Avon Products, Inc.
Case Analysis 2
The suggested outline for the assignment is as follows:
(1) An introduction covering the background information of the case (1-2 paragraphs).
(2) Key issues of the case (about two pages).
Discuss the following issues:
A) What is the Foreign Corrupt Practices Act (FCPA)? Discuss the main provisions of the Act
that are relevant to this case study.
B) Do you believe that the President of the Company, Andrea Jung, was aware of the company
activities in China? Support your opinion. How does her management style affect your
C) Was Ms. Jung responsible for the Company activities in China?
D) Did the Company Internal Audit Group act appropriately with respect to the China activities?
Who did the group report to? Was this appropriate or should the Internal Audit Group have
reported to a different person or group? If so, who should the Group have reported to?
Provide additional insights based on our class discussions and from other sources such as
your textbook, professional auditing and ethical standards and court decisions.
(3) Conclusion (1-2 paragraphs)
Include a cover page with your name on it. The report should not exceed three pages (doublespaced with sufficient margins), excluding the cover page. It should be formatted using Times
New Roman 12-point font. Your name should appear on the cover page only. Please do not write
your name on any other page.
Submit both versions of the case study to the appropriate assignment in Canvas.
Avon Products, Inc.
The assignment will be graded on three dimensions: (1) Content, (2) Structure, Organization and
Development, and (3) Style.
Addresses the topic; provides sufficient textual evidence to
support the argument.
Introduction is present in the paper; includes the summary;
indicates how the paper is organized.
Each paragraph includes a topic sentence; develops one main
idea; has a transition sentence, where necessary, linking it to
the next paragraph.
The conclusion recaps the thesis statement and the essay’s
main points; presents a closing statement of the writer’s
The entire composition is logically organized; has a solid
argument with supporting evidence.
Main points are relevant to the thesis statement; are discussed
without too much repetition.
Is concise and precise; is free of misspellings; is free of
grammatical mistakes; lacks incomplete sentences; uses correct
punctuation; is free of jargon and clichés; cites references
1. All papers should be formatted using Times New Roman 12-point font. The text should be
double-spaced, except for indented quotations.
2. Please limit the paper to a maximum of three (double-spaced) pages.
3. Margins should be at least one inch from top, bottom, and sides.
4. Your name should appear on a separate cover page.
5. References should be listed on a separate page (not included in the 3 page limit)
6. In nontechnical text use the word percent; in tables and figures, the symbol % is used.
7. Use a hyphen to join unit modifiers or to clarify usage. For example: a well-presented
analysis; re-form. See Webster’s for correct usage.
8. Headings should be arranged so that major headings are centered, bold, and capitalized. Secondlevel headings should be flush left, bold, and both uppercase and lowercase. Third-level headings
should be flush left, bold, italic, and both uppercase and lowercase. Fourth-level headings should
be paragraph indent, bold, and lower case. Headings and subheadings should not be numbered. For
A CENTERED, BOLD, ALL CAPITALIZED, FIRST-LEVEL HEADING
A Flush Left, Bold, Uppercase and Lowercase, Second-Level Heading
A Flush Left, Bold, Italic, Uppercase and Lowercase, Third-Level Heading
A paragraph indent, bold, lowercase, fourth-level heading.
Avon Products, Inc.
Tables and Figures
Please note the following general requirements:
1. Each table and figure (graphic) should appear on a separate page and should be placed at the
end of the text. Each should bear an Arabic number and a complete title indicating the exact
contents of the table or figure.
2. Tables or figures should be reasonably interpretable without reference to the text.
3. Notes should be included as necessary.
Work cited should use the “author-date system” keyed to a list of works in the reference list (see
below). You should make an effort to include the relevant page numbers in the cited works.
1. In the text, works are cited as follows: author’s last name and date, without comma, in
parentheses: for example (Jones 1987); with two authors: (Jones and Freeman 1973); with more
than two: (Jones et al. 1985); with more than one source cited together: (Jones 1987; Freeman
1986); with two or more works by one author: (Jones 1985, 1987).
