FACULTY OF BUSSINESS ADMINISTRATION

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FEDERAL SENTENCING GUIDELINE FOR

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ORGANIZATION

a z 7 2SUBMITTED BY:

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SHAHBAZ AHMED MALIK (3007)

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SHOAIB TARIQ (3003)

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HAFIZ BILAL (2967)

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SHAMILA (2983)

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SUBMITTED TO: PROF. Ms. IRUM

S SUBMISSION DATE: FEB 19TH 2009

Contact: Shahbaz Ahmad

(0300-6957234, 0333-4094882)
 ACKNOWLEDGEMENTS

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First of all we are happy to complete the task which we were given with
blessing of God and also we are grateful to all the people in our life who

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have, supported us, advised us, taught us and who have always encouraged

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us to follow our dreams and ambitions. Our dearest friends and our tutors
who have taught us that no dream is unachievable. As in the words of Walt

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Disney “If you can dream it, you can do it.”

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We wish to thank our Professor Ms. IRUM, for intellectual support,

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encouragement, and enthusiasm, which made this research assignment

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possible, and his patience for correcting both our stylistic and grammatical

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errors.

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achieve our objectives.

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 The FSGO
Organizations can be federally prosecuted, and those that are convicted can
receive stiff sentences under the FSGO. Organizations also can be placed on probation.

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Examples of crimes for which organizations have been prosecuted include fraud, money

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laundering, bribery, embezzlement, antitrust violations, copyright/trademark
infringement, and environmental (water, air, toxic pollutants) violations.

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If an organization is convicted of a crime, its punishment under the FSGO can be

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lessened if it has an effective compliance and ethics program. The seven steps of an

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effective compliance and ethics program as defined by the FSGO, allow an organization
to police itself.

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The FSGO – Background

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Bressler and Bressler (2006) point out a key starting point for the bare minimum

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for business ethics and "doing good" but the FSGO update of 2001 suggests that we must

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go further. According to the FSGO, this bare minimum was not effective in decreasing

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ethics abuse that we found in the 1990s.

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The Federal Sentencing Guidelines for Organizations (FSGO) were born out of

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problems in the 1980s where companies were not punished due to crimes. Individuals

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were able to hide behind corporate status so punishment was narrowed. The FSGO gave
guidelines for punishment of companies based on size and responsibility. But with the

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punishment came some opportunity. If a company could show that they were making a
good faith effort to reduce criminal activity within their organization through programs,
the company would be less liable and investigation should be reduced as needed. This
was implemented through a FSGO program, which determined the amount of the fine and
other sanctions, level on the organization that broke the law. Showing that the company
had been trying to do the right things could reduce the responsibility. For example if an
organization was over 5000 employees and if the offense occurred despite an effective
program to prevent and detect violations of law, then 3 points were subtracted from the 5-
point total, thus reducing the punishment issued.

In 2001, there was a meeting to evaluate the 10-year effectiveness of the

guidelines and to consider improving the guidelines. In that meeting, several changes
were recommended, the biggest being to change the emphasis from companies only

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avoiding liability to having a positive business ethics program. Specifically, it was

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suggested that companies move beyond just an observance program to an “observance

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and ethics program” which entailed not only avoiding criminal liability but also keeping

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all laws. Specific guidelines where distributed as to what constituted an effective ethics

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program which have become important to all large corporations. The spirit of these
additional guidelines should be interpreted as an effort to encourage companies to do the

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right thing rather than just as a way to establish an ambiguity for getting around an ethical

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problem. The seven guidelines (established in 2004) for ethics initiatives include:

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(1) Established standards and procedures to detect and prevent criminal conduct

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(2) The organization's governing authority shall know about the ethics program and

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provide oversight for implementation and effectiveness of program. Key leaders shall

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also have responsibility and they shall identify specific key leader(s) who are responsible
to make sure people follow standards and procedures.

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(3) Make sure that the company is aware of and monitors organizational members who
have a background of carrying out illegal activities and not put them in situations of

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authority.

