Insights & Reports > Kroll Global Fraud Report

Amid the turmoil of the global financial crisis, the energy sector – especially oil and gas companies – has also faced issues of wide price fluctuations. Many such firms in developing countries have been seeking innovative ways to reduce costs to avoid extensive cutbacks on commercial activities. Fraud reduction, too often a low priority in boom times, is an obvious way to save costs. Recent Kroll advisory projects in Brazil illustrate four low-cost, and potentially high-reward, ways to cut fraud. Companies in other sectors of the economy could use similar strategies.

 

Improved Internal Communication

An important aid in any investigation is information from staff but, before employees will provide it, the company must ensure that the mechanism to do so is considered legitimate and reliable. In a recent case, a drilling business, despite high technical expertise and competitive prices, lost in a bid competition to provide services to an oil extraction company. The drillers hired Kroll to investigate whether any internal information had been leaked to the winning consortium. Our investigation identified an official whom employees thought had probably been providing such details to the other firms, but whom nobody had dared to accuse because the official was believed to be protected by someone in upper management. An efficient internal communication mechanism could have prevented this situation and potentially led to the company winning the $300 million contract.

 

Internal Control Review

In highly liquid markets, the abundance of capital often leads to weaker controls. In the opposite situation, scarce capital causes the company to concentrate more on controls aimed at reducing expenses. Such attention is especially important after merger or acquisition activity. Recently a client, a large gas distributor, had acquired a similar firm and simply adopted the latter’s structure for distribution. Kroll conducted a study to evaluate the overlap in distribution routes. We found that data provided by the acquired business’s legacy system omitted certain information. This, in turn, caused the client’s ERP software to fail to register a significant percentage of the gas being traded. A $12 million accounting adjustment was necessary.

 

Fraud Auditing

Although no fraud was involved in the previous case, strengthened controls plugged a dangerous gap. Specialized audits are perhaps the most important low-cost action to address the larger opportunities for fraud presented by weakened internal controls. A major fuel distributor called us in after an anonymous hot-line tip that a finance employee was embezzling money. A statistical analysis of the supplier payments system found non-existent job orders that had purportedly been issued. Further investigation showed that, although 65 percent of these related to data entry errors, the rest resulted from the registration of a ghost supplier that had received fraudulent payments in the order of $3.5 million.

 

Asset Recovery

Tighter credit conditions can reveal the weakness of underlying collateral. A major Brazilian fuel supplier had granted credits to a large distributor for several years. Because of financial difficulties, the latter suspended agreed monthly payments on the debt. It was found that goods provided as collateral were of lower value than originally estimated and others did not even exist. Asset mapping, the location of hidden assets belonging to the owners of the distribution company, and a judicial finding of fraud allowed the recovery of 58 percent of the total debt that the fuel supplier had already been preparing to write off.

Bad economic times reveal fraud. As Brazil’s energy sector is finding, this makes anti-fraud initiatives both necessary and a timely way to reduce costs.

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Vander Giordano is a managing director based in São Paulo and specializes in business development for Latin America. He is a member of the Brazilian and International Bar Associations and has worked in a number of areas in the airline industry.

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