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MEOG BALK p anelones Internal Audit case study Middle East Company MOC) med sized integrated exploration, producing pipelines refining and se terminal) O Gas Coran with its head office is in Gut Country. The share listed on the Gutt Country Stock Exchange cache) and has current crude oil production 3 min barrels per day Last year MEOC's board of directontora megaproject to double the capacity of the company's Rub Al hall refinery (RAR ) The project was budgeted SR 32 billion and the resung facility increase the refinery's capacity from 250.000 to 500.000 barrels of gasoline and other refined products per day. Because the facility is located in the remote "Empty Querca the project will also have to expand the residential facilities including dining halls recreational facilities - because all of its workers to live on camp. This prodt wie first of many megaprojects that MEOC board has planned to expand and build facilities to expand production capacity RAK Refinery Expansion Project Roles and Responsibilities Middle East Oil Company (MEDC) RAKR Management Project Proponent Project Management Department Submitted bid Solicited project hide And approved GAC's bid Supervis work Appes Expenditures Gulf Area Construction Company (GACC) Contractor - Performs Project Work Under a Lump Sum Turnkey (LSK) Contract The project roles and responsibilities include: MEOC's RAKR management - is the project proponent, who prepared th project specifications and oversaw the competitive bidding process and madet final decision on GACC as the contractor. They continue to run the exisit refinery and must approve the Technical Completion Certificate (TCC) at the e ctober 13, 2010 Draft Page 1 of 5 MEOC Rub Alkall Refinery Expansion Project Infemal Auditing Case Study of each project phase, verifying that all the work for that phase was completed satisfactory MEOC Project Management Department (PMD) - Overseas the work of the contractor on this and other MEOC projects; approves all project expenditures Gulf Area Construction Company (GACC) is the contractor hired to perform the project under a Lump Sum Turnkey (LSTK) contract basis, meaning that they provided a quote for the completion of the entire proiect at a set price and completion date You are part of MEOC's Internal audit team has just performed a post-project audit review of the audit and has noted: 1) The auditor overheard several conversations while working in the RAK refinery suggesting that GACC may have received MEOC Internal cost estimates that would have given it an unfair advantage in bidding on the project contract 2) Auditor interviews with PMD supervisors indicated that MEOC's executive management had provided an overty ambitious target completion date: they suggested that the executives were trying to ensure that early completion would help ensure that they would receive incentive bonuses and stock options 3) The project came in just under budget and on time, but the project expenditures included: a) SR [Saudi Riyal] 186 million of RAKR's operating expenses. b) SR 320 million of expenses related to a project that was otherwise on-budget. c) SR 270 million of another refinery's training expenses. 3) Other contracts were identified that had expenses that were related to the project, but not involved with the actual project expenditures SR 142 million for correcting defects in GACC's work on the project. The contract specified that expenses related to remediation of project defects would be covered by the contractor. SR 235 million for draining a sewage tank on a weekly basis because the permanent sewage system was not ready on time. An oral agreement was made and the final price was not decided until the service was completed. Based on auditor's estimates based on standard industry pricing, these services were worth no more than SR 150 million. 4) PMD has not completed the monthly Contractor Quality Performance Index (CQPI) for GACC since the project inception. The CQPI is required by company policies to rate the contractor in order to identify contractors with consistently low scores 5) For the residential facilities, a schedule was prepared for the homes' completion and furnishing them with furniture and appliances. GACC delivered the furniture and appliances early, and stored them in homes that did not have walls or ceilings yet. Most of the furniture and appliances were ruined through exposure to excess sun October 13, 2010 Draft Page 2 of 5 MEOG Rub Alkall Refinery Expansion Process Internal Auditing Case Study dust storms, as well improper stacking, which caused scratches, dents and hanical failures. The auditors also noted that there was a problem with rodents ed incest infestations because the GACC workers ate in the incompleted buildings and left their trash and uneaten food there A) The audit identified three change orders (COA) for the project in the amount