Beruflich Dokumente
Kultur Dokumente
INTRODUCTION
T
he case of South MunaiGas enhances student learning by engaging students in an
interactive class discussion regarding cultural and structural factors that may lead to fraud
and corruption activities in an international context. It challenges students to address fraud
types, bribery, corruption, and misappropriation of assets through procurement procedures, based
on a real-world situation in Kazakh and Russian companies. In contrast to other internal control
cases (see Reisch 1999; Mellon and Marley 2013) that concentrate more on the auditor’s role and
responsibilities, this case gives students the opportunity to step into top management’s shoes and
We benefited from discussions from the editor and three anonymous reviewers. We gratefully acknowledge the
financial support of the School of Accountancy and MIS at DePaul University.
Editor’s note: Accepted by Charles D. Bailey.
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review the situation in all its complexity from that perspective. It exposes students to decision
making in an ethically ambiguous situation, and requires them to be creative and consider multiple
factors in solving a problem of corporate corruption in a real company. Similar to some previous
studies (Higgins 2012; Holtzblatt and Tschakert 2014, Dutta, Caplan, and Marcinko 2014), the
case immerses students in an original business and cultural environment as they examine
corporate governance structures. This case builds upon prior studies by focusing on internal
control weaknesses and the tone among senior management that can lead to the reoccurrence of
fraud following a merger of two entities. Moreover, the case demonstrates how corporate
corruption can develop and transform through time, and how poor governance structures can allow
company executives to commit fraud again and again.
PART ONE
Background
Kazakhstan is a country in Central Asia whose territory has historically been inhabited by
nomadic tribes. Kazakhstan is the ninth largest country in the world by geographic size, and its
territory is larger than Western Europe by 1,052,100 square miles. However, Kazakhstan’s
estimated population in 2016 was around 18 million people, compared to the European Union’s
510 million; Kazakhstan’s population density is among the lowest in the world at less than 15
people per square mile. From the mid-19th century until the early 1990s, Kazakhstan was part of
the Russian Empire; the country declared independence in 1991. Despite 150 years of history as a
part of the Russian commonwealth, the Kazakh people preserved their customs and rich nomadic
culture. Patriarchy and blood ties are of significant importance within the Kazakh community. Most
inhabitants of Kazakhstan proclaim that family is among the most important values in life. Strong
respect for elders and power are also a cornerstone of Kazakh society. Citizens demonstrate
respect for power by consistently electing the country’s current President, Nursultan Nazarbayev,
by large margins (more than 90 percent of the vote).
Kazakhstan is a fast-growing economy and conducts business in the solid hydrocarbon
industry. Over the last decade, Kazakhstan’s economy grew at an average of 8 percent per year
before a slowdown in 2014.1 International financial institutions describe corruption as one of the
biggest problems in doing business in the country. Prior to 2007, the World Bank listed Kazakhstan
as a corruption hotspot, along with Angola, Bolivia, Kenya, Libya, Pakistan, and others.2 In 2016 it
was ranked at a poor 131 out of 176 countries based on the Transparency International Corruption
Perception Index (e.g., http://www.transparency.org), which equates to a score of 29 out of 100
(see Table 1).
In the 1990s and early 2000s, the economy in Kazakhstan was unstable and the Kazakhstan
Stock Exchange (KASE) was volatile. In this context, shares of one of the oldest Kazakh oil and
gas (O&G) drilling companies, South MunaiGas (SMG), changed ownership regularly. The
company had been established in 1958 in Southern Kazakhstan (see Figure 1), but in 1994,
President and CEO of SMG, Rahim Kabaev, purchased enough shares to gain complete control
over the company. He had been CEO for ten years prior to his 1994 purchase. With ongoing
changes in the ownership of other shares, R. Kabaev was able to solidify his authority to make
1
International Monetary Fund (IMF 2013).
2
Stodghill (2006).
2017
Journal of Forensic Accounting Research
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FIGURE 1
Map of South MunaiGas Business Activities
decisions that would increase his personal wealth. R. Kabaev made several decisions during his
tenure at SMG that resulted in customer order decreases, equipment obsolescence, lower net
income, and the hiring of unqualified personnel. Consequently, toward the end of 2006, SMG was
headed toward bankruptcy.
