Don't be fuelish: Fraud in fuel inventory

Fuel is a dominant expense for some industries such as power, energy, mining and manufacturing. For example, in the mining industry, one mine will burn thousands of tons of fuel in just one month for extraction, excavators, generators, four-wheel drive vehicles and heavy-duty equipment. Prudent mining companies have to stockpile huge fuel reserves to prevent disruption of operations. Of course, large quantities of a valuable commodity invite fraud.

Industries that depend on large quantities of fuel have the same fraud risk exposures at all points of the usage chain: 1) purchasing or procurement 2) storage 3) consumption or usage and 4) delivery. Fraud examiners also need to know that the most critical, risky aspects of the fueling process include the controlling of prices, quantity and quality. (The quality of fuel can be affected by the addition of water or other liquid compounds.)

In many countries, governments hold fuel supplies through state-owned companies, so customers have to "queue up" for their allotments, especially where fuel is in short supply. (Other countries with liberalized fuel policies will procure from suppliers such as Shell, Total and Petronas.) These monopolies invite briberies, kickbacks or gratuities to gain fuel supply privilege. Buyers in other countries that have more liberalized fuel supplies that preclude monopolies can be victims, of course, of bid rigging. Regardless, fraud examiners need to set anti-fraud controls in fuel procurement operations.

RISK AT THE BEGINNING

The risk begins early in fuel delivery and storage. Most won't see anything suspicious, but a truck driver might leave a small portion of fuel in his storage tank, which he can then sell quickly for his personal gain.

Every day, truck drivers from an outsourced company get in line to pick up fuel from the operators of the main tanks and drive it to field tanks or directly pump the fuel into heavy-duty equipment. The main tanks receive fuel supplies from state-owned oil and gas companies. The field tanks and equipment can be at least 10 kilometers from the main tanks, which gives crooked truck drivers plenty of time to illegally unload fuel.

A manager at a main tank facility will document a field tank operator's fuel request and the corresponding dispatch. He gives the request form to a truck driver who'll show it to a main tank operator. The operator will fill the tank on the truck and record a load of say, 10,000 liters of fuel — the maximum capacity — on the dispatch form. The truck driver delivers the fuel to the field tank operator who then signs the dispatch form. The bookkeeper for the business that owns the field tank posts the usage as 10,000 liters in the fuel stock records.

A COMBUSTIVE CASE

In an actual case, an internal auditor for a mining company, during his audit, found that the usage actually wasn't 10,000 liters; it was closer to 10,500 liters — a significant difference. The manager rationalized that the stock count is always different than the recorded amount because fuel is a material item with frequent usage and high turnover. And many times the employees don't record the stock counts. The auditor wasn't satisfied with these answers.

Here are some obvious red flags:

• The wide differences between fuel stock count and the numbers registered on the books. 
• Fuel stock counts are never conducted.
• Truck drivers directly fill gas tanks on heavy-equipment vehicles because they say that the field fuel tank capacity is relatively small and can't store enough to cover daily fuel usage of the vehicles.
• An independent agency never calibrates tank capacities and tank flow meters. 
• No one checks the tanks in the fuel trucks after every filling to assure the drivers have deposited all the fuel. 
• Main tank or field tank operators don't check the tanks before every filling to see if the drivers have emptied them. 
• Main tank or field tank operators don't check to make sure that the drivers actually supply the full 10,000 liters in every filling.

When the auditor saw these red flags flying he hypothesized a non-cash asset misappropriation and developed a fraud theory. His strategy? Surveillance and surprise inspections.

In this case, the mining company had outsourced the fuel delivery service. Several months after the routine audit, the internal auditor followed a suspected truck driver and observed him stopping in the jungle, filling a can with fuel and hiding it behind a tree. The auditor, as he conducted a surprise inspection at the outsourced company's garage, discovered that the truck's storage tank wasn't empty. The auditor also found several full portable gas cans next to the driver's seat.

The auditor found that the truck driver never came back to the garage via the official hauling route but used the village road across the jungle. The village security gatekeepers were colluding with this and several other truck drivers in the fuel misappropriation scheme.

The outsourced company fired the truck drivers, but neither it nor the mining company pursued prosecution. The mining company did ask for compensation from the outsourced company.

LESSONS LEARNED

Here are some prevention and detection lessons learned:

1. The mining company installed carefully calibrated flow meters on each fuel tank. Authorized employees now monitor all fuel loading and unloading and open tank locks and break the seals. These authorized workers only sign the receiving forms when they believe fuel has conformed with agreed quantities. Technicians now replace old unreliable meters.
2. Warehouse employees now inspect the quality of fuel after each delivery. They only sign receiving forms when they believe the fuel conforms to standards. The company will periodically send fuel samples to independent laboratories. 
3. Fuel tanks are now equipped to store more fuel to shorten the long queues of truck drivers awaiting refueling and reduce the possibility of noncompliance with proper procedures. Also, only authorized persons can now enter warehouse storage rooms and use the equipment.
4. Documents and forms have been redesigned to include boxes for the reviewer or checker's name, segregation of duties, requester name, volume, etc.
5. An independent employee (or a "godown master" — a worker responsible for warehousing functions — accompanied by an independent employee) now conducts a physical count of liters of fuel. 
6. The company now investigates all fuel differences and holds responsible persons accountable. 
7. The internal auditors now conduct surprise audits. 
8. The internal auditors now identify all fraud risks and scenarios throughout the entire fuel procurement and consumption processes. Management includes these fraud risk factors when it reviews the status of its corporate risk profile and performs compulsory fraud risk analyses and assessments. 
9. Fraud examiners and internal auditors now know how the devices and equipment work and how to measure fuel quantity and quality. They also test equipment and devices. 

Before the mining company discovered the crime, the auditors never imagined that fraud was occurring and that the perpetrators could be so ingenious in their collusion to hide the asset misappropriations.

Fortunately, the internal auditors didn't ignore a few suspicious symptoms, devised a fraud theory and scenario and conducted covert operations to gather evidence. They had the proper fraud examination training to detect problems in the system, which led to wholesale changes in the fuel transfer operations.

Diaz Priantara, CFE, CPA, CICA, is an internal auditor at Bank Mandiri in Jakarta, Indonesia. He also lectures on tax and fraud auditing at Mercu Buana University in Jakarta. 

The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.Fraud-Magazine.com or ACFE.com. Permission of the publisher is required before an article can be copied or reproduced.