Risky Relationships: A holistic audit strategy can provide confidence in the performance of third-party partners.

Author:Arnold, Ben
Position:THIRD-PARTY RELATIONSHIPS
 
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Third parties are becoming increasingly important to succeeding in today's complex business environment. Many organizations are assessing their core strengths and turning to a diverse range of outside organizations where specialist capabilities are required. While such relationships can give organizations a competitive advantage, they also can impact their reputations.

Like all business relationships, trust is integral in working with third parties. Internal auditors can help their organization ensure that trust is fostered and maintained. Moreover, they can assess whether the organization has established effective processes to support its third-party relationships.

A HISTORY OF SETBACKS

Using third parties has its risks. Choosing a partner and determining the type of contractual arrangement to put in place can be difficult because of the range of options available (see "Third-party Relationships and Impacts" on page 33).

Once chosen, there is no guarantee that the third-party relationship will succeed. There are numerous examples where the actions of third parties have significantly damaged the reputation and financial strength of the contracting organization. In these instances, competitors press their advantage.

TSKJ A joint venture formed by the U.S.'s M.W. Kellogg Co. (now known as KBR), France's Technip, Japan's JGC, and Italy's Snamprogetti, TSKJ won four contracts worth more than $6 billion between 1995 and 2004 to design and build liquefied natural gas facilities on Bonny Island, Nigeria. None of the participants had a majority stake in the joint venture. TSKJ reportedly used agents to bribe Nigerian government officials, and the U.S. Securities and Exchange Commission (SEC) initiated the case in 2009. The SEC declared that each joint venture partner had culpable knowledge of the payments because senior executives from each company, including some who were serving on the TSKJ steering committee, participated in meetings where the bribery was discussed.

The four companies paid a combined $1.7 billion in civil and criminal sanctions for the decade-long bribery scheme. These include: Snamprogetti and its parent company ENI paid $365 million; Technip paid $338 million; and consortium leader KBR and its former parent Halliburton paid $579 million.

The nonfinancial impacts in this case included reputational damage and criminal charges against current and past joint venture parent employees. KBR's U.S. Foreign Corrupt Practices Act (FCPA) violations impacted successor liability after Halliburton acquired KBR in 1998. These were based on book and record violations and Halliburton's lack of post-acquisition vigilance. On the...

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