Fraud: blame it on scale

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Arpinder Singh
The Financial Express
7 February 2011

The oil & gas industry contributes about 15% to India’s gross domestic product. The sector has become lucrative with rising energy demand and government intervention. This has made it a target for fraudsters.

With marked instances of fraud and corruption, it is imperative for companies in the oil and gas sector to adopt robust internal controls backed by strong data analytics to mitigate key fraud risks and raise the red flag at early stages. Monitoring of bidding and licensing processes, and third party deals are highly advisable. The fraud scenarios in this sector include irregularities in oil and gas exploration, corruption in global operations and fraud schemes.

Bribery and corruption is prevalent in the sector

Though India has improved its score on Bribe Payers Index (BPI) at 6.8 out of 10 in 2008 compared to 4.62 in 2006, the BPI survey reveals that public works and construction companies in real estate and property development, oil and gas, and mining are the most likely to attract corruption activities.

EY’s forensic review of most oil and gas majors has indicated that oil-rich nations and other developing economies such as India lack the infrastructure and controls necessary to combat corruption, thereby creating more opportunities for undetected bribery in the public and commercial sectors.

The complex supply chain in this sector necessitates involvement of middlemen and agents. Many such agents or middlemen are able to leverage historical relationships with government bodies. There is also much movement of people, import/export of machines, permits and visas.

Also, any infrastructure building involves heavy capex. Leakages in the bidding process occur on account of high value contracts. Cartelisation by vendors and payment of kickbacks are often observed in this sector.

Potential irregularities in dealing with vendors include creation of fictitious vendors, releasing of payments without purchase orders (PO) or multiple invoices being raised against the same/open PO. Such poor controls on vendor adjustments can increase exposure to risks like excess payment to vendors. Unauthorised advances disbursed to vendor may not be recoverable at times.

Companies in this sector incur heavy expenditure towards the process of finding oil and gas reserves

Fudging the deployment period for resources and usage of low graded equipment at the price of high graded equipment are the common fraud risk in the sector.

EY’s study has indicated that a lack of strong controls has increased the exposure to potential irregularities in dealings with discounts and credit control. This includes discounts that may be reimbursed on the basis of fake invoices submitted by the stockist. The sector stimulates fast and compulsive sales; wherein, fraud risks like execution of unauthorised credit limit to a customer are likely to occur. At times, excess discounts may be passed to favour select customers.