2. Unless confusion would result, do not use “p.” or “pp.” before page numbers: for example:
(Jones 1987, 115).
3. When the reference list contains more than one work of an author published in the same year,
the suffix a, b, etc., follows the date in the text citation: Example: (Jones 1987a) or (Jones 1987a;
4. If an author’s name is mentioned in the text, it need not be repeated in the citation, for
example: “Jones (1987, 115) says ...”
5. Citations to institutional works should use acronyms or short titles where practicable: for
example, (AAA ASOBAT 1966); (AICPA Cohen Commission Report 1977). Where brief, the
full title of an institutional work might be shown in a citation: for example, (ICAEW The
Corporate Report 1975).
6. If your paper refers to statutes, legal treatises or court cases, citations acceptable in law
reviews should be used.
You must include a list of references containing only those works cited. Each entry should contain
all data necessary for unambiguous identification. With the author-date system, use the following
format recommended by the Chicago Manual:
1. Arrange citations in alphabetical order according to surname of the first author or the name of
the institution responsible for the citation.
2. Use authors’ initials instead of proper first names.
Avon Products, Inc.
3. Dates of publication should be placed immediately after authors’ names.
4. Titles of journals should not be abbreviated.
5. Multiple works by the same author(s) should be listed in chronological order of publication.
Two or more works by the same author (s) in the same year are distinguished by letters after the
Footnotes are not to be used for documentation. Textual footnotes should be used only for
extensions and useful excursions of information that if included in the body of the text might
disrupt its continuity. Footnotes should be consecutively numbered throughout the paper with
superscript Arabic numerals. Use single space for footnotes.
All information (ideas, facts, interpretations etc.) obtained from all sources that you consult for your
paper must be cited even if you made substantial changes in the author's original wording or if you
are quoting from professional standards, such as an SAS or PCAOB statement. If you have any
doubts as to whether or not to cite a source, cite it. One of the most common causes of low grades
on papers is inadequate (or non-existent) citations. In addition, failure to cite the work of others that
you incorporate into your paper may be viewed as being plagiarism. By citing your sources you
protect yourself and the journal that publishes your work (in most cases) under the doctrine of fair
use in U.S. copyright law. (For more information go to http://en.wikipedia.org/wiki/Fair_use)
All direct quotes of three lines or less should be double spaced with quotation marks. Direct
quotes of more than three lines should be single spaced and indented five spaces on either side.
Avon Products, Inc.
During the early 1880s, David McConnell, the son of Irish immigrants, eked out a
livelihood in New York City by selling books door to door. The persistent McConnell tried one
gimmick after another to boost his sales. One evening, he prepared a homemade batch of rose oil
perfume. He planned to give a small sample of the perfume to each housewife willing to spend a
few minutes listening to his sales pitch. The gimmick worked; in fact, it worked too well.
McConnell’s prospective customers were much more intrigued by his free samples of perfume
than the books he was offering for sale. So, the enterprising businessman quit selling books and
began peddling his homemade perfume from door to door.
In 1886, at the age of 28, the growing demand for his perfumes—which by this time
included five fragrances—convinced McConnell to hire his first employee, Persis Albee, a 50year-old housewife. Shortly after hiring Mrs. Albee, it became apparent to McConnell that she
was more proficient at selling his merchandise than he was. McConnell eventually realized that
Mrs. Albee’s success stemmed from her ability to quickly establish a personal rapport with
potential customers, something he struggled to do. With the help of Mrs. Albee, McConnell
began recruiting other middle-aged women who displayed her charming and unpretentious
demeanor to market his perfume products. From that humble beginning, Avon Products, Inc.,
was born. Over the next century and beyond, the buoyant neighborhood “Avon lady” became a
part of Americana and served as the foundation of a global, multibillion-dollar merchandising
In 1920, McConnell’s business reached the $1 million annual sales plateau for the first
time. By the close of the twentieth century, a sales force of more than three million Avon
representatives marketed the company’s products to nearly one billion customers scattered
around the globe in 140 countries. By the year 2000, the company had reached another historic
landmark. In November 1999, Andrea Jung, a first generation American just like David
McConnell, was named Avon’s first female chief executive officer (CEO).
