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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 computer-

assisted 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 submittedby 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 AudiTPrice 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

rabaat laka,

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.

Overcharges in the Hydrocarbon Industry:What Audit Approach Should the Auditor Take?

ISACA JOURNAL VOLUME 1, 2009

JournalOnline

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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 bycustomer

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, supportingdocumentation 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 timelyprocessing 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.

ISACA JOURNAL VOLUME 1, 200

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