01 Pdfsam EY Draft Internal Audit Report Phase 2

Bloom Energy India Private Limited

Internal Audit Report - FY 2009 – 10 (Phase 2)

November 24, 2009

Page 2 Draft – For discussion purposes only

Contents

► Background & objective of review 3

► Scope of review 4

► Detailed observations

► Logistics & Distribution 5

► Manufacturing, Testing and Quality 15


Background

► Ernst & Young Pvt. Ltd (EY) has been appointed as Internal Auditors to undertake a review of select processes at Bloom Energy India Private Ltd. as per the scope & terms outlined in the engagement letter. This report presents the findings and recommendations based on our phase 2 review undertaken at Bloom Energy India Private Ltd. for the period April to October 2009

Objective of review

► The objectives of the review were to:

► Gain an understanding of the processes and review the controls and assess potential risks in the process

► Identify risks through walkthroughs of transactions

► Evaluate the existing controls to mitigate these risks

► Test effectiveness of controls and identify control gaps

► Suggest recommendations, as appropriate to mitigate the control gaps identified

Background & objective of review


Scope of review

► Logistics and Distribution

► Identifying, evaluating and selecting logistics service provider

► Process for entering in to contracts with service providers

► Process for monitoring compliance with contract terms & conditions and SLAs

► Process for tracking transit time and delays

► Reconciliation of service provider bills against dispatch records

► Performance evaluation process for service providers

► Process for insurance claims (if any)

► Accounting of invoices and payment processing

► Manufacturing, Testing and Quality

► Process for tracking & verifying work-in progress

► Tracking status of process orders

► Process for tracking wastages

► Process for accounting of wastages in ERP

► Compliance with testing and quality control procedures

► Process for tracking rejections post quality control

Detailed observations – Logistics & Distribution


Logistics & distribution policy & procedures

Observation► Our review of the logistics & distribution process noted

that currently there is no documented policy and procedures with regard to:

► Logistic service provider selection

► Parameters for selecting and evaluating logistic service providers

► Standard terms and conditions of a contract

► Criteria for evaluating the performance of a logistic service vendor

► Tracking & monitoring of service levels

Root cause

► Need for establishing a standard process for procurementnot initiated

Risk► People dependent processes

► Adhoc / inconsistent procedures followed

► Inadequate internal controls

Recommendation

► Develop a policy and procedure document for logistics & distribution function detailing process objectives, roles & responsibilities, inputs to the process, key activities, management information systems, formats and SLAs for monitoring performance of service providers

► Conduct a training session to roll out the standard operating procedures for logistics & distribution team

► Identify a process champion within logistics & distribution team with responsibility to implement the standard operating procedures

Policy & Procedures for Logistics & distribution

Roles & responsibilities

Delegation of authority

Documentation standards

Performance evaluation

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Weak controls over selection of Logistic vendors

Absence of a system to track & monitor shipment & transit time

Formal contracts not available

No vendor selection process and services of only one vendor have been taken

The delivery & transit time of shipments are not tracked

No formal contract available with the inbound logistic vendor

Design gaps in process


Logistics service provider

Observation► Our review of the process for selecting logistics service

provider noted the following:

► Documents such as the request for quotation (RFQ),comparative quote analysis and approval authority forselection of logistics vendors were not available

► No formal contracts/ agreements were entered into with the logistics service providers currently being used

► Contractual terms & conditions have not been defined and agreed

Root cause

► Absence of a defined process for selection of logisticsvendors & entering into contracts prior to utilizing servicesof vendors

Risk► Possibility of availing services at higher rates

► Possibility of bias in selection of service providers

► In the absence of a binding document/contract with the logistic service provider, the company is not adequately protected with rights/obligations and payment covenants

Recommendation

► Process for selecting logistics vendors to be defined andadhered to with immediate effect. All potential logistics serviceproviders must be identified and an RFQ must be sent

► Quotes received must be reviewed and a comparativeanalysis must be prepared on parameters such as references,credentials, price quote, terms & conditions etc. Selection oflogistics service providers must be documented and signed asper authorization matrix

► Formal contract must be entered into with selected logisticservice provider detailing contract terms & conditions

Payments to logistics service providers without a valid contract & documented rates


Service levels agreements (SLAs)

Observation► Our review of the logistics & distribution process, noted

the following:

► SLA’s with the logistic service providers were not defined and documented

► Standard delivery & transit times for different routes are not defined with the logistics service providers

► Absence of a mechanism to track shipment & transit time. Further, online tracking of shipments is also not provided for by the current freight forwarder (Agility Logistics). As a result, critical parameters such as delivery & transit delays are not measured & tracked

► Variance in shipment times for deliveries made (refer annexure in next page)

Root cause► Absence of a defined process for monitoring performance

of logistics service providers

Risk► Inability to track delay in delivery of shipments & transit

time leading to non availability of material on the required date

► Possibility of delayed deliveries going unnoticed

Recommendation

► SLA’s to be defined with the logistic service provider including the following;

► Standard delivery times & transit times for different routes

► Security levels & safety conditions of the transportation equipment used

► Time within which a customer query should be resolved

► Incorporate a mechanism to track and monitor SLA’s and any deviations from the defined standards should be recorded and reported to the management

Enter into a contract with the logistic service

supplier

Shipment of goods from supplier end to Bloom Energy India

Pre defined SLAs defined for each route

Monitoring of SLAs based on actual shipment time

SLAs not defined with logistic service provider

Performance of service provider not reviewed


Service levels agreements (SLAs)