of SR 0.7 million SR 0.9 million and SR 1.2 million ne RARK Med that the cos they all related the change order de ngement started to 95%, 85% and 75oz same change. Also, the for a total of SR 2.8 million Review of the change order descriptions led the auditor to determine that they all related to the same change. Also, the auen determined that the cos were 9594 596 and 750 complete, respectively. Whene RARK Mangement started the CO paperwork MEOC policy requires that the co be approved before the actual work commences Large Cos - those over SR 2.0 - require a Special Review Committee (SRC) to review the change order. RAK Refinery management explained that they could not wait for the extra few days for this approval because the project was so far behind schedule at that point. 7) During RAKR start-up testing, one of the welds on a pipeline joint did not hold and the resulting pressure release sent three of the RAKR engineer / test observers to the hospital; the one closest to the disaster was in the intensive care unit for three weeks. The auditors asked for the documentation that the GACC welders were certified in their job, as they required and PMD could not supply the documentation When the auditors asked GACC, they asked for time and finally admitted that the welders were not certified. The auditors reviewed the inspection records on the welds and found that they had all passed inspection. However, the disaster investigation report found the weld amalgam did not have the proper mixture of proper metals to meet project specifications. Page 3 of 5 MERCRUDALK Refinery songs Internal Auditing Case Study Discussion questions 1. PMD defended the classification of project expenses from Issue 3 above. "The project expenses charged to non-project contracts was approximately equal to the amounts of non-project expenditures charged to the project so this is not a serious problem. This is just an unimportant paperwork technicality. Does PMD have valid point? Why or why not? 2. What issues in this case, if any, warrant referral to MEOC's fraud investigation unit 3. Which organization - RAK Refinery management, PMD OF GACC - is responsible for the project problems? 4. What kind of pressures does an overly ambitious target completion date place on the project? 5. Government contracts are known for cost overruns and outlandish pricing. What is the role of the cost accountant in these cases? Discuss this statement that blames the accounting system: 3, 2010 Draft Page 4 of 5 MEOG BALK p anelones Internal Audit case study Middle East Company MOC) med sized integrated exploration, producing pipelines refining and se terminal) O Gas Coran with its head office is in Gut Country. The share listed on the Gutt Country Stock Exchange cache) and has current crude oil production 3 min barrels per day Last year MEOC's board of directontora megaproject to double the capacity of the company's Rub Al hall refinery (RAR ) The project was budgeted SR 32 billion and the resung facility increase the refinery's capacity from 250.000 to 500.000 barrels of gasoline and other refined products per day. Because the facility is located in the remote "Empty Querca the project will also have to expand the residential facilities including dining halls recreational facilities - because all of its workers to live on camp. This prodt wie first of many megaprojects that MEOC board has planned to expand and build facilities to expand production capacity RAK Refinery Expansion Project Roles and Responsibilities Middle East Oil Company (MEDC) RAKR Management Project Proponent Project Management Department Submitted bid Solicited project hide And approved GAC's bid Supervis work Appes Expenditures Gulf Area Construction Company (GACC) Contractor - Performs Project Work Under a Lump Sum Turnkey (LSK) Contract The project roles and responsibilities include: MEOC's RAKR management - is the project proponent, who prepared th project specifications and oversaw the competitive bidding process and madet final decision on GACC as the contractor. They continue to run the exisit refinery and must approve the Technical Completion Certificate (TCC) at the e ctober 13, 2010 Draft Page 1 of 5 MEOC Rub Alkall Refinery Expansion Project Infemal Auditing Case Study of each project phase, verifying that all the work for that phase was completed satisfactory MEOC Project Management Department (PMD) - Overseas the work of the contractor on this and other MEOC projects; approves all project expenditures Gulf Area Construction Company (GACC) is the contractor hired to perform the project under a Lump Sum Turnkey (LSTK) contract basis, meaning that they provided a quote for the completion of the entire proiect at a set price and completion date You are part of MEOC's Internal audit team has just performed a post-project audit review of the audit and has noted: 1) The auditor overheard several conversations while working in the RAK refinery