. We
would consider the proper proceedings in the communication of these acts in accordance with the two
circumstances: as noncompliance and as fraud. First to be considered are the proper proceedings in the
communication of the act as noncompliance with laws and regulations. According to paragraphs 18 to
28 of PSA 250, the following are the proceedings to be followed when noncompliance to laws and
regulations are discovered:
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1. When the auditor becomes aware of information concerning a possible instance of
noncompliance, the auditor should first obtain an understanding of the nature of the act and
the circumstances in which it has occurred, and sufficient other information to evaluate the
possible effect on the financial statements. In the case of Triton, the Pertamina and BPKP
auditors, after obtaining an information of Triton’s non-compliance with the FCPA, should have
first obtain an understanding of the circumstance and the possible effect of it in the financial
statement. They should have performed procedures in order to achieve understanding of the
nature of the act and the circumstance in which it occurred.
2. The auditor shall also report the noncompliance in the following forms:
a. Reporting Non-Compliance to Those Charged with Governance
The auditor shall communicate with those charged with governance matters involving noncompliance with laws and regulations that come to the auditor’s attention during the course of the
audit, other than when the matters are clearly inconsequential (paragraph 22). This communication shall
be done as soon as practicable especially when in the auditor’s judgment; the non-compliance is
believed to be intentional and material. On the case of Triton, after the Pertamina and BPKP auditors
have obtain an understanding of the circumstance of the act and its possible effect to the financial
statements, they should have communicated their understanding to those charged with governance of
the firm considering the fact that the management of Triton Indonesia has the consent to the
noncompliance. If those charged with governance would also give consent to the noncompliance of laws
and regulations, the auditor should consider withdrawing from the engagement if it is not prohibited by
law or regulation.
b. Reporting Non-Compliance to Regulatory and Enforcement Authorities
If the auditor has identified or suspects non-compliance with laws and regulations, the
auditor shall determine whether the auditor has a responsibility to report the identified or suspected
non-compliance to parties outside the entity. In the case of Triton, the Pertamina and BPKP auditors
should have at least created a report that would state the noncompliance of Triton Energy to the FCPA.
This act would not be considered as a violation of the confidentiality requirements because it would be
one of those circumstances that an auditor can disclose facts to legal bodies.
3. The auditor may also consider withdrawing from the engagement unless prohibited by law or
regulation. He may consider this necessary when management or those charged with
governance do not take the remedial action that the auditor considers appropriate in the
circumstances. In the case of Triton, the Pertamina and BPKP auditors should have informed
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Triton Indonesia and the Triton subsidiary of the corrective actions to be taken with regards to
the noncompliance. If they refuse to perform those actions, Pertamina and BPKP auditors
should withdraw from the engagement.
According to PSA 240, the following are the proper proceedings in the communication of
fraudulent acts.
1. Communication to those charged with management
When the auditor has obtained evidence that fraud exists, it is important that the matter be
brought to the attention of the appropriate level of management as soon as practicable. In the case of
Triton Indonesia, those charged with management should have been informed that there evidence of
fraud in the presentation of their financial statements. However, in the case of Triton Indonesia, it was
evident that management was involve in the commission of fraud. The next step should have been
performed.
2. Communication to those charged with governance
It would also be appropriate if communication will not only be limited to those charged with
management but also to those charged with governance. This usually is important when management is
also part in the commission of fraud. Pertamina and BPKP auditors should have communicated the fraud
to the Triton Board of Directors. If only they have been informed, they would have performed actions
that would eliminate or stop the fraudulent transactions of Triton Indonesia. However, as stated in the
case, some Triton executives have also consented to the fraudulent transactions. In light with this, the
next step couls also be considered.
3. Communications to regulatory and enforcement authorities
The auditor may, in certain circumstance, override the duty of confidentiality. One of these
circumstances is when it is required by regulations or law. In the case of Triton, the Pertamina and BPKP
auditors should have created a report regarding the fraudulent transactions performed by Triton
Indonesia.
4. Withdrawing from the engagement
There are many circumstances that the auditor may consider in deciding whether to withdraw from the
engagement. One of those is when the entity does not take the appropriate action regarding fraud that
the auditor considers necessary in the circumstances. In the case of Triton, Pertamina and BPKP auditors
should have considered withdrawing from the engagement.