New CEO Energizes
Avon Andrea Jung earned a degree in English literature from Princeton in 1979. Before
pursuing a law degree, the 20-year-old Jung decided to take a short break from academics to gain
some real-world experience. During a college career fair, Jung landed a job as a management
trainee with Bloomingdale’s, an upscale New York-based retailer. Jung soon became fascinated
by the retail industry and decided to forego law school.
During the first few years of her career, Jung earned a reputation as a marketing savant,
which allowed her to move rapidly up Bloomingdale’s employment hierarchy. After leaving
Bloomingdale’s in 1985, Jung accepted a series of progressively higher-ranking marketing
positions with other major retailers. In 1994, Jung left Neiman Marcus to become the president
of Avon’s U.S. product marketing group, a position she held for two years before being
promoted to president of global marketing for the company. In 1999, Avon’s board chose Jung to
serve as CEO after a dismal earnings report caused a sharp drop in the company’s stock price.
The new CEO quickly energized Avon. During the first two quarters that Jung oversaw
the company, its sales increased nearly 10 percent while its earnings leaped by 40 percent. Those
impressive results would be overshadowed by the company’s performance over her first five
years as CEO. Over that time frame, Avon’s net income and stock price each increased nearly
300 percent. Jung would eventually become the longest-serving female CEO of a Fortune 500
firm, remain a permanent fixture on the “most powerful” women in business rankings, and be
widely recognized as the most prominent Chinese American in the U.S. business world.
A series of bold initiatives launched by Jung were responsible for the company’s quick
turnaround after she was promoted to CEO. One of those initiatives was giving Avon a sleeker,
more “hip” image to attract younger women to its products. That strategy included introducing a
line of products specifically designed for women in their twenties and hiring prominent young
women to serve as company spokesmodels, such as Academy Award-winning actress Reese
Witherspoon and sports celebrities Serena and Venus Williams.
Another strategic measure Jung implemented was expanding Avon’s international
operations. The new CEO placed particular emphasis on extending Avon’s presence in such
large and potentially lucrative markets as China, India, Russia, and Latin America. She took a
personal interest in Avon Products China (APC), the company’s largest operating unit in its
Asia-Pacific sales region.
Jung, whose parents had emigrated to the U.S. from China via Canada, was asked during
an interview why she focused so much time and energy on developing the Chinese market for
Avon’s products. “It’s a huge opportunity, not just to sell our products but to do this … by
teaching women to be self-sufficient and economically independent. Nowhere is this more
important than in China.” The Chinese subsidiary was so important to Jung that she required its
top official to report directly to her.
The Guanxi Solution
Avon faced a major obstacle that stymied Jung’s plan to exploit the Chinese market. In
1998, the year before Jung became Avon’s CEO, the Chinese government had outlawed the
“direct selling” of merchandise. Because Avon used direct or person-to person selling as the
principal marketing method for its products, the new Chinese policy posed a major setback for
the company. Following the implementation of the direct selling ban, Avon established small
retail outlets or “Beauty Boutiques” in major Chinese cities. But Jung and other top company
executives were convinced that the only way to maximize Avon’s sales in the huge Chinese
market was to somehow regain direct selling privileges in the country. To help achieve that goal,
APC established a “Direct Selling Task Force.”
Jung became personally involved in Avon’s goal of convincing the Chinese government
to lift its ban on direct selling. Because she was fluent in Mandarin and spoke other Chinese
dialects as well, she traveled to China to personally meet with high-ranking Chinese government
officials to discuss that issue with them.
Another strategy Avon used to regain direct selling privileges in China was hiring an
executive for APC’s Corporate Affairs Department to serve as a liaison between Avon and key
Chinese government officials. This individual’s employment contract mandated that he “help
open doors and develop the required ‘guanxi’ to successfully conduct business [in China].”