(4) Communicate standards and procedures to all employees (including key leaders and
when needed governing board) and others associated with the organization through
training, publications and other means.
(5) Set up a way to identify criminal conduct and give members of the organization a way
to report criminal conduct without fear of retribution and otherwise evaluate the
effectiveness of the program.

(6) Carry out discipline against those who commit an offense and those who do not report
the offense and provide appropriate incentives to perform in accordance with the

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compliance and ethics program.

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(7) Respond appropriately to problems that do occur and learn from problems that do

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occur and make changes to that the problems do not happen again.

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The Road Map

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The seven components provide a road map when assessing the compliance and

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ethics elements of corporate governance. The assessment needs to be handled in two

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steps. First, CPAs must determine if the programs and procedures that support each of the

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seven components are well designed. Second, they must determine if these programs and

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procedures are operating effectively.

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Internal auditors are best suited to determine if the seven components exist and

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are operating effectively. Because internal auditors deal with company operations on a

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daily basis, they are intimately familiar with personnel and procedures and can

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effectively assess corporate governance. If a company doesn't have an internal audit staff
to carry out the assessment, consultants could be asked to complete this task. External
auditors can use the seven steps in their audit planning to help them assess the potential

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fraud risks in their audit of clients' financial statements.

Step One
Determine existence and evaluate design of programs. Each of the seven FSGO
guidelines is very broad in nature. Hence, several programs and procedures may be
necessary to satisfy each guideline.
 FSGO 1 indicates that organizations need standards and procedures that will
prevent and detect criminal conduct these preventative and detective internal controls are
the responsibility of management, and management must take ownership of them. In

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today's environment, a proactive fraud auditing approach is also needed in high-risk

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areas. A good way to accomplish this is to have a fraud investigation unit those partners
with internal auditors. This investigation unit is an additional program that helps an

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organization meets the spirit of FSGO 1.

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FSGO 2 states that high-level personnel must ensure that the organization has
an effective compliance and ethics program. CPAs (Certified Professional Auditors)

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must determine if someone is responsible for such a compliance and ethics program. This

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would include determining which executives are responsible and how the board of

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directors and audit committee fit in.

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FSGO 3 deals with exercising due diligence when putting people into positions

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of substantial authority. CPAs must determine when and if background checks are

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performed on company personnel and who is responsible for these checks.

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FSGO 4 addresses the communication of the company's compliance and ethics

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program. It also recommends that employees receive ethics training. CPAs should
identify all communication vehicles by which the compliance and ethics program is

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communicated to company personnel. In addition, they must determine if ethics training
programs already exist.

FSGO 5 indicates that an organization needs to determine if its compliance and

ethics program is being followed. For CPAs to determine if guideline 5 is being met, they
must investigate whether or not management has a procedure to assess if its compliance
and ethics program is being followed. Guideline 5 also requires that there be an
anonymous or confidential mechanism by which employees can report a suspected
wrongdoing. In this case, CPAs should determine if there is a mechanism for this type of
reporting, such as an employee hotline or ombudsman program.

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FSGO 6 requires that a compliance and ethics program be promoted and

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enforced consistently organization wide. CPAs must determine if there are written

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policies regarding the escalation path if there is a violation of the compliance and ethics

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programs. Are the policies the same worldwide? Do the policies require consistent
enforcement for both executives and lower level workers?

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FSGO 7 indicates that an organization needs to respond appropriately to

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detected criminal conduct. CPAs should determine if there are written policies as to how

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detected criminal conduct will be handled. These policies might specify when an

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employee will be reprimanded, fired, or expected to make restitution; when a criminal

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offense will be referred to outside law enforcement; and so on.

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Because the seven FSGO guidelines are general and broad, CPAs must use their

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professional judgment as to what programs and procedures in each of the seven areas are

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adequate to achieve effective corporate governance. Because this is a new and evolving
area, few companies have attempted to perform, or have an outside consultant perform, a
comprehensive assessment of the compliance and ethics elements of their corporate

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governance structure.