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D. Do the Pertamina and BPKP auditor have a responsibility to apply audit procedures intended to
determine whether the client has complied with the FCPA?
 What is the Foreign Corrupt Practices Act of 1977?
The Foreign Corrupt Practices Act of 1977 is a federal statute of the United States that imposes
criminal penalties on American enterprises that bribe officials of foreign governments. The FCPA deals
with two separate, but related subjects: payments to government officials and corporate accounting and
control practices. These subjects are related because, in the past, payments made by U.S. companies to
government officials often were made out of funds that were not recorded on the company’s books or,
if made from recorded funds, were inaccurately described. Thus, the FCPA makes it a crime not only to
bribe a foreign official, but also to make false or misleading entries on a company’s books for any
purpose whatsoever. Violation of the FCPA’s antibribery provisions requires: (1) use of the "mails or any
means of instrumentality of interstate commerce"; (2) "corruptly in furtherance of"; (3) offer or
payment of money or a "thing of value"; (4) to a foreign official or to a third party while "knowing" that
some of the pay will be shared with a foreign official; (5) for the purpose of inducing the foreign official
to help the company in "obtaining or retaining business." Three of these conditions warrant further
discussion:
Foreign Official. The FCPA’s definition of a "foreign official" includes not only persons employed directly
by a foreign government, but also persons employed by commercial enterprises owned or controlled by
foreign governments and private persons who have responsibilities similar to those of governmental
employees, such as private architects or engineers retained by government agencies to design or
supervise the construction of governmental buildings.
Payment to Third Parties. A payment to a third party may be prohibited by the FCPA even if the payor is
not certain that the payment will be shared with a foreign official. It is sufficient if the payor acts with
"willful blindness," or simply fails to make inquiries that a reasonable person would make, given the
information available concerning the third party and the nature of the payment.
Obtaining or Retaining Business. This term includes not only payments made for the purpose of
obtaining a government contract, but also payments made for the purpose of obtaining favorable
regulatory decisions.
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The wording of the FCPA is quite interesting and makes its scope rather clear. The fact that the
FCPA deals only with bribes made to foreign government officials acts to exclude from the FCPA. s ambit
payments to foreign persons who are not governmental officials. Additionally, the fact that the FCPA
deals only with bribes that are intended for the purpose of obtaining or retaining business acts to
exclude grease or facilitating payments from the scope of the FCPA. A grease or facilitating payment is a
payment made to expedite or secure the performance of a routine government action. Routine
government actions include obtaining permits or licenses, processing official papers, clearing goods
through Customs, loading and unloading cargo and providing police protection. The quid pro quo
requirement of the FCPA makes inadvertent violations of the FCPA unlikely.
Answer:
Pertamina and BPKP auditors have the responsibility to apply audit procedures intended to determine
whether the client has complied with the FCPA because:
Firstly, in the acceptance of an audit, according to PSA 210, an auditor is to accept or continue an audit
engagement only when the basis upon which it is to be performed has been agreed. One of the bases is
the establishment of the preconditions of an audit. The preconditions of an audit include the use by
management of an acceptable financial reporting framework in the preparation of the financial
statements and the agreement of management and, where appropriate, those charged with governance
to the premise on which an audit is conducted. As stated, one of the preconditions of the audit is the
use of an acceptable financial reporting framework in the preparation of the financial
statements(paragraph 6). In some jurisdictions, law or regulation may supplement the financial
reporting standards established by an authorized or recognized standards setting organization with
additional requirements relating to the preparation of financial statements(paragraph A34). In those
jurisdictions, the applicable financial reporting framework for the purposes of applying the PSAs
encompasses both the identified financial reporting framework and such additional requirements
provided they do not conflict with the identified financial reporting framework. This may, for example,
be the case when law or regulation prescribes disclosures in addition to those required by the financial
reporting standards or when they narrow the range of acceptable choices that can be made within the
financial reporting standards. In the case of the FCPA, its supplementation in the form of providing a
requirement for companies to devise and maintain an accounting system which tightly controls and
accurately records all dispositions of company assets should be considered in the acceptance evaluation
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phase of the audit. Therefore, necessary audit procedures are to be conducted in order to determine
that FCPA is applied in the preparation of the financial statements.
