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Daimler and the value of internal audit

The $185 million in civil and criminal payments agreed in a U.S. courtroom last week by the German car maker Daimler have been widely reported. What has been less well covered is the role of the internal audit team that could have prevented the wreck in the first place.

In 1997 Germany ratified the OECD Anti-Bribery Convention and implemented domestic enabling legislation which took effect in early 1999.

At a Daimler Board of Management meeting that year, the company’s chief internal auditor proposed changing the company’s way of doing business. He advocated a new integrity code with “anti-bribery provisions in light of the new German law which had the effect of outlawing tax deductions for foreign bribes,” according to the court papers.

In response, participants at the meeting discussed the prospect “that adopting such policies would result in Daimler losing business in certain countries,” the court documents state. Daimler’s board did actually adopt the head of internal audit’s recommendation: an integrity code. What it didn’t do, according to the Court papers, was enforce the code, train employees to comply, audit the code otherwise ensure bribery was abandoned.

A year after the integrity code was adopted, Daimler’s (un-named) internal audit chief issued a warning to senior sales and finance executives and Daimler’s legal department. In 2001, the audit chief recommended closing all the “Third Party Accounts” associated with the bribes, but Daimler’s overseas sales chief and other top overseas sales managers “resisted this recommendation”. It wasn’t until 2004 that auditors finally blew the whistle on a practice which is said to have dated as far back as 1977.

US government prosecutor, John Darden has noted that Daimler got off relatively lightly, but admitted that “Daimler showed excellent cooperation, the company has undertaken an effort to clean its own house. That reflects a serious change of mind on part of Daimler. This deserves credit.”

The fines are certainly smaller than the U$800 million paid by Siemens in 2008 to settle a US investigation into its bribery of officials to secure contracts in Argentina, Bangladesh, Iraq and Venezuela.

Whoever said that only BOFIs should have Risk Committees?

Sound audit and internal audit practices are a key protection for shareholders and while the mainstream media finds it easier to write attention grabbing headlines about executive pay, we need to ensure that the debate about shareholder-focused audit and separation of internal audit functions doesn’t get lost in the noise.


OECD Anit-Bribery Convention Update >>

What do you think?