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Detecting Fraud in the Time of $45 Oil – MNP LLP

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These translations are done via Google Translate



Oilfield Service News August 15, 2017

Executives in the oil and gas industry looking for savings on their bottom line in the wake of lower crude oil prices may be surprised to find evidence of fraud in their companies.

However, Michael McCormack, MNP Senior Manager, Investigative and Forensic Services, says a lot can be done to fix the problem and prevent it in the future.

McCormack, who served 24 years with the Ottawa police and on an elite RCMP financial crimes task force before joining MNP, said fighting fraud often comes down to one of the fundamental principles of good business – due diligence.

The forensic expert explained the oil and gas and oil field services industries in Alberta traditionally have been profitable but have not put sufficient controls or proper policies and procedures in place to ensure fraudulent behaviour didn’t occur.

He attributed part of the lack of due diligence to the rush to turn a quick profit when prices are high, leaving the door open to people who saw there were holes in the system waiting to be exploited.

McCormack said he and his colleagues expected more incidents of fraud to surface when crude prices dropped and companies began to examine their operations for cost savings and effectiveness. But that didn’t immediately happen, possibly because the sector had seen price fluctuations before and companies were confident they were well insulated from possible fraud.

Tighter Budgets, More Scrutiny

Attitudes began to change once it became apparent the $50-a-barrel price was not a passing phase. “They’re starting to look to the bottom-line numbers, they’re starting to look at controls and weaknesses within their systems to ensure that they’re not losing money in the wrong places,” said McCormack, who has been with MNP for seven years.

“We’re starting to see a lot more oil and gas companies be concerned about things like vendors and perhaps now spending a little bit more time doing due diligence around those people.”

Corporate fraud’s reach into the oil and gas industry and oil fields service sector was spotlighted with the sentencing on June 28, 2017 of Ian Wilson Fisher, who had co-founded Calgary-based Arcan Resources Ltd. Fisher pleaded guilty to fraud exceeding $5,000 and admitted to creating shell companies when he was Arcan’s operations manager in 2008.

He acknowledged billing close to $5 million in false invoices, and used the money to buy drugs and a luxury home at a resort. He was charged in 2015.

Crippling Consequences

McCormack said it can take 12 to 18 months to detect a fraud and when it’s found – in the form of a sketchy $2,000 vendor’s cheque, for example – it’s usually the tip of the iceberg. “The fraud is likely going to be somewhere in the range of 7 to 10 times that amount,” he explained.

All transactions will need to be examined to determine the scope of the fraud. Investigators will also have to determine if the guilty party colluded with anyone and how controls were circumvented so those gaps in the system can be plugged.

McCormack said he believes fraud is a widespread problem in the industry that can have crippling consequences if its dangers are not taken seriously. “With the dwindling oil price, what we’re seeing more and more is that businesses can just be absolutely devastated financially,” he said. “They will end up in either a position of having to declare bankruptcy or just closing the door and throwing hundreds of people out of work.”

Prevention Before Detection

One of the services MNP provides to clients is a risk assessment that can be vital in preventing fraud. McCormack said one of its aspects is a “black hat exercise,” where clients would look at their organization through the eyes of a fraudster and consider how they might rip it off.

Controls, policies, procedures, how the company does business and who has control would all be looked at and once that examination is done, the necessary changes can be made.

McCormack, who is based in Edmonton, said MNP can also recommend additions to contracts, such as the ability to demand an audit of a vendor’s financial statements and invoices if something does go wrong. Whistleblower tip lines have also proved useful because people are guaranteed some confidentiality when they step forward to report potential wrongdoing.

But the cornerstone of McCormack’s advice comes back to due diligence, both with vendors and employees.

Do Your Due Diligence

He acknowledged that because of the reliance on vendors, companies may have been willing to turn a blind eye to some higher costs as long as they got what they needed, but those days are rapidly ending now with lower oil prices.

“A lot of companies recognize that doing due diligence to ensure that you are actually getting the best price for the best service is something that’s going to be very critical,” he said.

Vendors should be thoroughly vetted and their references checked. Find out who they are, who is on their board and who are shareholders. Get references and check them to see if they can provide the services they offer and do so competently. MNP also makes extensive use of the internet, employing Google and several resources such as the CanLII website, which is a vast, nationwide legal database.

Employees, while a valued part of any business, also need to be watched for any unusual activity, such as odd transactions or the nature of their relationships with vendors.

Trust Not, Want Not

McCormack said motives for fraud vary, but in the majority of cases he’s seen, it has been traced to addiction, particularly gambling.

In the end, while trust is a worthy trait, so is vigilance. And reliable policies and procedures are key to keeping a business safe from fraud.

“I hear quite often with our clients in oil and ​gas that they trust the people they deal with and they trust their actions,” McCormack said. “The problem is, of course, that trust is not a control in an organization.”

Contact MNP’s Oilfield Services Team​

Jason-Kingshott-MNPMNP understands the oilfield services industry – its drivers, challenges and opportunities. We are proud to provide insight into the latest industry news and trends in our newsletter.

For more information on MNP’s OFS services, contact Jason Kingshott, CPA, CA, Business Advisor, Oilfield Services​ at 403.537.7615

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