Russian-based NorthOilService (NOS) acquired SMG in 2007, with the intention of expanding
into the Kazakh market and providing a full array of services to existing SMG customers. Due
diligence performed by one of the Big 4 accounting firms prior to the SMG acquisition revealed
significant cost inefficiencies in SMG’s operations, weaknesses in management, and inaccuracies
in accounting reporting. Although the audit suggested the possibility of mismanagement, the type
and extent of that mismanagement were unclear. NOS management still considered the deal
profitable and although SMG was headed toward bankruptcy, it still had a favorable reputation in
Kazakhstan as the oldest and best-known drilling contractor in the country, and had a strong
customer base. NOS’s strategic plan for SMG called for significant improvements and investments
that included purchasing new drilling rigs, increasing the number of drilling teams, and expanding
SMG’s customer base geographically. Since NOS did not have prior knowledge of drilling
full power of attorney for SMG, he formally reported to the President/CEO of SMG, R. Kabaev.
Natalie Semenov, Vice-President of Economics and Finance for SMG
* Hired by NOS, N. Semenov was responsible for all financial and accounting issues at
SMG. In addition, she was the wife of V. Semenov and reported to the President/CEO of
SMG, R. Kabaev.
A. Sernev and both Semenovs were highly experienced in drilling operations and were hired
by NOS specifically for the SMG project. They had been working together for more than ten years
and had participated in many successful O&G drilling projects in northern Russia. They brought
with them several team members with whom they had worked previously: key engineers,
mechanics, and procurement specialists. This management team concentrated directly on the
reorganization of SMG’s production practices and on the $30 million investment program that NOS
initiated to increase profitability for SMG.
Although the pre-acquisition audit raised flags about SMG’s accounting practices, it was
through the work of the new management team that NOS discovered widespread corruption at
SMG. NOS’s legal counsel led the investigation of these practices of corruption, joined by two new
candidates who were brought in to handle security and procurement; the three came to form an
unofficial anticorruption team:
Yuri Schmidt, Lawyer of NOS’s legal department
* Y. Schmidt was responsible for the procedural guidelines of NOS’s standard corporate
policies and for all SMG internal legal issues. To ensure his independence and impartiality, he
reported directly to the Deputy Director on Legal and Organizational Issues (LOI) for NOS.
Anton Petrov, Vice-President of General Affairs for SMG
FIGURE 2
Corporate Structure for South MunaiGas
February 2008
*A. Petrov was an experienced security officer who was hired by NOS to oversee
production support and security. He reported to the First VP, V. Semenov.
Roman Borisov, Deputy Head of Procurement for SMG
* Hired for the project by NOS, R. Borisov was responsible for procurement within SMG.
In order to optimize SMG’s management system, NOS issued a new corporate structure for
SMG in February 2008 (see Figure 2). SMG’s spending for production support activities, such as
transport, maintenance, procurement, and food supply, had been enormously high. At the same
time, the quality of these services was poor and the majority of these operations were non-
transparent. Under the new structure, all production support divisions such as transportation,
procurement, and social services were subordinated to the new VP of General Affairs.
3
Per Prime Group, Kazakhstan, ‘‘The legal system of Kazakhstan, along with legal system of Italy, France,
Germany, and Austria, and other countries, belongs to the Roman-German (continental) legal system as
opposed to the Anglo-Saxon legal system (England, the U.S.), where judicial precedents are the main legal
sources, Roman-German legal system has a single hierarchically structured system of enacted law sources’’
(see, http://www.prime-group.kz/pdf/2LEGAL_SYSTEM_OF_KAZAKHSTAN.pdf ).
Employees in warehouses and drilling sites appropriated company materials and supplies for
their own profit and that of people close to them. To cover their thefts, they would report higher
consumption of materials and supplies in production reports. Supervisors would conspire with
other employees in the ‘‘hiding’’ of company assets. Some workers stole equipment from drilling
sites and sold it for their own profit. SMG also provided food services to their employees. Cooks
and staff involved in cafeteria service would write off food supplies and transfer those supplies
directly to a restaurant owned by the Deputy Head of Social Supplies, who was R. Kabaev’s
cousin.
