Financial operations in Oil Procurement and Distrcaibution sector

An evaluation of internal controls on financial operations within the Oil Procurement and Distrcaibution sector. A case study of Petro-trade and the National Oil Infrastructure Company (NOIC) By Tshepo Dhlamini (R164091L) Research project submitted in partial fulfilment of the requirement of the Bachelor of Accountancy Honours Degree Supervised by Mr Ndamba.

Introduction In this chapter the researcher explores, the company background, the background of the study, statement of the problem, research questions, research objectives, and limitations of the research, significance of study and definition of terms.

The study is to make an evaluation of internal controls on finance operations. The main problem of this is to investigate Noczim after having been split into Petro-trade and NOIC and inherited the issues under concern. This is what prompted the research to be undertaken. The study is to establish that there is an internal control policy that is prevalent at both Petro-trade and NOIC. 1. 1 Background to the study

At independence in 1980 the Zimbabwe Oil Procurement Consortium (ZOPCO) a consortium of companies, which had taken over Genta was responsible for the procurement of petroleum products, due to the problem experienced by ZOPCO which led to high shortages in 1982, the government decided to take control of the sector considering the strategic importance of petroleum products, hence the formation of the National Oil Company of Zimbabwe (NOCZIM). ZimOnline (3 September 2010) alleged that Noczim had been split into two companies namely, Petro trade and the National Oil Infrastructure Company (NOIC).

The article published stated that the Energy and Power Development Minister Elton Mangoma said the government has split Noczim into to two companies, one to focus on trading(Petro trade) and the other on infrastructure development(NOIC). The move was meant to ensure viability and profitability of the companies. “As of the 1st of January 2011 there will be two successor companies to Noczim, one playing a regulatory role and the other focusing on infrastructure development,” he said.

The Minister said the move to unbundle the government-controlled Noczim followed the realisation that it was not viable for the enterprise to be both a regulator and a player. The Minister said the government was yet to decide exactly how much it would require potential investors to plough into the oil trading company formed out of Noczim. “The partner for the infrastructure company will be taken in on an operational basis and they will be assisting in the stock management of the company,” he said.

“For the trading one we are looking for an equity partner though we are yet to come up with the actual figure of the kind of investment we require. ” – ZimOnline Internal control systems within companies have been questioned all over, particularly in Zimbabwe because of some spectacular and well published corporate collapses. Perpetuated by the harsh economic environment and the collapse of many businesses including the United Merchant Bank which collapsed on the 31st of July 1998, Trust Bank which collapsed on the 18th of September 2007 and ENG which also collapsed on the 23rd of September 2004, just to name a few.

It was alleged in Financial Gazette that Noczim’s financial position was worsened amid allegations of fraud and extravagant expenditure. “Information at hand shows that as of March 6 2008, Noczim was making on average a 23% loss on all products. Further investigations revealed that losses by the company were due to lavish spending by the management, including the purchase of top-of-the-range luxury cars, internal loans, holiday allowances, massive travel allowances and unnecessary million-dollar developments. ”

On 24 May2010, Stanley Gama published an article in the Financial Gazette reporting that, in 2008 the directors and one board member awarded themselves holiday allowances of U$$12 000 each while middle managers were awarded between $4000 to $5000. The organisation’s bankruptcy came to light after the Zimbabwe Revenue Authority (ZIMRA) desperately moved in, in a bid to recover the money owed to them. It was assumed that NOCZIM owed ZIMRA over US$25 million dollars. However the figure ballooned to about US$135 million due to penalties for failure to pay duty on time.

The Financial Gazette’s staff writer Levi Mukarati, reported on 2nd June 2011 that, “The finance director has been failing to advise the chief executive officer on major investment decisions. The chief executive officers’ handling of expenditure decisions was such that there was little room for advice from the finance department. As a result the ZIMRA debt ballooned to an unsustained level. According to minutes of a Noczim board meeting held in May 2010, the fuel procurement company collected US$85,986,455 from fuel companies on behalf of ZIMRA from February 2009 and remitted part of the money and retained over US$29 million.

” Staff at Noczim on unbundling constitutes staff at Petro trade and Noic. Against the background of corporate turbulence and the loss suffered by NOCZIM, the researcher feels there is need for this study to analyse internal operations. The standing of the finance function seems to have been greatly compromised by its failure to advise and point out the discrepancies pertaining to the manner in which the finance operations had been run down. 1. 2 Main problem The oil industry is a critical sector in many countries in the world.

Cases of corruption have been erupting in many countries especially Africa for example Nigeria and Lybia just to name a few. The oil sector therefore affects the economy both positively and negatively. Noczim having been split into Petro trade and Noic has inherited the issues under concern. This has prompted the research to be undertaken. Despite the existence of well-built computerized accounting systems and internal controls, cases of interruption; misstatements and inappropriate reporting have persisted to escape the attention of the auditor.

Research Assumption The assumption is that effective internal controls on will positively affect the financial operations within a firm or an entity paying special attention to the Oil Procurement and Distribution sector.  Scope of study The intended study will focus on the impact of internal controls on the work of the internal auditor in a fuel company.

The application of information systems and its impact to the reliability of audit results is somehow beyond organizational control. Reliance on these systems on the assumption that everything is being done on a computer is cost effective, fast, reliable and accurate but may have repercussions to the fuel company. Factors such as programmer errors may cause software flaws which the auditor may overlook resulting in the auditor giving the wrong opinion. Thus, even though these systems are more crucial within modern day business than ever, they should be adopted and implemented with much scepticism.

On the same token, the audit profession has also been affected and as such cannot turn a blind eye on matters to do with these systems. Thus it is inevitable that the audit profession has responded to these systems. 1. 7 Significance of the study The study will be of key importance to selected organisations [Petro-trade and the National Oil Infrastructure Company (NOIC)] as well as other firms using computerised information systems whose financial statements and activities are subject to some degree of audit on the impact of these systems on the work of the internal auditor.

It will highlight the contribution of computerised information systems in improving the quality of internal audit work for firms in different sectors in the economy of Zimbabwe. Most importantly the research will also focus on areas that need the special attention of auditors to minimize detection risk. Consequently the aim will be to suggest measures that can be taken to minimise the challenges the internal auditors may face in the course of their work.

The study will provide theoretical basis on accounting information systems successful adoption dimensions to firms. It will provide practical guidance for accounting information systems implementation in small and medium business. It will also provide empirical and practical contributions for organisations in effectively applying accounting information system and auditing in computer environments to increase transparency, efficiency and effectiveness in their operations.