Secondly, it would be one of the things to be considered in understanding the Entity and its
Environment. According to paragraph 3 of PSA 315, the auditor is to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement or assertion levels,
through understanding the entity and its environment, including the entity’s internal control, thereby
providing a basis for designing and implementing responses to the assessed risks of material
misstatement. One of the factors to be considered in understanding the entity and its environment is
the regulatory factors (paragraph A17). Relevant regulatory factors include the regulatory environment.
The regulatory environment encompasses among other matters, the applicable financial reporting
framework and the legal and political environment. Examples of matters the auditor may consider
include accounting principles and industry specific practices, regulatory framework for a regulated
industry, legislation and regulation that significantly affect the entity’s operations, including direct
supervisory services and others. The FCPA can be considered as among the regulatory factors that must
be taken into consideration in the performance of the audit. The accounting and record-keeping
provisions of the FCPA that apply to companies which are publicly traded in the U.S must be taken into
consideration. These provisions make it a requirement for such companies to devise and maintain an
accounting system which tightly controls and accurately records all dispositions of company assets.
These provisions are intended to prohibit the existence of "slush funds", i.e. accounts that are frequently
used to make illegal payments. They are also intended to prohibit the mislabeling of payments and the
misrepresentation of expenses. The accounting and record-keeping provisions of the FCPA are
essentially a re-enactment of established accounting procedures for publicly traded companies. The
Pertamina and BPKP shall evaluate whether the Triton Indonesia’s accounting policies are appropriate
and consistent with the provisions in the FCPA.To do this, audit procedures must be undertaken that will
determine whether the FCPA provisions must be applied. One also of the things to be considered in
understanding the entity is the internal control. According to paragraph 12 of PSA 315, the auditor shall
obtain an understanding of internal control relevant to the audit. The provisions of the FCPA regarding
accounting and record keeping are well associated with the internal control of the entity. The antibribery provisions of the FCPA also are related in understanding the internal control. The understanding
of the internal control takes into consideration its different components. One of its components is the
control environment (paragraph 14). As part of obtaining an understanding of the control environment,
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the auditor shall evaluate whether management, with the oversight of those charged with governance,
has created and maintained a culture of honesty and ethical behavior. In the case of Triton, the
management had taken a serious role in the bribery action. They even were among those who gave the
permission in the payment of bribes to the foreign official. A former accountant even called his former
superiors as “unprincipled, unethical liars”. The control environment therefore plays an important role
in understanding the entity and its environment because it can provide a pervasive effect on assessing
the risks of material misstatements. The control environment in itself does not prevent or detect and
correct a material misstatement, it may, however, influence the evaluation of the effectiveness of other
controls. Because of this, the auditors must apply audit procedures that would determine whether the
FCPA is applied because the application of the FCPA would be a thing to be considered in understanding
the internal control.
Thirdly, according to paragraph 10 of PSA 250, the auditor shall obtain sufficient appropriate audit
evidence regarding compliance with the provisions of those laws and regulations generally recognized to
have a direct effect on the determination of material amounts and disclosures in the financial
statements. Paragraph 6 of PSA 250 has identified 2 categories of laws and regulations. First category is
laws and regulations that are generally recognized to have a direct effect on the determination of
material amounts and disclosures in the financial statements such as tax and pension laws and
regulations. Second are other laws and regulations that do not have a direct effect on the determination
of the amounts and disclosures in the financial statements, but compliance to which will be fundamental
to the operating aspects of the business, to an entity’s ability to continue its business, or to avoid
material penalties. In this case the FCPA falls in the two categories. The bribery provision falls under the
indirect effect and the accounting and record-keeping provisions fall under the direct effect
category.Moreover, paragraph 7 of PSA 250 added that on each categories identified an auditor has
different responsibilities. On the first category, auditor is responsible to obtain sufficient appropriate
evidence that compliance with the provision of those laws and regulations. For the second category, the
auditor’s responsibility is limited to undertaking specified audit procedures to help identify noncompliance with those laws and regulations that may have a material effect on the financial statements.
In the case of FCPA, it has a direct effect on the amounts and disclosures in the financial statements.
This is because FCPA sets forth accounting and recordkeeping provisions that have a direct effect on the
presentation of the financial statements. Because of this effect, PSA 250 requires the auditor to perform
specified audit procedures to help identify instances of noncompliance with other laws and regulations
that may have a material effect on the financial statements.
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