NERC is carrying out forensic audit of DisCos – here’s what it means

The National Electricity Regulatory Commission (NERC) says it is ready to commence a forensic audit of Nigeria’s eleven distribution companies to know their commercial viability.

During the BusinessDay Future of Energy Conference held in Lagos on July 12, the Commission’s Vice Chairman, James Momoh through a representative said an open book review of the DisCos’ operation is long overdue.

What does it mean?

According to online resource, investopedia a forensic audit is an examination and evaluation of a firm’s or individual’s financial information to understand the state of affairs. It is often used for litigation and could be used to determine financial viability of a business.

Forensic audit process, Source PwC

The investigation for a forensic audit follows the same format as a regular audit of financial statements. The steps can include planning, review and a report. If the investigation was undertaken to discover the presence of fraud, evidence is presented to uncover or disprove the fraud and determine the amount of the damages suffered.

In the case of NERC, the objective is to discover their financial viability but the approach remains the same. The regulator will embark on a study of the revenue management of the DisCos who settle as little of 15 percent of their market invoice.

The audit will seek to determine what is the basic revenue baseline and the minimum they are allowed to remit, develop appropriate basis for appropriation and disbursement of market funds.

Why the forensic audit?

Nigeria’s electricity market has shortfalls of about N1trillion, this means that power supplied cannot be fully accounted for. DisCos who collect money from electricity users which should be used to pay all other market operators collect barely 40 percent of their market invoice.

The power sector is designed such that DisCos collect money, remit to the Nigerian Bulk Electricity Trader (NBET), who pays GenCos and Gas Companies. If DisCos collect poorly, everyone else is short-changed.

The Federal Government has provided bailout funds to assuage these shortfalls, but without plugging the gaps from which these leakages occur, they would not achieve their purpose.

Expected Outcomes

More often than not, forensic audits uncover evidence of malfeasance and it is conducted to find evidence strong enough to prosecute the guilty.

A financial examination of the DisCos accounts may not exactly lead to litigation but when it uncovers evidence of poor revenue management, the regulator can inflict bruising fines or even withdrew their license in cases of misappropriation.

Recently, NERC found that the Benin DisCo used revenue it collected to provide loan facilities for its directors, which constitutes a breach of their performance contract. It is possible some other DisCos could have similar challenges.

What does it mean for you?
For Nigeria’s electricity users, this kind of audit is long overdue. As a result of the poor financial management practices of the DisCos customers pay huge amounts in estimated billings, there are no investments to improve the distribution network to provide better supply.

NERC says the forensic audit will correct these problems. However, for it to be effective, the regulator must be willing to mete out sanctions where necessary something it has often been accused of neglecting to do.

The commission says it is setting up an Information Technology system that will monitor revenue collection real time and also show how money is spent. The application of technology may help check subsequent abuse.