Ripe for the picking

Ripe for the
picking
Internal fraud in a changing
oil and gas landscape

Volatility in the oil and gas market, geopolitical instability,
slow energy demand growth and economic sanctions
have brought new challenges for oil and gas companies,
including testing companies’ ability to preserve capital,
reduce spending and withstand sustained pressure on
balance sheets.
1 Ripe for the picking A changing oil and gas landscape

The main drivers
Driven by anemic economic growth in Europe and North America,
oil and gas companies continue to invest in emerging markets,
often perceived to be of higher risk for bribery and corruption.
While it is good practice for companies to build or strengthen
compliance programs in higher-risk markets, one must ask how
much attention has been given to perceived low-risk local markets
such as the UK?
For example, mergers and acquisitions in the North Sea have
created a global marketplace for professionals from various
regions of the world who have brought in their own culture and
work practices. This raises new challenges in establishing a
standard in corporate culture.
The current volatility has triggered budget cuts and increased
pressure on the cost of doing business across this industry.
Finance, production, sales and operations managers are all under
pressure to continue to deliver results. In some cases, this may
provide a strong incentive to do whatever it takes to make the
numbers look good. In fact, In our 2016 Global Fraud Survey,
almost half of respondents felt that potentially unethical behavior
was justified in order to meet financial targets.
These factors can heighten a company’s exposure to internal
fraud and misconduct risks in the form of corruption, asset
misappropriation or financial misstatement. Corruption and
mis-selling have increasingly become the focus of enforcement
and regulatory action. However, it is vital that while responding to
these developments, oil and gas companies do not neglect their
internal fraud controls.
This was made evident in our recent 2016 Global Fraud Survey,
where a third of extractive respondents said they were willing
to act unethically in order to survive an economic downturn,
while a fifth of respondents said that loyalty to their company
would prevent them from reporting an incident of fraud.
This environment of increased pressure and market instability
exposes oil and gas companies to a greater risk of internal fraud
and misconduct.
The favorite forms of internal fraud
Manipulation of expenses continues to be a high-risk area for
internal fraud and we will likely see this exacerbated by the
instability in the market. The pressure that companies face to
increase profits with fewer assets and manpower may have
unintended effects on this type of fraud. There may be a greater
risk of employees seeking to replace lost pay increases or
bonuses by embezzling funds through manipulation of expenses,
gifts and hospitality. One recent case saw a former finance
executive charged for allegedly defrauding a North Sea company
of £1 million.
In another case, one international oil exploration company has
notified the UK Serious Fraud Office (SFO) of dubious expenses
and unauthorized bonuses after being alerted by a whistle-blower.
Initial investigations have led to the firing of a number of senior
personnel and compounded the collapse in the company’s oil price
and subsequent de-listing.
An issue we often observe is billing and procurement fraud.
A payroll officer at an energy company recently defrauded her
employer of £1.3 million over four years by fabricating demands
for payment from HMRC and funneling the proceeds into her
personal account.
Financial misstatement can also be a high risk area: a North
American exploration and production company oil producer
was accused by the SEC of overstating the value of oil and
gas properties by more than $400m following acquisition.
The company subsequently agreed to pay the SEC $5m to settle
the matter with the company’s former CFO and former COO being
charged with accounting fraud.
Ripe for the picking A changing oil and gas landscape
2

Some insights from our 2016
Global Fraud Survey
(Oil, gas and mining)
35%
of
respondents said they were
willing to act unethically to
help a business survive an
economic downturn
43%
felt
that potentially unethical
action could be justified to
meet financial targets
21%
said
that loyalty to their
company would prevent
them from reporting an
incident of fraud
24%
said
that loyalty to colleagues
would prevent them from
reporting an incident of fraud
3 Ripe for the picking A changing oil and gas landscape

Disrupting internal fraud
Using the fraud triangle to explain the factors that cause someone
to commit fraud, one sees a pattern. In most of these cases, red
flags such as the perpetrator living beyond his means, falling into
acute financial difficulties or having unusually close relationships
with customers and vendors were clearly discernible.
Ultimately, the risk of fraud can be reduced by taking steps to
disrupt any one or more of these three attributes: rationalization,
opportunity; or pressure. EY regularly supports companies
operating in the Oil & Gas sector in developing these
counter-fraud mechanisms.
Fraud model originally developed by Donald R Cressey 1
Culture
Internal
► ► “I need the money”
► ► “It is such a small amount
anyway”
► ► “No one will ever know”
Rationalization
Opportunity
►►
Loopholes in internal
systems and controls
Pressure
►►
Keeping up with the lifestyle of peers
►►
Debts/addiction
►►
Malice/revenge
1
Donald R. Cressey, Other People’s Money
(Montclair: Patterson Smith, 1973) p. 30.
Ripe for the picking A changing oil and gas landscape
4

