Triton Energy Ltd.: Case Analysis

Bag-ao, Earl Ryann

Budiongan, Ma. Nor Pia

An analysis of the Triton Energy Ltd. case

Table of ContentsA. 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 protectsafeguard 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

and objectivity in the form of bribery? And what safeguards Triton Energy could have applied to

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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?

• What control activities Triton Energy could have applied to minimize the occurrences of the illegal

payment to foreign government officials?

• How important was the independence and the audit of the internal auditor in the prevention of the

illegal act of payment to foreign government officials?

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,

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Triton posted losses of $7.8 million in 1988 and, in an effort to mitigate its oil losses, diversified into

other energy-related industries, including seismic equipment manufacturing, domestic pipeline

systems and airport services operations.

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

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plans to dump the majority of its non-oil subsidiaries, and decided to shuck major portions of its

underperforming overseas oil and gas operations.

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 52-

week 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.

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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

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

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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.

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.

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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

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

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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,

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 state-

owned 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

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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

petroleum products . The major products of the industry are fuel oil and gasoline. Other than that,

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

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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 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

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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 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

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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 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, the

elements 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.

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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 non-

American 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

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

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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 national laws. Examples of thesethis 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.

TheseThis information sare 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

16 | P a g e

decides to accept or continue the client relationship or a specific engagement. The firm should also

document how the issues were resolved.

First, according to PSA 210,

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

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

17 | P a g e

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.

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.d

According to PSA 220, the engagement partner shall form a conclusion on compliance

withindependence requirements that apply to the audit engagement. In doing so, theengagement

partner shall obtain relevant information from the firm and, where applicable, networkfirms, to identify

and evaluate circumstances and relationships that createthreats to independence and toevaluate

information on identified breaches, if any, of the firm’sindependence policies and procedures to

determine whether they create athreat to independence for the audit engagement.

e

The firm must ensure that engagement teamis complying with the quality controls prescribed by

the auditing standards and that theengagement 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.f

According to PSQC 1

, The firm should establish policies and procedures designed to promote an internal culture based on

the recognition that quality is essential inperforming engagements. Such policies and procedures should

require the firm’s chief executive officer (or equivalent) or, if appropriate, the firm’smanaging board of

partners (or equivalent), to assume ultimateresponsibility for the firm’s system of quality control.

g

The firm should establish procedures that determine the related entities from which there is a

possibility that independence of the engagement may be affected due to direct or indirect relationship

and accordingly communicate it with the partners and professional staffs.

18 | P a g e

h;

The firm should setcorrective actions and establish policies that penalize engagement team members

who doesn’t comply with ethical requirements. i

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 appropriateconsultation on difficult or contentious matters. Be satisfied that

members of theengagement team have undertakenappropriate consultation during the course of the

engagement, both within theengagement team and between the engagement team and others at

theappropriate level within or outside the firm. 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

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;

19 | P a g e

(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;

(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;

20 | P a g e

(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

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

21 | P a g e

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

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

22 | P a g e

(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.

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

23 | P a g e

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,

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

24 | P a g e

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:

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 non-

compliance 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

25 | P a g e

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

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

26 | P a g e

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.

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

27 | P a g e

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.

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

28 | P a g e

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

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

29 | P a g e

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 anti-

bribery 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,

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,

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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 non-

compliance 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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