SMG management and employees employed a great variety of methods to engage in fraud
and corruption. Foremen used SMG’s transportation services, equipment, and personnel to
provide services to third parties for their own profit rather than the benefit of SMG. Employees
would sign maintenance reports for SMG work that was not done, and the cash paid to contractors
for incomplete maintenance work at SMG would be split between the contractor and those SMG
employees. In another scheme, SMG staff intentionally allowed transportation equipment to
deteriorate so that parts could be sold cheaply to transportation contractors.
Although there was plenty of corruption in the aforementioned operations, the main cash flows
from corruption came from fraudulent operations in SMG’s procurement process. The head of the
procurement department, Nik Bervo, was one of R. Kabaev’s closest associates. N. Bervo
organized operations and negotiated with the parties involved, thus allowing R. Kabaev to avoid
direct involvement. Nonetheless, all significant procurement transactions were controlled
personally by SMG President R. Kabaev.
The fraudulent procurement process took place in a codified manner. First, the procurement
department collected bids from suppliers for desired material or equipment. Second, N. Bervo
would negotiate the deal with suppliers. N. Bervo’s intention during price negotiations was not to
get the most competitive price, but to determine which suppliers were willing to give a kickback
payment. The typical kickback for SMG was 20 percent of the total deal. This was usually split
equally between R. Kabaev and N. Bervo. In the contract and other applicable documents, the
transaction cost and kickback were aggregated into one price in order to hide the kickback. These
documents were signed by President R. Kabaev. Once these suppliers received payment from
SMG, they would transfer back the negotiated kickback amount in cash personally to N. Bervo. He
would then give R. Kabaev his share.
For significant purchases (e.g., drilling bits, spare parts for the rigs, or fuel), N. Bervo would
use another scheme. He would find the supplier with the best price and/or the best discounts, but
not necessarily the best quality. An associate of either N. Bervo or R. Kabaev would create a
company that would sign a contract with SMG to provide that good. The contract would require a
pre-payment. The contract price included the price of the supplies from the proposals that N. Bervo
obtained from other suppliers, expenses for the newly created company, and an amount for N.
Bervo and R. Kabaev. The company supplying SMG would use the funds from the prepayment to
obtain supplies, but these goods would be of lower quality since they were the lowest priced. In
fact, sometimes the supplies were used and worn out. At other times they were materials stolen
from SMG.
N. Bervo justified the high costs of materials and supplies by arguing that the company was
experiencing shortages of materials needed urgently to continue operations in a timely manner.
However, the shortages were based on N. Bervo’s practices of insufficiently reserving supplies,
which he justified as a cost-saving measure. To prevent supplies from running out, N. Bervo would
make expensive purchases under the pretense that any long production stoppages would result in
losses for SMG. As a result of these procurement practices, SMG suffered high supply costs,
inefficiency, and low-quality materials and supplies.
PART TWO
Anticorruption Measures after the NOS Acquisition
N. Bervo’s fraudulent procurement process was well-organized and hidden. Additionally, the
President, R. Kabaev, protected N. Bervo. Kazakh corporate culture, and especially the strong
power of elites, meant that NOS could suffer major blowback if it chose to dismiss N. Bervo without
direct evidence of wrongdoing. This corporate culture is not unique to Kazakhstan; the dominant
Russian corporate culture shares many of these norms. In the face of these standards, NOS
began to implement new procedures at each step of SMG’s procurement process to avoid
corruption, and they focused their efforts on finding information to document N. Bervo’s
misconduct.
R. Borisov was hired by NOS as Deputy Head of Procurement to serve under N. Bervo and
observe his daily activities. R. Borisov also collected data on suppliers and the market. He
analyzed the prices of deals made by N. Bervo and compared them to prices in the open market.
R. Borisov’s scrutiny created enough incentive for N. Bervo to change suppliers, which led to an
increase in the quality of material purchased and a decrease in its prices.