Significant variations in shipment time for shipments through similar routes

Variations in shipment time


Freight charges

Logistic teamSelection of freight

provider

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Link GRN with the Material receipt GRN

Purchase Requisition for courier freight raised by material requisitioner

Logistic team unaware of duty free procurements made using courier

GRN’s raised for freight not linked with GRN raised for material receipt

Illustrative process flow

Design gaps in the process

Observation► Our review of the process of freight payments noted the

following:

► Absence of a process to verify whether freight hasbeen received for the freight invoices received fromlogistic service providers

► Absence of a process to verify whether freightcharges are paid only for goods ordered from thesupplier

► As on October 31, 2009 total duty paid as per accountno. 52118 ‘Commissioner of Customs’ (BangaloreEHTP) in Oracle system was INR 1,211,506. However,in some instances, applicable duty was paid by thefreight forwarder & then billed on to the company. Whileprocessing payments to the freight forwarder, nobifurcation of freight charges is made between customsduty paid in Oracle system leading to inability intracking total duty paid and list of materials for whichduty is to be paid


Freight charges

Root cause► The GRN’s raised for closure of the PO’s created for

freight charges are not linked to the GRN’s raised forrecording the corresponding receipt of goods

► Absence of a process to pass separate accountingentries for freight charges & customs duty in Oraclewhile making payments to the freight forwarder

► Absence of bill of entry documentation for duty paidshipments

► Logistics team is unaware of duty paid shipmentsthrough courier

► Documentation (material invoice, Bill of Entry & TR-6challan) was not maintained/retained by logistics team

Risk► Possibility of not claiming drawback on re-export of duty

paid goods► Possibility of processing payments for shipments not

received or ordered► Inability to segregate duty paid and duty free goods

(during customs audits)

Recommendation► Intimation of receipt of imported shipments (email) to

be given to the logistics team by thestores/warehouse division

► During processing of freight invoices, the Financeteam to provide the reference of the GRN number ofthe goods received for the corresponding freightinvoice

► Explore the possibility of configuring Oracle to linkGRNs raised for material receipt & correspondingfreight charges

► Supplier invoice number, item description, materialrequisitioned by, and all other relevant information tobe captured on the freight invoice (freight charges) ofsamples for which GRN would not be created

► Journal entry for customs duty paid across locationsto be posted under a separate ‘customs duty’ account

► Assign the responsibility of administrating couriershipments to the logistic team


Consultant and clearing & handling agent (CHAs) contracts

Observation► Our review of the services rendered by logistics consultants

(Supply Chain & EOU) and other Clearing & Handling Agents(CHAs) noted the following:

► Documents for selection of consultants (Supply Chain &EOU) were not available

► No contract / agreement was entered into with EOUConsultant and other CHAs (Ex: Nippon express,Transglobal logistics, etc)

► During the period April to October 2009, EOU Consultantand the CHS agents were paid INR 1,502,556.Payments were processed without valid contracts/agreed upon rates

► Of the 5 SCM Consultant invoices reviewed, we notedthat in 3 instances (amounting to INR 179,835), specificapprovals for services received beyond the scope, asdefined in the contract, was not obtained (refer annexureof next page)

Root cause► Absence of a defined process for selection of consultants

& entering into contracts prior to utilizing services of consultants

► Finance team is not in possession of the contract with the consultant

Risk ► In the absence of a binding document/contract with the

consultant, the company is not adequately protected with rights/obligations and payment covenants

► Possibility of unauthorized payments being made to the consultant

Payments amounting to INR 1,502,556 made

without a valid contract & agreed upon rates


Consultant and clearing & handling agent (CHAs) contracts

Recommendation

► Procedures and documents, such as the request forquotation (RFQ), comparative quote analysis andvendor approval authority, or selecting consultantsmust be defined and adhered with immediate effect

► A formal contract should be entered into with theconsultants. The contract should cover the scope ofservice, payment terms and conditions, etc

► The copy of the contracts should be maintained withthe Finance team and adherence to the contractshould be monitored by the Finance team

► For services availed beyond the scope, as defined inthe contract, a specific approval mechanism to bedefined and incorporated prior to availing suchservices. The approval obtained to be attached alongwith the service provider’s invoice. The Finance teamshould check for such approvals prior to processingpayments

Payments amounting to INR 179,835 made without

specific approvals

Services rendered beyond the scope of the agreement with Supply Chain Consultants


Customs duty

Root cause

► Process to approve reimbursement of customs charges to DHL does not require the courier agency to submit corresponding Bill of Entry

Risk

► Possibility of excess customs duty reimbursed to the courier service provider

Recommendation

► Incorporate a process of verification of custom duty amount as specified in the invoice with the Bill of Entry prior to processing of the payment

► Retain a copy of the Bill of Entry for record purposes

Observation

► During our review of the process of reimbursement of customs duty paid to DHL, we noted that there is no process to verify the customs duty amount with the Bill of Entry

► During our sample review of 5 inbound charges invoice submitted by DHL during the period between April –October 2009, we noted that for customs duty amounting to INR 34,291, the Bill of Entry was not available. Further on discussions with Senior Sourcing & Procurement Engineer and Senior Accountant, we noted that the reimbursement charges submitted by DHL were not supported with a Bill of Entry

Receipt of goods at the customs

frontier

Customs duty paid by DHL (as

per the Bill of Entry)

Inbound charges invoice raised by

DHL on BEIPL

Payment processed by Finance team

Verification between invoice and Bill of Entry not performed

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