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Thursday 22 February 2018

THE ANONYMOUS ENGINEER EXPLAINS FORENSIC AUDIT

Recently the Commission of Inquiry into the Muskrat Falls project announced that it had contracted the management firm of Grant Thornton LLP to conduct a Forensic Audit. What does Forensic Audit mean? What is involved? What will it accomplish?

Who would answer those questions better than the  "Anonymous Engineer". He was the first person to ask for a "Forensic Audit".  Having worked on the project he made this declaration: “I could not put up with falsifying information anymore."

The whistleblower played a key role in bringing to public attention the issue of "falsified" or "low-balled" estimates. His concerns were first noted on January 30, 2017 in a post entitled Muskrat Falls Estimates A Complete FalsificationA more detailed explanation of what had occurred followed with a second post - February 6, 2017 - called Muskrat: Allegations of Phony Cost Estimates.

The Anonymous Engineer's revelations were ones that neither the Premier nor the Minister of Natural Resources could refute, and which likely influenced the Government's call of the Public Inquiry. 
In this piece the "Anonymous Engineer" explains, in straightforward language, the process used by Forensic Auditors to conduct their investigations and to answer - hopefully - the questions posed at the outset.  - Des Sullivan

Guide to a Forensic Audit

Guest Post by the "Anonymous Engineer"

The words “Forensic Audit” have been heard over and over in Newfoundland and Labrador and many people might be wondering what it means. This is a process that will provide much needed answers to questions such as: who was responsible for producing lowballed estimates, who approved them, who falsified forecasts? Those questions, and others, have been asked many times; no answers were forthcoming. 

Initially, there was strong resistance to conducting an Audit at the highest levels of Government - from Premier Dwight Ball, Minister Coady and Stan Marshall, CEO of Nalcor. However, the Government’s opposition to an Audit/Inquiry collapsed under enormous public pressure as the consequences of several billion dollars of cost overruns and multi-year project delays were assessed, resulting in the ordering of the Judicial Inquiry.
The Commission of Inquiry, led by Justice Richard LeBlanc, has determined that a Forensic Audit is required to clarify the process of project approval and it is now underway.
I have prepared a guide to how a Forensic Audit is conducted and what it should achieve. Hopefully, this explanation will give the public a better understanding of why it was necessary for Judge LeBlanc to order the Forensic Audit as the first step in his Inquiry. 

What is a Forensic Audit?
In general, a Forensic Audit is an analytical process that is used to systematically and methodically investigate a variety of alleged wrongdoings. The wrongdoing may consist of a wide range of infractions such as falsified financial statements, the false reporting of higher profits, an understatement of expenses and losses or false information given to achieve a predetermined result. It might, for example, involve tax fraud, bribery, corruption or other kinds of misbehaviour or incompetences. These infractions can occur in any organization, whether private enterprise, a Government Department or agency.
The process of audit is exclusively impartial, non-political and fact based.
It examines the work processes and procedures, the decision making and approval hierarchy, the utilization of available information and the legitimacy of available information, that were the basis of the above mentioned infractions. Deliberate falsification of information, such as the suppression of unfavorable data, cannot be precluded. It might determine if a high level of executive pressure was applied on staff to come up with pre-determined conclusions.
The primary function of a Forensic Audit is to establish how decisions were made and who made them. In other words, it examines the approval process and confirms who was responsible for what.

The Audit Group has to develop work processes appropriate to the task, define roles and responsibilities, particularly the hierarchy of approval, examine the validity of the information used to arrive at conclusions, and determine if the conclusions were contrived.

It is important to note that the Audit group is brought in after the fact - after the damage has been done. Consequently they will conclude, after thorough analysis, where the practice deviated from the norm, how and why the infractions occurred, what the systemic failures were, and – a matter always critical - who is responsible and accountable.


How is a Forensic Audit Done?
The most critical function is data gathering and compilation.  If the information is still available, the Audit Group will access all the information available at the time the original analysis was performed. On a large project this means hundreds of documents need to be retrieved and stored.
The Audit team will then systematically goes through the historical data, critically examining the information and its validity. Large companies that specialize in Forensic Audits have data bases of “bench mark” data gathered from many previous similar exercises on which they have worked. If the data used by the organization in question is in conflict with the “bench mark data”, an investigation into the source of such data begins.

