Avon Company Bribery Scandal in China

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Avon incorporation is one of the leading door-to-door distributors of cosmetics. After a long period of successive trading in China, the internal audit of the subsidiary company indicated some form of misappropriation. This was attributed to management disregard to ethical management in financial decisions. The company, which engaged in direct sales of cosmetic products, exposed the malpractices of foreign officials. Although China prohibited the direct sale of products in the period prior to 2006, it allowed Avon to begin the direct sales on a limited basis. After February 2006, the act underwent amendment, which allowed for direct sales, but on strict regulations. As a result, it opened up the market for Avon. These subsequent events of the company lack of emphasis on ethical values led to the vulnerability of the company to employee malpractices.

After the company realized the poor performance of its subsidiary in China, which was followed by an undisclosed whistleblower, the company undertook efforts to unravel the real fraud that occurred and tackle the imminent losses that were bound to occur. The scandal concerned the bribery given to China’s officials to get permit for firm’s operations (Xinhua, 2012, February 22). On a specific note, the bribe was attributed to the miscellaneous expenses in the company like travel, gifts and entertainment, which were not incurred appropriately. With this report, the company undertook a thorough audit of the foreign subsidiaries in compliance to the internal investigation and China’s compliance reviews. Additionally, the company focused on assessment of its accounting practices such as the reporting of the expenses especially on the affected elements of accounts. In this regard, they reviewed the treatment of expenses such as gifts, travel and payments made to agents for business dealings.

During the investigation, Avon adopted the moral decision-making principle by suspending the suspects of the practice from the company pending the investigations (Ciulla, 2007). This was based on the idea that their ethical failures had led to business failures. The officials suspended included S.K. Kao, China’s subsidiary head, Jimmy Beh, China’s CFO, C.Q. Sun, head of China’s corporate affairs, and Ian Rossester, head of global internal audit and security in New York. In this regard, the strategic management considered the malpractices of china subsidiary as out of ethical irresponsibility. Because the company upheld moral standards for its employees, the officials got involved in fraud. After the dismissal, the management, headed by chief executive officer Andrea Jung, appointed the head of Avon’s southern Latin America, Rene Ordonez, to manage the China unit with immediate effect.

In the analysis of the fraud, the company had to incur huge funds to unravel the facts about China’s operation. These amounts were obtained from the company’s net profits, which led to the decline in the profits attributable to the shareholders. In this regard, before the announcement of the scandal, the company had spent an estimated $90,000 in the previous two years conducting investigations. In 2010, when the fraud became public, the company spent $900,000 in China and other subsequent subsidiaries in other countries that were involved (Bacani, 2011, May 11). As mention by the CEO, the company had allocated similar amount as of the previous quarter to be used for investigation. With this effort, many participants in the fraud were to be unraveled and subjected to law.

The aftermath of this foreign scandal that occurred because of corruption practices of the officials was detrimental to the firm’s stock performance at the security exchange market in New York. Since the announcement of the scandal, the firm’s stock performance dropped by 8 percent. With further unraveling of the fraud, the stocks were expected to considerably decline. On the side of China, the new manager had taken effective control of the firm and operation was normal. However, the expected general revenue compared to the previous trading period had declined by a margin of two million Yuan. This significant amount required consideration in the formulation of strategic policies. In addition, its immediate rival, Amyday, had surpassed the company’s performance in the market. Therefore, it necessitated the new manager to undertake radical measures to regain the firm’s lost glory (Velasquez, 2006).

In the investigation of Avon’s subsidiary, its former president, K. Kao, underwent through evaluation with regard to misconduct. The investigators assessed his level of adherence to ethical standards in management of the firm. Initially, being the leader he could not monitor the conduct of his subordinates with regard to ethical values such as integrity and transparency. Taking into consideration the normative myopic he demonstrated, his subordinates undertook unethical practices. Due to the scandal, through his inadequacy in leadership, the company experienced a shock in the subsidiary, which led to his suspension. Based on this event, the company experienced a decline in the total revenue of approximately 2 percent. Later, the quarter’s earnings dropped by a margin of 31 percent. Nevertheless, after his replacement, there had been a lot of effort taken to retain the market share and avoid instances of similar events reoccurring.