suggesting that GACC may have received MEOC Internal cost estimates that would have given it an unfair advantage in bidding on the project contract 2) Auditor interviews with PMD supervisors indicated that MEOC's executive management had provided an overty ambitious target completion date: they suggested that the executives were trying to ensure that early completion would help ensure that they would receive incentive bonuses and stock options 3) The project came in just under budget and on time, but the project expenditures included: a) SR [Saudi Riyal] 186 million of RAKR's operating expenses. b) SR 320 million of expenses related to a project that was otherwise on-budget. c) SR 270 million of another refinery's training expenses. 3) Other contracts were identified that had expenses that were related to the project, but not involved with the actual project expenditures SR 142 million for correcting defects in GACC's work on the project. The contract specified that expenses related to remediation of project defects would be covered by the contractor. SR 235 million for draining a sewage tank on a weekly basis because the permanent sewage system was not ready on time. An oral agreement was made and the final price was not decided until the service was completed. Based on auditor's estimates based on standard industry pricing, these services were worth no more than SR 150 million. 4) PMD has not completed the monthly Contractor Quality Performance Index (CQPI) for GACC since the project inception. The CQPI is required by company policies to rate the contractor in order to identify contractors with consistently low scores 5) For the residential facilities, a schedule was prepared for the homes' completion and furnishing them with furniture and appliances. GACC delivered the furniture and appliances early, and stored them in homes that did not have walls or ceilings yet. Most of the furniture and appliances were ruined through exposure to excess sun October 13, 2010 Draft Page 2 of 5 MEOG Rub Alkall Refinery Expansion Process Internal Auditing Case Study dust storms, as well improper stacking, which caused scratches, dents and hanical failures. The auditors also noted that there was a problem with rodents ed incest infestations because the GACC workers ate in the incompleted buildings and left their trash and uneaten food there A) The audit identified three change orders (COA) for the project in the amount of SR 0.7 million SR 0.9 million and SR 1.2 million ne RARK Med that the cos they all related the change order de ngement started to 95%, 85% and 75oz same change. Also, the for a total of SR 2.8 million Review of the change order descriptions led the auditor to determine that they all related to the same change. Also, the auen determined that the cos were 9594 596 and 750 complete, respectively. Whene RARK Mangement started the CO paperwork MEOC policy requires that the co be approved before the actual work commences Large Cos - those over SR 2.0 - require a Special Review Committee (SRC) to review the change order. RAK Refinery management explained that they could not wait for the extra few days for this approval because the project was so far behind schedule at that point. 7) During RAKR start-up testing, one of the welds on a pipeline joint did not hold and the resulting pressure release sent three of the RAKR engineer / test observers to the hospital; the one closest to the disaster was in the intensive care unit for three weeks. The auditors asked for the documentation that the GACC welders were certified in their job, as they required and PMD could not supply the documentation When the auditors asked GACC, they asked for time and finally admitted that the welders were not certified. The auditors reviewed the inspection records on the welds and found that they had all passed inspection. However, the disaster investigation report found the weld amalgam did not have the proper mixture of proper metals to meet project specifications. Page 3 of 5 MERCRUDALK Refinery songs Internal Auditing Case Study Discussion questions 1. PMD defended the classification of project expenses from Issue 3 above. "The project expenses charged to non-project contracts was approximately equal to the amounts of non-project expenditures charged to the project so this is not a serious problem. This is just an unimportant paperwork technicality. Does PMD have valid point? Why or why not? 2. What issues in this case, if any, warrant referral to MEOC's fraud investigation unit 3. Which organization - RAK Refinery management, PMD OF GACC - is responsible for the project problems? 4. What kind of pressures does an overly ambitious target completion date place on the project? 5. Government contracts are known for cost overruns and outlandish pricing. What is the role of the cost accountant in these cases? Discuss this statement that blames the accounting system: 3, 2010 Draft Page 4 of 5