At the same time, Y. Schmidt, NOS’s lawyer, collected all active contracts and analyzed
SMG’s rights and liabilities with regard to its customers and suppliers. He analyzed potential risks
of key SMG assets including land, buildings, and drilling rigs, and he developed measures for
asset protection. For example, Schmidt wanted to protect the drilling rigs from being taken over by
someone who could win a potential lawsuit. Schmidt worked on improving and implementing
internal control procedures. He adapted NOS’s corporate bylaws for procurement procedures and
contract work based on Kazakh law and the environment at SMG. The Board of Directors voted to
implement these new bylaws, making them mandatory for the company. These new control
procedures (see Figure 3) required that deals over $35,000 be subject to Tender Committee
approval. This committee consisted of the First VP, the VP of Economics and Finance, the Head of
Accountancy, NOS’s lawyer, and the head of the Initiating Department. Contracts over $100,000
were subject to approval by the Board of Directors. Also, all contracts were subject to revision by
the Committee before being signed by President R. Kabaev. Y. Schmidt was a Committee
member. He used his role on the Committee to screen all company deals, as well as the legal
FIGURE 3
SMG Procurement Processes after NOS Acquisition for Bids over $35,000
documents of counterparts. Y. Schmidt would examine these documents for legal and corruption
risks. The new bylaws made Schmidt responsible for implementation and compliance. He was also
responsible for monthly reports to the Deputy Director on LOI for NOS4 and the President of SMG.
These reports documented all violations of the new bylaws by SMG’s officials, including those of
President R. Kabaev.
A. Petrov, the VP of General Affairs, collected and analyzed the information provided by R.
Borisov and Y. Schmidt. A. Petrov would then work with regular NOS employees and SMG
counterparts to gather data from these insiders about the fraudulent practices within SMG. In
addition to this work on documenting corruption, A. Petrov also improved control of production
processes. By implementing new reporting forms, he organized proper controls over the use and
maintenance of corporation transport and equipment. He hired an independent security agency to
secure inventories, warehouses, and other SMG facilities. And along with the VP of Economics
and Finance, A. Petrov developed and implemented a new wage system for drilling teams that
motivated the teams to work faster and save materials.
All of these measures revealed internal corruption mechanisms and structure, aided in
removing corrupt executives, and helped to consolidate control of SMG’s finances. Although these
measures were successful, the new management still lacked direct evidence of N. Bervo’s
involvement in corruption. However, the Deputy Head of Procurement R. Borisov eventually found
a supplier willing to confirm that N. Bervo requested illegal kickback payments. On the phone, the
supplier confirmed N. Bervo’s request for the kickback payment and provided details of the
proposal including amounts and terms. However, the supplier refused to provide any written or
give official oral confirmation of this story. This left the management team at an impasse. However,
A. Petrov asked a new employee, an IT specialist, to come into the office to transcribe the
supplier’s story from dictation. A. Petrov then asked the new employee to write the supplier’s name
on the paper and to sign it. Even here we see ethical standards that differ from the ideals advanced
in Euro-American practice. If an informant refuses to be named in front of those whom he/she is
incriminating, it is unethical to use that informant’s name against his/her will, especially since the
informant’s safety may depend on protecting his/her identity. Nonetheless, SMG’s First VP (A.
Petrov) and legal counsel (Y. Schmidt) went to the President’s office and placed the incriminating
transcript in front of President R. Kabaev. R. Kabaev called N. Bervo into his office and after N.
Bervo read and processed the information, N. Bervo quietly wrote his letter of resignation.
TRANSFORMING CORRUPTION
The new management succeeded in taking control of SMG’s processes, step by step.
However, the unofficial anticorruption team (A. Petrov, R. Borisov, and Y. Schmidt) came to the
conclusion that a new corruption system was taking the place of the old one. This new system was
strategically designed by the new management, including managers newly hired by NOS for the
SMG project. The methods of the system were similar to the old system, but the fraudulent
operations were more sophisticated.
4
The Deputy Director on Legal and Organizational Issues for NOS was in charge of corporate development of
NOS. He personally controlled the process of establishing a new corporate system in SMG, including
anticorruption work, internal control, contractual and corporate legal work, internal organizational issues, and
human resources management. He exercised his tasks in SMG though Y. Schmidt and other new SMG
employees who reported directly to him. He worked directly with SMG’s Board of Directors and reported to the
CEO for NOS.
