Table of Contents
A. CASE BRIEF
Case Abstract
Auditor’s Dilemma
Auditor’s Question
Research Questions
B. CASE CONTENT
The Entity
History
Business Operations:
Investments and investment activities:
Financing and financing activities:
Financial Reporting:
The Industry
Industry Factors:
The market.
Pricing.
The competition.
Technology relating to the entity’s products
Regulatory Factors:
Accounting Principles and Industry specific practices.
Other regulatory entities and taxation
Environmental consideration.
C. ANSWERS TO RESEARCH QUESTIONS:
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 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, 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 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.
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 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. 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 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.