Practical steps for combatting internal fraud
EY can provide companies with practical support in developing successful anti-fraud frameworks.
Employee due diligence
As well as conducting due diligence on key members of staff, corporate integrity methodologies can be
utilized to profile employees’ decision-making processes, allowing organizations to detect weak links
and be alert to any potential breaches.
Internal controls
Process workflow can be examined, modeled and set up to utilize known fraud-deterrents such as bank
reconciliations, IT security audits and process audits.
Forensic reviews
Analyzing data to examine compliance, deviations and red flags is an important tool to detect fraud.
The results can be used to detect fraud retrospectively, as well as to protect against these specific
fraud patterns in future.
Whistle-blowing
Companies need to have clearly defined whistle-blower policies and processes, which ensure that
allegations are investigated and resolved in a timely manner.
Despite this, our recent EMEIA Fraud Survey 2015 has shown that 14% of extractive companies did not
have a whistle-blower hotline, and out of those who do have this in place, less than half said a report
would always be followed up on by senior management.
Investigations
Should fraud occur, companies must have the tools and training necessary to quickly investigate,
and if necessary, evidence wrongdoing.
Data analytics
Proactive monitoring through forensic data analytics can be used to detect fraudulent activity early on
and discourage future misconduct.
Underpinning an effective anti-fraud framework is a culture that encourages and nurtures a strong,
sustainable organization, which serves wider society, through cultivating a working environment guided
by values that are shared by everyone.
Cultural integrity
Our 2015 EMEIA Fraud Survey showed that the extractive sector still has a long way to go in addressing
cultural integrity. Less than a quarter of respondents rated their companies’ ethical standards when
doing business as very good, while two-thirds felt that unethical practices may often go unnoticed by
the head office. Only 36% of respondents, felt that their company had improved ethical standards in the
past year.
5 Ripe for the picking A changing oil and gas landscape

Are companies sufficiently aware of the risks?
Almost half the companies surveyed in the National Fraud
Authority report in 2013 said they had been victims of Insider
Fraud. While the ACFE’s 2016 Report to the Nations found that
oil and gas companies had a similar likelihood of being victims
of fraud, their financial losses were some of the heaviest. Out of
23 industries, oil and gas companies suffered the fifth largest
financial losses at an average of $275,000.
Across each of the sectors, the report found that losses were
estimated to be 5% of company revenue. These losses are usually
not recovered and the eventual cost to the company can be
up to four times higher, taking in the cost of the investigation,
disciplinary action, and replacements (CIFAS, April 2014).
The collateral damage to reputation, political and social capital,
loss of productivity, and drop in employee morale amplify these
losses even further.
There is also a risk that internal fraud is heavily underreported
due to low whistle-blower activity, tolerance of minor infractions
and a desire to keep the firm’s reputation untarnished. Companies
need to re-examine key messages and tolerance levels for
unethical behavior and misconduct. They then need to adopt
a robust corporate integrity framework and actively engage in
fraud management programs if they want to limit their exposure to
this risk.
The final word
The current instability in the oil and gas market and subsequent
pressures on headcount and budget reductions, means that firms
need to think strategically when identifying efficiencies in their
counter-fraud programs. Companies operating in this sector
should not view investing in their counter-fraud framework as a
burden to profitability. An effective counter-fraud program must
be seen as a requirement to securing a sustainable success take
over in the current marketplace.
Successfully combating internal fraud will require firms to take a
multi-faceted approach, integrating the expertise of their business,
compliance, internal audit and risk functions. It means developing
the tools, processes and systems to allow firms to monitor, detect
and investigate promptly when something appears out of place.
Firms that exploit new developments in forensic data analytics,
may be able to create greater efficiencies in the long run.
However, countering fraud is a wider question than merely early
detection. It begins with organizational culture, continues through
internal processes and culminates in the way that breaches are
investigated and resolved.
Given the volatility currently faced by oil and gas firms, it is now
more important than ever for firms to prioritize implementing
effective internal fraud controls.
Ripe for the picking A changing oil and gas landscape
6

EY Fraud Investigation & Dispute
Service contacts
Find out how we can help you protect the financial and
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efficiently to prevent, detect and resolve any threats you face,
however complex.
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