The case of the missing boiler fuel

The new head of a milk processing plant in India was reviewing his company’s management reports when he noticed a glaring discrepancy in the amount of fuel indicated in the report and amount it actually had. The plant, which used the leaves and husks of eucalyptus to fuel its boiler, should’ve had 150 tons of fuel, or 20 heaps of eucalyptus. But the plant head could only find two heaps. He asked the head of engineering and the boiler manager to account for the discrepancy but only got evasive answers. When the company’s internal audit team began to dig into the fuel reports to resolve the discrepancy, they discovered that records were missing.

The milk processing plant hired my company for a forensic investigation to resolve the matter. Here I’ll guide you through our audit process and how we discovered a scheme among the plant’s engineering head, boiler manager and the plant’s vendors to manipulate the company’s fuel supplies for financial gain.

Our approach

My team met with the company’s head of internal audit for a background briefing and to learn whether they suspected anyone of fraud in the company. We then designed our investigation to include multiple data analyses, including an e-discovery review of the boiler manager’s data, a review of the company’s boiler fuel consumption and procurement processes, and a market benchmarking analysis.

E-discovery review

During e-discovery reviews, forensic investigators examine emails, and other digital communications and data that can be used in legal proceedings. We imaged the boiler manager’s laptop and made a backup of the server data. Then we selected relevant keywords to efficiently search through documents and information. We reviewed communications among the boiler manager, procurement employees and vendors, and put the data in an Excel file. The information was hosted and processed using the e-discovery platform, Relativity. (See “What Is E-Discovery?” Proofpoint.)

Analytics review

Our team set about analyzing data from the company’s accounting department and its operational enterprise resource planning (ERP) software. (See “What is ERP? A Comprehensive Guide,” by Ian McCue, Oracle NetSuite, Oct. 26, 2023.) We used tools such as Power Bi and SQL for data analysis and visualization.

To determine if there were any abnormal consumption patterns, our team examined the periodic (i.e., yearly, semi-annual, quarterly, monthly, biweekly and weekly) percentages of consumed boiler fuel. This included analyzing the periodic input (fuel) to output (steam generated based on readings of steam-flow meters) patterns of the boiler fuel to detect any unusual spikes in consumption. We also examined the boiler fuel’s purchase patterns.

Process walk-through

We conducted a walk-through of our client’s procurement-to-consumption process, which encompassed purchases of fuel, inventory management and boiler operations. It was during our walk-through that we learned how the closed-circuit television (CCTV) in the boiler storage yard had been broken for over a year and the boiler manager never requested its repair. We also discovered that:

• Only three months’ worth of manual registers were available for the 24-month review period; 21 months of registers were destroyed.
• There was no process for maintaining weighment slips, which vendors submit to record the weight of a vehicle and its cargo.
• No procedures existed for keeping track of the boiler fuel’s weight.

Transaction testing

After analyzing the data and the company’s processes, we tested all transactions that the company had previously flagged as problematic. We reviewed the sample transactions from the boiler manager’s requests for husks and eucalyptus leaves from the vendor to their arrival at the plant. We also reviewed documents for inventory, materials storage, and the company’s burning and monitoring procedures.

Market benchmarking

To measure the fuel supplier’s performance in the market, we performed a market benchmark analysis with a mystery-shopping exercise at the fuel supplier’s business. We gathered intelligence about the fuel supplier’s product quality and its customers’ purchasing habits. (See “Benchmark your business,” Business Victoria.)

The outcome

Our investigation revealed that 40% of the data on the boiler manager’s laptop had been deleted. Deleted data potentially included draft Microsoft Excel spreadsheets or PDF files, based on their file names. In my experience with investigations in India, individuals sometimes maintain spreadsheets in obscure folders. These spreadsheets are used for various purposes, such as recordkeeping or financial calculations.

We also noticed spikes in boiler fuel consumption patterns, so we examined those points in time in the boiler manager’s data obtained through our e-discovery. We noted that whenever there was an increase in the amount of fuel purchased from the supplier, there were also frequent calls between the boiler manager and the supplier.