The new corruption system was smaller and more organized. V. Semenov (First VP of SMG)
and N. Semenov (VP of Economics and Finance) controlled the system, and A. Sernev (Head of
the Project from NOS and a member of SMG’s Board of Directors) headed and secured its
operations. The system united the people that the Semenovs’ and A. Sernev had brought with
them to work at NOS/SMG. However, these managers were careful to employ only corruption
methods that were extremely difficult to detect. They were able to formalize their procedures based
on N. Semenov’s control over the company’s financial and accounting systems. Due to
Kazakhstan’s procedures that place great control in the hands of powerful elites, thus allowing
companies to select their auditing company, N. Semenov was able to personally choose SMG’s
independent auditor.
A. Sernev and the Semenovs’ engineers and supervisors took advantage of the increase in
efficiency of the drilling teams by using them to provide services to third parties for their own profit.
The majority of corruption profits were laundered by NOS’s $30 million SMG investment program,
through shadow companies owned by the Semenovs and A. Sernev.
EPILOGUE
At the beginning of 2009, the Semenovs, A. Sernev, and some of their subordinates were
fired. Word spread quickly through the drilling industry that companies ought not to hire these
former executives. However, no legal action was taken against the Semenovs and A. Sernev,
since NOS lacked direct evidence of their fraud. As a result of implementing anticorruption
measures in the procurement process, the company saved more than $2,500,000 on key material
purchases within the first six months of 2009. Despite the fact that President R. Kabaev was
dismissed in Spring 2009, NOS hired him as an honorary consultant without authority. The desire
for maintaining an ongoing working relationship on the part of both parties demonstrates the lack of
acrimony involved in the case. Although SMG is a particularly extreme example, practices of
bribery and fraud are widespread in the Kazakh business community; rather than punishment,
maintaining amicable relationships among elites is a Kazakh cultural priority.
The NOS Board of Directors appointed one of SMG’s drilling managers who was not involved
in A. Sernev and the Semenovs’ frauds to be the new President of SMG. A new Head of
Accountancy was also hired at the time. The NOS Board also established a new corporate
structure for SMG by abolishing the First VP position and including a lawyer in the SMG staff who
reported directly to the President. By the end of 2009, all NOS corporate procedures had been fully
adopted within SMG. R. Borisov and Y. Schmidt were transferred to a different NOS company and
A. Petrov left SMG in 2010.
After a difficult period of recovery, which included only 77,051 drilled meters in 2008, SMG
broke its historical record with 227,099 drilled meters in 2010. It became the most profitable
company in the NOS group and accounted for 16 percent of the Kazakhstan O&G drilling market.
The NOS shareholders that had provided funds for the SMG project began to receive profit
payments in accordance with terms of the investment agreements. However, in 2010 the NOS
Security Department began to receive reports of corruption-related activities that were being
perpetrated by the ‘‘new management.’’ SMG counterparts and employees reported that the
practice of shadow companies and kickbacks was back, and that percentages of such payments to
the new President are even higher than they were to the old President, R. Kabaev. Drilling and
cementing teams received direct orders from the new President to perform works for third parties
without any contract, but with direct cash payment to the President.
No one from new SMG management team confirmed these facts; nevertheless, NOS’s
Security Department collected a significant amount of evidence that indicated widespread
corruption, and presented this evidence to NOS’s CEO. Despite the incriminating data collected,
the CEO of NOS did not proceed with any actions against the new CEO of SMG. Again, this lack of
concern for high-level corruption points to both Russian and Kazakh norms of protecting elites, and
an understanding of a certain level of fraud as being standard practice. The extent of these
practices may differ from the U.S. and Western Europe, but analysts ought to seriously consider
Western firms’ own practices of protecting their ‘‘elites’’ before dismissing this case as inherently
and diametrically juxtaposed to business practices in the U.S. and Western Europe.
REFERENCES
Dutta, S. K., D. H. Caplan, and D. J. Marcinko. 2014. Blurred vision, perilous future: Management fraud at Olympus.