The chief financial officer, Jimmy Beh, was responsible for misappropriation of funds while in control of the funds flow. Out of inattention blindness, the officer focused on the normal activities of the company without taking into considerations the ethical malpractices. This led to the misuse of funds resulting in huge losses to the company. In addition, as the supervisor of the funds, he could not report any fraud that took place under his authority. This later led to violation of ethical standards, which necessitate the consideration of governing laws or rules. In addition, despite having got involved in the malpractice, he attempted to conceal the bribery act by documenting financial reports that was forged. This act illustrates misconduct in official duty and lack of ethical values such as accountability and responsibility. Consequently, the company made huge losses (Hartman, 2008).

C.Q. Sun, the head of corporate affairs in China, was alleged of irresponsibility in the company affairs at the market, which led to malpractices of the officers dealing with the government officials. This crucial matter led to misconduct of the corporate affairs because of the fraud. Despite their consent of the malpractices in the firm, he portrayed inattention blindness by focusing on the failures, which adversely affected the firm. Additionally, the leader did not take the initiative of resigning until he was suspended following the investigation.

Ian Rossester, the head of global internal audit and security in New York, was alleged of irresponsibility to monitor transparently the accounting progress of its subsidiaries within the holding company. He depicted change blindness, by allowing the scandal remains unnoticed until an undisclosed individual tipped-off the CEO. This form of irresponsibility led to dire consequences to the company. In addition, the company’s reputation was severely tainted.

The publicity of the Avon bribery scandal led to a drastic drop in the market position of the company. As a result, the performance of the company in the security exchange market declined. This was followed by a rapid decrease in the profits attributable to shareholders. The engagement of Avon officials in corruptions indicated the inadequacy of tight supervision of subsidiaries in the market with regard to ethical standards. Nevertheless, the firm’s affirmative action restored the stakeholders’ faith in the company and allowed it to undertake a thorough investigation. Following this event, Avon’s rating in the public domain improved and the investigations were effective.

The media made substantial impact on the company’s performance in relation to the publicity of the reports that transpired in the bribery scandal. At the public domain, the company’s ineffectiveness illustrated the adversity that stakeholders were exposed to due to fraudulent executives. Similarly, it exposed the company’s disregard to integrity in its business activities in foreign countries. The fact that senior officials gave out bribes demonstrated the unfair practices that the company engaged in to gain favor from governments (Hartman, 2008).

While performing investigations, the firm evaluated how their employees value ethical codes in fulfillment of tasks. The firm’s subsidiaries in China discarded the codes of practice contained in the ethical codes and engaged in fraudulent activities, which tainted the company’s image. The legal breach was great in China authority exposing the company to additional charges. For the key culprits, they faced the law for their official irresponsibility. The practice of bribery in china could not succeed because it was unjust means of seeking growth and expansion in the market. Nevertheless, the wastage of resources and corruption contributed to the inefficiency in operation leading to decline in market. Thus, with lack of ethical responsibility, the officials could not survive the problems they initiated.

References

Bacani, C., & 2011, 1. M. (2011). Lessons From Avon’s China Bribery Scandal | CFO innovation ASIA. Strategic Intelligence for CFOs, Finance Directors, Controllers and Treasurers in Asia | CFO innovation ASIA. Web.

Ciulla, J. B., Martin, C. W., & Solomon, R. C. (2007). Honest work: a business ethics reader. New York: Oxford University Press.

Hartman, L. P., & DesJardins, J. R. (2008). Business ethics: decision-making for personal integrity and social responsibility. Boston: McGraw-Hill/Irwin.

Velasquez, M. G. (2006). Business ethics: concepts & cases (6th ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.

Xinhua. (2012). Avon bribery scandal bodes poorly for multinational firms – China.org.cn. China.org.cn – China news, weather, business, travel & language courses. Web.

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Avon Company Bribery Scandal in China

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