Independent Regulatory Commission Commonwealth of Dominica

1. Independent Regulatory CommissionCommonwealth of Dominica The Role of the Regulator in Fraud Prevention in a Regulated Utility Presented by: Connie Joseph Financial Analyst Independent Regulatory Commission Commonwealth of Dominica

2. Background • Many successful businesses such as regulated utilities, banks and other large conglomerates are exposed to substantial amounts of inherent business risks. Like sizeable businesses, regulated utilities are faced with business risks, more so, the risk of fraudulent acts which are being brought about by the actions of unscrupulous employees. The Association of Certified Fraud Examiners (ACFE) 2012 report revealed that a typical organisation losses approximately 5 percent of its annual revenue to fraudulent acts.

3. Background - Definition of Fraud • International Standard of Auditing (ISA) 240 defines fraud as “an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage”. The term is used to describe acts of bribery, forgery, extortion, corruption, theft, conspiracy, embezzlement, misappropriation. It occurs in situations in which conditions are right for it to happen. These conditions include lack of or inadequate internal control system and or weaknesses identified in the organisation’s systems and processes.

4. Background cont’d Utilities impact considerably on the cost of production and standard of living of an economy. The technological and economic features of the industry are such that a single provider is often able to serve the overall demand at a lower total cost. This cost is relatively higher when compared to a combination of smaller entities. In some instances, competition cannot thrive under these conditions and eventually some players may have to exit the market or fail.

5. Background cont’d • The entities that survive are monopolies and they have the power to restrict output and set prices at levels higher than are economically justifiable. Given these conditions, governments have intervened into the market by setting up regulatory agencies to regulate the operational activities of the regulated utilities.

6. The Principal Objectives of the Regulatory Agency • To act as an independent authority for setting rules and regulations for the utility sector through the process of public consultation with stakeholders; • To provide a forum for customer’s appeal in their dealings with service providers and advise and support government’s policy on the supply of services for economic development; • To establish a tariff which balances the interest of the consumers and investors alike where the investors are able to realize a fair return on investments while customers can expect an efficient, responsive and economical service in an environment where their rights are protected.

7. Fundamental Responsibilities and duties of the Regulatory Agencies • Determine the revenue requirement of the regulated utility; • Review tariff filing for compliance with utility regulatory rate proceeding filing requirement; • Conduct specific audits and other investigations where applicable; • Designing price structures and price levels that will collect the allowed revenue, while providing, appropriate price signal to customers; • Setting service quality standards and consumer protection requirements;

8. Fundamental Responsibilities and duties of the Regulatory Agencies • Overseeing the financial responsibilities of the utilities, including reviewing and approving utilities capital investments and long term planning; • Serving as the arbiter of disputes between consumers and the regulated utilities; • Protect the health and safety of all persons affected by the operators in the sector; • Establish rules and guidelines which will allow for consistency, predictability and transparency in the regulation of services supplied to the economy; • Review and approve license agreement between the regulatory body and regulated utilities.

9. Fraudulent acts in Public Utilities • Dishonest cashiers could pocket customer’s cash or cheques during payment of utility bills and not credit the customers’ accounts with the specific amounts. This act of theft could result in the number of disconnections to customers services; • Unscrupulous employees could conspire to steal inventory supplies and pass the associated cost to the customers’ utility bills; • Specific fraud scheme could negatively affect the quality of service delivered to consumers. For instance fraudulent acts among electricity providers could result to increases in the number of system losses resulting to increase in power outages.

10. Corporate Core Values that Regulatory Personnel must Uphold • Predictability • Integrity • Professionalism • Responsiveness • Transparency • Teamwork

11. Corporate Core Values that Regulatory Personnel must Uphold (cont’d) The Regulatory agency must ensure that at the helm of the regulated utilities core business strategy is the need to establish a fraud policy statement. The statement should apply to the directors and employees of the regulated utilities and should demonstrate the organisation’s commitment to combating fraud whenever it is found. The fraud policy statement should communicate the organisation’s attitude and approach to the threat of fraud.

12. Corporate Core Values that Regulatory Personnel must Uphold (cont’d) • In keeping with the regulatory framework, the agencies must be endowed with competent commissioners and professional staff. These individual should have the expertise and knowledge to develop and implement strategic rules and regulations to be followed by the regulated utilities.

13. Test of Controls and Fraud Prevention Techniques /Guidelines Set Risk Management Guidelines:- • Identify risk areas: The regulatory body should ascertain the areas most vulnerable to fraud risk. The patterns of losses and areas of potential losses should be monitored so that locations susceptible to risk can be identified. Some potential high risk areas include inventory, fuel storage, cashiers work stations, computer information systems, accounting records and storage of keys.

14. Test of Controls and Fraud Prevention Techniques/Guidelines • Assess scale of the risk: Identify and assess what measures are already in place to prevent fraud. This could be executed by evaluating the current system of internal controls. The regulatory agencies could review the auditor’s interim and final audit reports and records to ascertain the level of potential high risk areas of the regulated utilities.

15. Test of Controls and Fraud prevention Techniques /Guidelines (cont’d) • Physical Security:- This is a preventative measure which controls or monitors access to physical assets. The controls should not applied only to physical assets like utility plants in service and premises, but also to inventory, fuel storage, cash, computer information system, accounting records and other documentations. For example one should ensure that tight controls are kept over computer system,

16. Test of Controls and Fraud prevention Techniques /Guidelines (cont’d) • Physical security • Not only to prevent unauthorized access and use, but also to protect the integrity of accounting information. The threat to computer system can come from both inside and outside the utilities as computer hackers may gain access in order to extract or corrupt information. The use of diesel in generation of energy needs to managed efficiently to prevent the risk of thief. The control should adequately secured and periodically reviewed

17. Test of Controls and Fraud Prevention Techniques /Guidelines Responsibilities:- During periodical audits, reviews or spot checks, the regulators need to ensure that employees are allocated appropriate responsibilities so that they can work to achieve anti-fraud objectives in the most efficient manner. The major principles are: • Clear definition of the responsibilities of employees should be communicated:- This includes defining the level of authority. This preventative measure set a limit on the amounts which may be authorised by individual officers.

