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:
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 Falsification. A
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.