Footage from cameras at the entry gate and weighment areas showed that multiple vehicles entered the plant, but those vehicles were all assigned the same identifying vehicle number in the procurement reports. Typically, each vehicle is assigned a unique registration number by the Regional Transport Office (RTO). With the help of public domain information, we confirmed that the vehicles coming into the plant were tractors and small trucks.

Our benchmarking exercise revealed that although the fuel cost was similar for all the vendor’s customers, the calorific value, or amount of heat produced from combustion, was lower than it should’ve been. No laboratory tests for moisture and dust content in the leaves and husks had been performed, so we couldn’t reconcile actual consumption with theoretical consumption. Accurate moisture and dust content would’ve allowed us to calculate the actual energy derived from the fuel and compare it to the theoretical consumption based on the fuel’s specified calorific value. If actual energy output is significantly lower than expected due to high moisture or dust content, a vendor could be supplying subpar fuel.

The boiler manager’s bank statements showed that he received money from companies and individuals connected to overhauling, repair and maintenance vendors. He received procurement transaction documents through emails and reverted them to the supplier before sending the invoices to the company. Metadata from the vendor’s invoices and price quotations showed that the boiler manager had modified or created those documents. Upon further examination of the numbers reported to management through the ERP records, we noted that the management information systems (MIS) reports were inconsistent with the report from accounting and the operational ERP.

Based on our investigation, we surmised that the engineering head and boiler manager were possibly colluding in a kickback scheme with vendors. Three years of financial transactions among the engineering head, and repairs and maintenance vendors amounted to 8 million rupees, and 4 million rupees with overhauling vendors.

From interviews with the company’s stakeholders, including vendors, employees and management, we learned that people were indeed suspicious about the boiler manager and thought he was living beyond his means. They took note of his expensive phone and car that cost more than what his salary could afford. He later admitted that the engineering head had given him the car and the phone to keep silent about the scheme.

The repair vendors had agreed to perform substandard work on the plant’s boiler, most likely to split the cost savings. Further, some of the vendor’s bills were fictitious since its employees never entered our client’s premises and were charged as instructed by the boiler manager and engineering head. The vendor’s fraudulent bills totaled 23 million rupees.

Our client ultimately fired both the boiler manager and engineering head, and initiated proceedings to recover their ill-gotten gains.

Prevention and detection

As fraud examiners know, implementing preventive measures and processes can help protect a company from the type of kickback scheme our client experienced. Key to fraud prevention is the perception of detection, and if our client had maintained fully operational cameras throughout the processing plant and informed employees that they were being monitored, it might’ve given employees pause about engaging in fraudulent behavior. Likewise, maintaining records and training employees to obtain documentation from vendors could’ve reduced the risk of fraud.

Poor recordkeeping caused significant difficulty for our investigation. Many of the records we needed were unavailable and had been destroyed. Organizations should take the following steps to maintain important records:

1. Devise a robust records management policy outlining retention periods and disposal procedures.
2. Utilize secure storage facilities for physical records, such as locked cabinets or off-site storage.
3. Convert manual records to digital records monthly or quarterly so that documents are always preserved.
4. Implement access controls and encryption for digital records to prevent unauthorized deletion or modification.
5. Regularly back up digital records in secure and redundant locations to mitigate the loss of data.
6. Conduct regular reviews and audits to ensure compliance with retention procedures.

Lastly, robust internal controls would’ve decreased opportunities for schemes with vendors. Here are recommended internal controls for inventory management and procurement:

1. Conduct regular reconciliations between ordered and actual inventory levels.
2. Establish strict vendor evaluation criteria.
3. Adopt just-in-time inventory management to minimize excess stock. (Just-in-time inventory management refers to companies receiving only the amount of inventory they need, when they need it.)
4. Implement clear segregation of duties within procurement and inventory processes.

Lastly, a broad-level data analysis of a client’s practices and processes like we did with periodic consumption patterns, input-output patterns, purchase patterns and fuel inward patterns can determine abnormalities that require further investigation. Conducting a comprehensive process walk-through of the procurement-to-consumption process also helped identify gaps in any process that might’ve been exploited by fraudsters.

Anuj Choudhary, CFE, CA, CISA, is a corporate compliance manager at Dr. Reddy’s Laboratories Limited. Contact him at ca_anuj@outlook.com.