18. Test of Controls and Fraud Prevention Techniques /Guidelines (cont’d) • To be effectives, the regulators should ensure that the utilities have proper systems in place to conduct regular spot checks to make certain that transactions have been authorised • Responsibilities:- The regulatory agencies should ensure that the regulated utilities have procedure manuals which contain clear reporting lines of responsibility and the most effective spans of command to allow for adequate supervision in its overall operations.

19. Test of Controls and Fraud Prevention Techniques /Guidelines (cont’d) Segregation of duties to avoid the opportunities for abuse:- • The Regulatory authority should make certain that at the core of the regulated utility processes is the need to maintain separation of duties. This control ensures that the key functions and controls over a process is not all carried out by the same member of staff. A case in point an officer responsible to collect cash and update cash book should be deposit cash to the bank.

20. Test of Controls and Fraud Prevention Techniques /Guidelines (cont’d) Financial controls:- • The regulatory agencies should ensure that the use of budgets and delegated limits for some categories of expenditure and other accounting controls should ensure that expenditure is properly approved and accounted for by the responsible manager. Supervising:- • The regulators should make certain that managers scrutinise the work performed by their staff. It provides a check that employees are performing to meet standards and work is executed in accordance with instructions.

21. Test of controls and fraud prevention techniques /guidelines (cont’d) Systems:- • The regulators should substantiate whether the controls over the development of new systems and modifications to existing systems or procedures are essential to ensure that the effect of changes is properly assessed at an early stage and before implementation. Fraud risk should be identified as part of this process and the necessary improvements in controls introduced.

22. Test of Controls and Fraud Prevention Techniques /Guidelines (cont’d) Monitoring and Evaluating: • The regulatory authority should periodically scrutinise the overall procedures of the operation of the regulated utilities. Effective monitoring, including random checks, should deter and detect some types of fraudulent activities. Set policies and activities of the regulated utilities should be evaluated periodically for economy, efficiency and effectiveness

23. Test of Controls and Fraud Prevention Techniques /Guidelines (cont’d) Audit Trail:- • The regulatory agencies should ensure that audit trail processes are maintained at regulated utilities. An audit trail should ensure that all transactions undertaken by the regulated utilities can be traced through the system from start to finish. In addition to allowing detection of fraud, it enables the controls to be reviewed.

24. Control Mechanisms that the Regulatory Authority could Propose • Ensure that assets such as vehicles, cellular phone, equipment and other resources are used only for official business; • Maintain vehicle logs, listing the dates, time and mileage, purpose of the trip and names of the employees using the vehicle; • Maintain an equipment list and periodically complete an equipment inventory count; • Require that cheques should be signed only when all required information is entered on the cheque and that supporting documents such as approved and authorised invoices and payment vouchers are attached to the cheque for further verification;

25. Control mechanism that the regulatory authority could propose • Inventories are kept in secured and spacious warehouse so that items are not stolen or damaged. Goods and resources of same or similar types are kept in the same general area to minimise confusion and ensure accurate count; • Detailed physical inventory count should be carried out on a periodical basis. • Appropriate controls are in place to effectively manage the inventory process.

26. Control mechanism that the regulatory authority could propose • Ensure that all cash and cheques received are promptly recorded on appropriate accounting system and deposited to the bank on a timely basis, that cash takings agreed with the amounts stipulated on the customers bills and cash takings are balanced daily.

27. Audit Activities performed by the Independent Regulatory Commission The Independent Regulatory Commission has conducted the following audits at Dominica Electricity Services Company Limited during the fiscal year 2012 to 2013: • Audit of Inventory • Audit of Fixed assets • Fuel management audit

28. Audit Activities performed by the Independent Regulatory Commission (cont’d) • The audit enables the Commission to review the company’s internal controls and processes as it relates to fixed assets, inventory and fuel management. The Commission was able to access whether the current procedures brought about weaknesses in the regulated utility internal control system.

29. Audit Activities performed by the Independent Regulatory Commission (cont’d) • The audit revealed that the entity maintained reasonable and adequate internal controls systems in the area of inventory and fixed assets. However the fuel audit demonstrated that some of the fuel meters were faulty. The Commission recommended that the entity should identify an independent metrology technician to calibrate the fuel measurement devices.

30. Audit Activities performed by the Independent Regulatory Commission (cont’d) The Commission provides immense benefit to consumers: • The Commission make certain that the consumers are afforded efficient, and reliable services at fair and reasonable prices; • Through the system of public consultation consumers are able to question the work performed by the regulated utilities and regulators. This medium enables the consumers to place greater reliance and confidence on the tasks performed by the regulated utility, in the pursuit to bring about increase efficiency in the operation of the regulated utilities;

31. Audit Activities performed by the Independent Regulatory Commission (cont’d) • The Commission also allows consumers to express their grievances on matters in which they felt their rights as a consumer was infringed upon. In that way, the Commission is able to advise the customers or assess the matter with both parties in an effort to resolve the situation.

32. CONCLUSION • Companies need to earnestly consider the risk of fraudulent acts as it can create tremendous burden and financial losses on the operational activities of the firm. Fraud acts can also demoralised an organisation's culture, system and processes. Like directors of reputable companies, regulators must develop systematic approaches that will enable them to take proactive measure to combat and prevent fraudulent acts at regulated utilities.

33. Thank you • Questions