Questions such as these will be addressed: is the data current or outdated?  Is it appropriate to the circumstances? Is it supported by fact or valid assumptions; if so, are the assumptions documented? Who authorized the use of the data? Is the data “signed off” by a competent authority for use? Again, meticulous attention is paid by Forensic Audit Firm in establishing the validity of the data.
If an estimate on a large capital cost project is in question, such as the Muskrat Falls project, the unit prices used come under enormous scrutiny. Again the Firm will assess if the validation procedures were adhered to. If the unit prices used are not appropriate, the Forensic team will develop their own unit prices from appropriate data bases and rationalize the gaps. An investigation begins as to the use of inappropriate unit prices. 

In a large capital cost project, the degree of development of design at the time of estimate preparation is crucial. If the degree of development of design is low, then corresponding allowances need to be included for design growth. The Audit Firm will confirm if that accommodation was made. 

Another key function of the Forensic Audit is to establish whether the costs generated by the estimating tasks were subject to an “Executive Review.” This is a rigorous process that will include proof of sign off of the estimate by a nominated Executive; signatures and sign off dates are sought. It will ask if the published forecast was the approved forecast; if not, additional investigation follows.
The Audit team will investigate if a project “Risk Review” was done, examine the project “Risk Register” prepared and costed by the project team, and assess the cost of risk included in the final published price. If this process was faulty, additional investigation follows. For instance, it will want to know how the Risk Review produced by SNC-Lavalin was lost, and then found again four years later. 

In instances where the cost forecasts are suspect, the Audit group will confirm the published forecasts and the ones provided to the department that publishes them. If there is a discrepancy, it will be investigated. If the “working papers” are missing, then additional investigation follows.
The Audit team also investigates the development of the Project Construction Schedule. It will determine if the durations for activities were realistic and achievable. It will ask: are the completion dates derived from a realistic Critical Path Analysis or were they force fitted? If the durations are unrealistic, the Audit team investigates the source of the scheduling information.
The development of the budgets against the work packages. The compatibility of the scope of work and budget will be investigated.
The logic on which contracts are awarded will also be investigated. The Corporation will be required to explain to the Audit group the criteria for awarding contracts – sufficiency of budgets, understanding of the scope of work etc. The award of the contract to Astaldi will be of particular interest.
The Audit group will investigate the validity of the forecasts during construction. The enormous cost increase between September 2015 and April 2016, will surely warrant strict scrutiny.  The gaps between work done between by EY and Nalcor, when the massive overruns were first made public, will undoubtedly be investigated.

The multitude of analysis, investigations, and discussion of results require communication of the Audit group with the Executive Decision Makers of the Corporation. Those Executives are charged with the responsibility of explaining the gaps found by the Audit group. 

From the foregoing analysis it should be clear that the level of investigation and analysis of a thorough Forensic Audit is very intensive. This leads us to the next important question – what is accomplished?

What Does a Forensic Audit Accomplish?
The single most significant accomplishment of a Forensic Audit is that it restores clarity and transparency to a process that was previously obscure and opaque. Roles and responsibilities are defined as they should have been when the Organization undertook the task or tasks under investigation.
The Forensic Audit makes very clear who knew what and when, what decisions were made by whom and the consequences of those decisions. It makes specific accountability possible and reports who was responsible for the decisions taken.
It describes the circumstances of the work and clarifies all the assumptions on which the project was sanctioned and implementation was allowed to proceed. If, during any part of the process pressure was exerted on staff to come up with pre-determined results contrived by Executive Management, such a circumstance will be given illumination. The process forces accountability and assigns responsibility to where it belongs.

Most importantly, it will answer the questions that Newfoundlanders and Labradorians have been asking for years!!

Note:
It must be noted that Justice LeBlanc, as the head of the Judicial Inquiry, reserves the right to accept all of the findings of the Forensic Audit, accept some of the findings or accept none of the findings.