Guanxi is a Chinese term that refers to a system of exchanging favors to establish and strengthen
social networks and relationships. The key feature of guanxi is reciprocity.
“The norm of reciprocity is … ingrained in the very fabric of Chinese society
which is not necessarily the case in the United States. As a matter of fact, in the United
States, the reciprocity norm has been deemed unfair in the business world as it violates
rules of fair competition. Therefore, in the United States, reciprocity is viewed as more of
a hindrance or obstacle to business—an unethical act.”
A final measure Avon implemented to regain direct selling privileges in China was the
hiring of a consulting firm. That firm’s responsibility was to manage public relations issues that
might arise from Avon’s pursuit of its direct selling initiative. Avon’s management realized that
Chinese government officials are averse to public criticism. Chinese regulatory officials are
particularly averse to any suggestions that they are catering to the economic interests of large
foreign corporations’ intent on establishing or expanding operations in China. The consulting
firm’s mandate was open-ended. For example, the contract with Avon did not “contractually
bind the consulting company to comply with the FCPA [Foreign Corrupt Practices Act].”
After several years of lobbying the Chinese government, Avon received good news when
a government official told a company representative that China would be lifting its ban on direct
selling. The official also indicated that Avon would be the first company to receive a direct
selling license. In April 2005, China’s Ministry of Commerce officially granted Avon the right to
use direct selling to market its products on a test basis in two large Chinese provinces. One year
later in March 2006, the Chinese government granted Avon a direct selling license that was
national in scope. Nine months passed before any other foreign companies were granted such a
Avon took full advantage of its head start. In October 2006, Andrea Jung reported that
APC already had nearly 250,000 licensed sales representatives in China and that the subsidiary
had realized a nearly 70 percent increase in quarterly sales within the country following the
lifting of the direct selling ban.
Andrea Jung received a startling letter in May 2008 from a former APC employee. That
individual, who had served as the Associate Director of APC’s Corporate Affairs Department,
told Jung that over a period of several years his department had made improper payments to
Chinese government officials “in the form of meals, entertainment, travel, sponsorship of
cultural events, gifts of art, and cash.” The payments had been made allegedly to influence the
decisions of those officials in carrying out their assigned responsibilities.
If the whistleblower’s allegations were true, the improper expenditures had violated the
FCPA. The FCPA prohibits companies registered with the SEC from bribing government
officials in foreign countries. The federal statute also requires SEC registrants to maintain
reliable accounting records and effective internal control systems. If a company violates the
FCPA’s anti-bribery provision, it typically violates the accounting records and internal control
provisions as well.
Jung forwarded the letter to Avon’s legal department and corporate audit committee. Five
months later, the audit committee launched an internal investigation of the allegations. Avon also
reported the allegations to the U.S. Department of Justice (USDOJ) and the Securities and
Exchange Commission (SEC). The USDOJ and SEC jointly enforce the FCPA and coordinate
their investigations of potential FCPA violations.
Avon’s internal investigation and the parallel investigations by the USDOJ and the SEC
revealed that the issue of improper payments by APC to Chinese government officials had
surfaced within the company as early as April 2005. Routine audit procedures by members of
Avon’s global internal audit staff had uncovered a series of suspicious expenditures made
directly to, or for the benefit of, such officials. Subsequent to that discovery, Avon’s global
internal audit staff considered the “need to provide training on the provisions of the FCPA in the
Asia-Pacific region, including China.” This training was never provided because of budgetary
During the fall of 2005, Avon’s internal auditors performed a limited scope audit that
focused on “discretionary payments” made by APC’s Corporate Affairs Department. An initial
draft report of that audit indicated that “it was a common business practice for Avon Products
China to offer gifts and meals to various government officials and that the majority of the
government-related activities at Avon Products China were not adequately documented.” The
report also suggested that the “gifts and meals might be construed as the company’s intent to
expedite licenses from the government or to avoid unfavorable rulings against the company,
therefore potentially violating the provisions of the FCPA.”
The internal audit of APC’s Corporate Affairs Department prompted complaints from
that department to Avon’ ...
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