Question

Pelican Oil is a publicly traded oil and gas company specializing in global exploration and offshore drilling. Even though Pelican has been operating for almost 30 years, it is still considered a “newcomer” in the industry. The key leaders in the industry are large conglomerates that have been operating for over 100 years.

Over the last 18 months, the global supply of oil has exceeded the demand, resulting in a significant drop in oil prices. A drop in oil prices means decreased revenue for oil and gas companies of all sizes. For smaller companies in the industry like Pelican, significant drops in oil prices are harder to withstand. (The larger conglomerates are so well diversified that they have an easier time withstanding fluctuations in the oil market.) In response to the drop in oil prices and decreased demand, Pelican has temporarily suspended drilling operations and laid off employees in the field and in the corporate office.

You are preparing for the upcoming audit of Pelican. Looking at the interim financial statements for the current year, you calculate an 18% decrease in revenue compared to the same interim period from the previous year. You have been reading in the global financial news that the drop in oil prices has led to increased fraud in the industry, with much of the fraud being committed by senior managers. The audit team is meeting tomorrow to have a brainstorming session about fraud risk for Pelican Oil.

To prepare for the brainstorming meeting, research online the types of fraud that occur in the oil and gas industry. Assess the risk of fraud for Pelican Oil by discussing the fraud risk factors that may be present.

Answer 1

ANSWER:

Types of fraud in the oil and gas industry at the exploration and drilling level include:

• Unrealistic assumptions and improper assessment of projected returns on investment
• Inappropriate calculation of royalty payments due to unclear requirements
• Obtaining exploration licenses
• Theft of inventory
• Misrepresenting the quality of product being refined and processed
• Bribery, especially in foreign countries, to obtain special privileges or win contracts

Internet research may reveal more types of fraud. This information obtained from Ernst & Young brochure titled “Fraud Risk Management, Oil and Gas Sector,”