Consequently, to make judgments as to what constitute adequate and well-

designed programs and procedures to support corporate governance, CPAs should
consider the following:
* Research the professional literature on corporate governance.
* Attend professional seminars dealing with this topic.
* Review the websites of relevant professional organizations, such as the Institute of
Internal Auditors, the Association of Certified Fraud Examiners, the Ethics &
Compliance Officer Association.
* Have a brainstorming session with the professional staff to gather ideas about what

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constitutes adequate corporate governance.

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Step Two

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Determine if components operate effectively. The simple existence of the seven
components is not enough. As a second step in assessing the compliance and ethics

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elements of corporate governance, CPAs must also assess the effectiveness of each of the

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seven components.

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Examples of how CPAs might assess FSGO 3 (background checks) and 5 (ethics

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program) follow. The same evaluation strategies can be applied to the other five

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guidelines.

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Background checks. FSGO 3 states that an organization must exercise due

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diligence and not place individuals with questionable backgrounds into positions of

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substantial authority. This guideline necessitates that CPAs assess the effectiveness of the
background-check process. CPAs must determine what background check procedures
presently exist. If written policies and procedures exist, CPAs must read and assess them.

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If written policies do not exist, CPAs must interview knowledgeable people as to the
informal background-check procedures that have traditionally been followed. If informal
policies are the norm or are absent in critical areas, CPAs should suggest that the
organization's human resources department develop formal written policies for
background checks.
 Both written and informal policies should be reviewed for reasonableness. For
example, are the people performing the background checks qualified to do so? Is

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adequate documentation maintained on all background checks? Are the backgrounds of

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all new hires checked with no exceptions? What, specifically, is checked - degrees

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conferred certifications, credit history, criminal record, previous employment, references,

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military background, and citizenship status? Based on the results of the background

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check, do policies exist indicating what conditions cause an applicant to be rejected? Are
there policies indicating when an application should be escalated for review at a higher

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level? Are there policies as to when an application should be investigated in greater

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depth?

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After gaining knowledge of and assessing the adequacy of the company's

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background-checking procedures, CPAs should test the procedures to see if they are

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working effectively. Ideally, that would involve selecting a random sample of employees

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who were checked. To assess if the background checks were done appropriately, they

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should be re-performed. Based on the sample, CPAs can develop some reasonable

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conclusions as to the effectiveness of the company's background-checking procedures.

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Ethics program FSGO 5 indicates, among other things, that organizations must

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periodically evaluate the effectiveness of their compliance and ethics program Assuming
that CPAs have already determined that the compliance and ethics program exists and is

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adequate (step one, above), they can move on to testing the effectiveness of the program.
 Lockheed Aircraft Corporation Scandal

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By 1971 the US Lockheed Aircraft Corporation was in severe financial trouble
and it embarked on a policy of allocating $24 million as bribe money to win foreign

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orders. In February 1976 revelations to a US Senate subcommittee led to official action in

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Japan, the Netherlands, and Italy.

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In Japan payments had allegedly been made to ex-Prime Minister Tanaka Kakuei
who received 500 million yen to ensure that All Nippon Airways bought Lockheed

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aircraft.

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In the Netherlands the husband of Queen Juliana, Prince Bernhard, Inspector-

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General of the Armed Forces, was discredited for having received $1.1 million.

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In Italy two former defense ministers were named as having purchased Lockheed aircraft

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for the Italian air force against the taking of bribes.

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In West Germany Minister of Defence Franz Josef Strauss and his party had

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received at least $10 million for West Germany's purchase of 900 F-104G Starfighters in

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1961.

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In Saudi Arabia Between 1970 and 1975, Lockheed paid Saudi Arms dealer Adnan

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Khashoggi $106 million in commissions. Khashoggi himself is said to have made
hundreds of millions from other corporations in this period, however as Khashoggi was a
mediator for bribes, his payment included money destined for officials. His commissions

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started at 2.5% + and eventually rose to as much as 15%.