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Overcharges in the Hydrocarbon Industry: What Audit Approach Should the Auditor Take?
rabindranath lackhan, cisA, ciA, cfe, llB, is vice president of CIFA. He has more than 17 years of audit experience and knowledge in the hydrocarbon sector and is currently the audit team manager at the Petroleum Company of Trinidad and Tobago (PETROTRIN). Lackhan also has international audit experience having worked in Houston, Texas, USA, and Caracas, Venezuela. Lackhan is involved in the detection, investigation and prevention of white-collar crime and has been consulted on all aspects of internal control systems and corporate governance.

The management at Oil Production Ltd. (OPL), an oil and gas production company, instructed its auditors to initiate an audit into the invoicing practices of its suppliers, after recognizing significant cost increases in the drilling and workover departments, without significant increases in the departments workload or contract costs. Furthermore, management was of the opinion that supervisors at all levels of the institution were approving invoices for goods and services that were not being supplied and/or that invoiced prices were much higher than approved price lists and contract prices. The auditors began by performing cost variance analyses among different services being provided by vendors and contractors. They also review their price lists and contracts for compliance with the provision of services, parts and equipment, as well as compliance with contracted rates. The AudiT Process The auditors decided that the best approach to be utilized included the following steps: Review all transactions of vendors and contractors over the period under investigation. Detail the total expenditure on each contractor for the period under review, and analyze the same against approved contracts and price lists. Gather all invoices of vendors and contractors with all the supporting documentation attached, and analyze the same. Create a database of all line items invoiced by detailing on a Microsoft Excel spreadsheet each item, quantity and rate for goods or services provided. Utilize Microsoft Excel, Audit Command Language (ACL) or any other computerassisted audit techniques (CAATs) to analyze the data collected. Compare findings with contracted terms to determine compliance with the same.

Review supporting documentation and compare the same with third-party information and/or files on goods and services provided. Document any discrepancies observed, and report to auditee management for corrective action. Discuss findings with management and specific vendors to demonstrate noncompliance with contracts or price lists. Seek recoveries from vendors or contractors. Overcharging occurs as a result of inadequate internal controls over the reviewing, processing and approval of contractors and vendors invoices; noncompliance with contracting procedures relating to price lists and contracts; and the ineffectiveness of evaluations and approval of tenders via tender committees. Audits of vendors international price lists and contracts were compared to invoices supported by field operations logs submitted by vendors and contractors, and the resulting overcharges and noncompliance issues were highlighted. The competitive bidding process and the contracting procedures for goods and services were also audited. The sum of US $446,373 was recovered during the audit. The following are cases involving vendor and contractor overcharges and practices that have been identified by the auditors over the years. resulTs of AudiT Price list overcharges by contractors resulted from irregular pricing methods, duplication of charges for the same equipment and service, overpricing, prices not in accordance with price lists, and inadequate controls over contract work by supervisory personnel. The following is a summary of identified methods of overcharging utilized by vendors and contractors in the hydrocarbon industry (the list is not all-inclusive): Manipulation of a floating currency exchange rate

ISACA JOURNAL VOLUME 1, 2009

 Duplication of charges for personnel and equipment Application of inflated rates Not issuing credits for goods returned Invoicing for goods and services not provided or that do not exist Invoicing for unauthorized personnel Misapplication of rates Charging daily rates instead of job rates Utilizing unauthorized and unapproved rates on invoices Paying for excess quantities delivered, not requested by customer Failing to implement contracted quantity or revenue discounts on goods and services provided Invoicing for the availability of equipment when, in fact, the equipment was not available Invoicing for operating charges when equipment was on standby Invoicing and delivering less than the contracted amounts of material ordered, but maintaining the same rate per item Invoicing for misapplication of rates for contracted schedule of personnel Excessive billing for services recommendATions To PrevenT And deTecT overchArges The following addresses audits major concerns regarding detecting and preventing overcharges by contractors and is meant to ensure that adequate coverage and internal controls are implemented to review contractors and vendors service job tickets, job logs, summary time sheets, cargo manifests and delivery notes to ensure compliance with price lists and contract terms and conditions. Furthermore, the accounting

team should create service entries on the organizations SAP accounting system to record services provided, and a unique service entry number or purchase order number should be created on the face of the service ticket to provide the appropriate audit trail and linkage to supporting documents and contractors invoices. The recommended system should provide adequate controls for contract compliance and ensure accuracy, validity, detection, completeness and timeliness of controls for the review and processing of service tickets, supporting documentation and invoices. Staff rotation is also recommended to prevent any collusive activity between staff and contractor employees. Furthermore, the rotation of staff will ensure the continuity of effort within the department and create a pool of trained employees who can adequately execute the duties outlined in the proposed job description. There must always be adequate supervision to ensure that the process is operating as planned and designed. Mandatory vacations should be implemented to prevent or detect any irregularities that may arise. Time budgets should be implemented to measure performance for the timely processing of service tickets and their supporting documents to ensure that contractors invoices are processed on a timely basis. Rate clerks should have the responsibility to investigate any discrepancies on invoices and be able to refer to previous invoices to determine the extent of the irregularity and overcharges. Furthermore, rate clerks should be able to execute spot checks on contractors to determine whether contractor invoices represent actual work completed and actual material and equipment utilized.

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ISACA JOURNAL VOLUME 1, 2009