The global shipping industry, the lifeblood of international trade, navigates a constant storm of challenges. Unpredictable prices, fuel costs, fluctuating demand, and evolving regulations create a volatile market. In this dynamic landscape, internal audit serves as a crucial anchor, ensuring a shipping company stays on course and avoids hidden reefs.

 

Beyond the Hull

Internal audits for shipping companies delve into the operational effectiveness and financial health of the organization's operations on land.

Here's how these audits play a critical role:

Financial reviews

Auditors meticulously examine a company's finances, ensuring proper accounting practices are followed. They identify potential fraud or internal control weaknesses, verify compliance with regulations, and assess the company's financial resilience in a volatile market.

Did you know that a 2020 study by PwC found that marine fraud costs the shipping industry an estimated $2 billion annually. [Source: PwC, "Maritime Fraud Survey 2020"]

Strong internal controls implemented after the audits can significantly reduce or mitigate multidimensional business risks.

Contract Compliance

A shipping company relies heavily on contracts with NVOCCs (freight forwarders), shipbuilders, Transport providers, Terminals, and insurers. Internal audits ensure these contracts are reviewed for proper negotiation, execution, and adherence to terms. A single breached contract can incur significant financial penalties for a shipping company.

According to a 2023 report by the Baltic and International Maritime Council (BIMCO), contract disputes account for a staggering 20% of all maritime arbitration cases. [Source: BIMCO, "Dispute Resolution in Shipping 2023"]

Internal audits play a vital role in mitigating this risk.

Operational Efficiency Reviews

Internal audits identify opportunities for improvement in operational processes, from streamlining cargo handling to optimizing vessel schedules. This translates to cost savings, faster container turnaround times, and a competitive edge in the market.

 

Riding the Rollercoaster of Pricing Fluctuations

Freight Rates

The cost of transporting goods by sea can fluctuate based on:

Supply and Demand: Rates rise when demand for shipping on a particular route outstrips available capacity. Conversely, rates fall when there's excess capacity. You can find freight rate indexes from organizations like the Drewry Maritime Research which track average freight rates on major routes.

Also, the Shanghai Container Freight Index and the Xeneta are good sources of information for tracking freight rates.

Seasonality: Freight rates often fluctuate based on seasonal variations in demand. For example, rates typically increase during peak seasons for certain commodities such as Chinese New year, Fruit seasons, etc.,

Geopolitical Tensions: Geopolitical instability can disrupt shipping routes and drive up freight rates. Recent examples were Suez Canal blockade or the Red Sea shipping crises

 

Fuel Costs

Bunker fuel: A type of heavy fuel oil used by ships, is a major expense for shipping companies. Its price fluctuates dramatically based on several factors:

Global Oil Prices: Bunker fuel prices are directly linked to global crude oil prices. You can find historical data and charts for Brent Crude oil (a benchmark for global oil prices).

Geopolitical Instability: Political unrest or conflict in oil-producing regions can disrupt supply and drive-up prices.

Environmental Regulations: Regulations like emission control standards or sustainability initiatives can influence the cost of refining bunker fuel.

Internal audits can help companies navigate these fluctuations by:

• Evaluating fuel procurement strategies to ensure they are getting the best possible deals
• Analysing fuel efficiency measures implemented on vessels to minimize fuel consumption
• Assessing the effectiveness of pricing strategies to maximize revenue in a volatile market
• Identifying alternative routes or modes of transport that might be more cost-effective during periods of high freight rates

 

30 Strategic Audit Points for Shipping Companies

Internal Auditors focus on the financial health, operational efficiency, and risk management practices that keep companies afloat in a volatile market. Due to all the complexities in auditing a shipping company, there are 30 strategic audit points that internal auditors can use for providing assurance and consulting:

Contract Management

Contract Negotiation and Execution: Review freight contracts, shipbuilding agreements, Transport contracts, Terminal contracts and insurance policies for proper negotiation, execution, and risk allocation.

Contract Performance Monitoring: Audit the monitoring and enforcement of contractual obligations by all parties involved.

Contractual Claims Management: Evaluate the process for handling contractual disputes and claims, ensuring proper documentation and cost recovery.

Contractual Termination Clauses: Review contract termination clauses to identify potential financial liabilities or missed opportunities to exit unfavorable agreements.

 

Operational Efficiency

Vessel Operating Costs: Analyze operational costs for each vessel, identifying areas for cost savings through route optimization, fuel efficiency measures, fuel hedging strategies, and crew management.

Cargo Handling Efficiency: Audit cargo handling procedures to identify bottlenecks and inefficiencies that delay turnaround times and increase costs.

Port Selection and Scheduling: Evaluate port selection strategies and vessel scheduling to minimize waiting times and optimize port calls.

