#3 Internal Controls and Risk

 (c) Michael Kraten, All Rights Reserved.
Here is the link to the introduction of the game.
Here is the link to the first module of the game.
Here is the link to the second module of the game.
This is the third module of the game.
Here is the link to the fourth module of the game.

Purpose of Conversation: Your group meets with John Aqua, a Senior Manager in the Enterprise Risk Management unit of Professional Review Services (PRS). John Aqua’s firm PRS is the current public accounting firm of WOW; it may soon be replaced by John Formica’s public accounting firm BFAC.

The Board of Directors of WOW is dissatisfied with PRS’s performance because the PRS auditors failed to detect a series of inappropriate payments. The local African office of WOW made these payments to Vastarian officials shortly before the Vastarian government awarded the construction contract to WOW.

John Aqua is extremely uncomfortable with his firm’s failure to detect the payments; he is eager to minimize any professional liability for himself and for his firm. Thus, although he publicly professes his enthusiasm for WOW as a client, he would (privately) prefer to lose WOW as a client than to continue to assume personal responsibility over client engagement services.

New Information: John confesses his discomfort to you in an informal meeting. The Board of Directors of WOW then asks you to assess whether the local African subsidiary office of WOW should continue to manage its own oversight system of internal controls regarding cash disbursements. The Board asks you to assess the levels of tolerable risk and avoidable risk that WOW should continue to assume regarding the possibility of inappropriate future payments.

Choice a: Do nothing and proceed with the project.
There is a 40% probability that a future bribery scandal will force the Board of WOW to shut down the project any way, resulting in massive litigation, the loss of future business, and $500 million in shareholder losses.

Choice b: Proceed with the project, but establish home office (i.e. United States) control over certain major cash disbursements.
This choice would cost the company $5 million to establish these controls. There would still be a 20% probability of a scandal.

Choice c: Establish home office (i.e. United States) control over all cash disbursements.
This choice would cost the company $5 million to establish these controls and an additional $5 million to address federal conflict-of-interest regulations. The probability of a scandal, however, would decline to 10%.

Choice d: Shut down the project.