Issues in Accounting Education 29 (3): 459–480. doi:10.2308/iace-50787
Higgins, H. N. 2012. Learning internal controls from a fraud case at Bank of China. Issues in Accounting Education 27
(4): 1171–1192. doi:10.2308/iace-50177
Holtzblatt, M., and N. Tschakert. 2014. Baker Hughes: Greasing the wheels in Kazakhstan (FCPA violations and
implementation of a corporate ethics and anti-corruption compliance program). Journal of Accounting Education
32 (1): 36–60. doi:10.1016/j.jaccedu.2014.01.005
International Monetary Fund (IMF). 2013. IMF Executive Board Concludes 2013 Article IV Consultation with the
Republic of Kazakhstan. Press Release No. 13/308, August 14. Available at: https://www.imf.org/en/News/
Articles/2015/09/14/01/49/pr13308
Mellon, M. J., and R. Marley. 2013. Roger’s dilemma: A situational examination of ethical behavior in the presence of
internal control deficiencies. Issues in Accounting Education 28 (2): 337–351. doi:10.2308/iace-50365
Reisch, J. T. 1999. Brodnax Minerals Company: A case study on auditors’ responsibilities. Issues in Accounting
Education 14 (4): 589–612. doi:10.2308/iace.1999.14.4.589
Stodghill, R. 2006. Oil, cash, and corruption. The New York Times (November 5). Available at: http://www.nytimes.
com/2006/11/05/business/yourmoney/05giffen.html
Learning Objectives
Students will gain an appreciation for the impact of culture within an organization and
country/society on corporate corruption.
Students will identify the internal and external fraud risk factors at SMG that led to
development and evolution of corporate corruption in SMG.
Students will gain knowledge about fraud types, bribery, and corruption.
Students will analyze decisions made by NOS’s management, SMG’s internal control
weaknesses. and make suggestions for improving internal controls.
Students will recognize corruption methods and tactics.
IMPLEMENTATION GUIDANCE
Intended Audience of the Case
The case can be effectively used in a graduate or advanced undergraduate level auditing,
managerial accounting, corporate governance, forensic accounting, or fraud examination course.
This case has been implemented by the authors and instructors at other universities in graduate-
and undergraduate-level auditing and fraud examination courses. However, given the emphasis on
decision making and critical thinking, the case is appropriate for use in any course listed above,
especially with a fraud examination component.
Case implementation requires approximately 90 minutes of class time.
Implementation Timeline
Based on two implementations of the case, the authors estimate the following timeline:
5
The graduate students who participated in the case activities did not receive any formal instructions from their
instructor.
TABLE 2
Student Evaluation of the Learning Objectivea
Mean Mean Mean
Response Response Response
Grad Undergrad Grad and
Survey Item Course Course Undergrad
I learned additional knowledge about the impact of culture 1.50 1.73 1.61
within the organization and country/society on corporate
corruption.
I learned additional knowledge about identifying internal and 1.67 2.01 1.84
external fraud risk factors.
I learned additional knowledge about fraud types, bribery, and 1.81 2.07 1.94
corruption.
I learned additional knowledge about identifying factors that 1.67 1.96 1.81
can lead to corporate corruption.
The case provided a good opportunity to identify internal 1.69 1.57 1.63
control weaknesses, including management override, and
suggestions for improving internal controls.
The case provided a good opportunity to recognize corruption 1.78 1.77 1.77
methods and tactics.
It was a valuable educational experience to complete a case 1.58 1.73 1.66
that is based on detecting fraud and corruption in a different
cultural environment.
I would benefit from having more cases like this one where I 1.75 1.73 1.74
can apply knowledge that I have learned.
a
1 ¼ Strongly Agree; 2 ¼ Agree; 3 ¼ Somewhat Agree; 4 ¼ Neither; 5 ¼ Somewhat Disagree; 6 ¼ Disagree; 7 ¼ Strongly
Disagree.
REFERENCES
Ernst & Young (EY). 2014. Global Fraud Survey. Available at: http://www.ey.com/Publication/vwLUAssets/EY-13th-
Global-Fraud-Survey/%24FILE/EY-13th-Global-Fraud-Survey.pdf