Maintenance and Repair Practices: Assess the effectiveness of maintenance programs for vessels and equipment, ensuring optimal performance and minimizing downtime.

Intermodal operations and Gate operations: Evaluate intermodal transfer efficiency, stakeholder collaboration, and shipment integrity. Scrutinize container gate throughput, security protocols, and dwell time bottlenecks.

Inventory Management: Audit spare parts and supplies inventory management practices to minimize waste and ensure crucial items are readily available.

Financial

Revenue Recognition: Ensure proper accounting, operational practices for freight revenue, considering factors like Freight invoicing, Local tariffs, and Container time pending charges, charter party terms and cargo claims.

Bunker Fuel Procurement: Audit procurement strategies for bunker fuel, analyzing pricing competitiveness and potential collusion.

Financial Reserves: Assess the adequacy of financial reserves to withstand market fluctuations and unexpected expenses.

Compliance with Maritime Regulations: Verify adherence to financial reporting standards specific to the maritime industry.

 

Risk Management and Compliance in Internal Audits of the Shipping Industry

Cybersecurity and Data Security: Evaluate the company's cybersecurity protocols and data security measures to protect sensitive information from cyberattacks.

Environmental Compliance: Audit compliance with environmental regulations regarding emissions, waste disposal, and ballast water management.

Safety Management Systems (SMS): Assess the implementation and effectiveness of the company's SMS to ensure the safe operation of vessels and crew safety.

Piracy Risk Management: Review the company's risk management strategies for piracy-prone areas, including security protocols and insurance coverage.

Geopolitical Risk Assessment: Analyze the potential impact of geopolitical tensions on shipping routes, costs, and cargo security.

Business Continuity Planning: Audit the company's business continuity plans to ensure they are prepared to respond effectively to unexpected disruptions.

Sustainability

Ballast Water Management: Evaluate compliance with international regulations for ballast water treatment to prevent the spread of invasive species.

Energy Efficiency Measures: Audit the company's efforts to implement energy-efficient technologies on vessels, reducing fuel consumption and emissions.

Waste Management Practices: Review waste management practices on board vessels and in ports, ensuring proper disposal and minimizing environmental impact

Recycling and Circular Economy Initiatives: Assess the company's commitment to recycling materials and exploring circular economy practices within its operations.

Sustainable Alternative Fuels: Evaluate the company's exploration and adoption of sustainable alternative fuels, such as biofuels or liquefied natural gas (LNG), to reduce its environmental footprint.

Cybersecurity

Access Controls and User Permissions:  Ensure access to sensitive systems and data is restricted based on the principle of least privilege.

Data Encryption: Verify that critical data, both at rest and in transit, is encrypted to safeguard against unauthorized access.

Vulnerability Management and Patching: Audit the company's processes for identifying, prioritizing, and patching vulnerabilities in IT systems.

Incident Response and Recovery Plans: Assess the effectiveness of the company's plans to respond to and recover from cyberattacks, minimizing downtime and data loss.

Cybersecurity Awareness Training: Evaluate the effectiveness of cybersecurity awareness training programs for employees, ensuring they can identify and avoid cyber threats.

By addressing these complex audit points, shipping companies can more effectively navigate the ever-changing seas, ensuring financial stability, operational excellence, and adherence to regulations. Remember, a robust internal audit function serves as a vital compass, guiding companies toward a secure and prosperous voyage in the dynamic world of shipping.

Conclusion: A Steady Hand on the Helm

Internal audits are a strategic compass for shipping companies navigating a volatile market. By providing an independent and objective assessment of operations and finances, internal audits offer valuable insights that allow management to make informed decisions for a more secure and profitable voyage.

 

Frequently Asked Questions Answered by Moiz Khan

1. How can internal audits evaluate the impact of digital transformation initiatives on the operational efficiency and cybersecurity of shipping companies?

Like other sectors of Transport and logistics, the shipping industry is also going through a major shift in digital transformation. Internal auditors can contribute significantly to evaluating the impact of digital transformation. Please refer to the table below to evaluate this impact on Operational efficiencies and Cybersecurity:

Operational Efficiency	Metric
Blockchain for Trade Finance: Assess the impact of blockchain on streamlining letter of credit (LC) processing and reducing associated paperwork and fraud risks.	For blockchain implementation, track the reduction in processing time for LCs and the number of fraudulent transactions identified.
AI-powered Route Optimization: Evaluate the effectiveness of AI algorithms in optimizing shipping routes based on weather patterns, fuel efficiency, and port congestion.	Measure the percentage improvement in fuel efficiency and the reduction in overall voyage time.
Predictive Maintenance with Sensors: Audit the implementation of sensor technology on vessels to predict equipment failures and schedule preventive maintenance, minimizing downtime and repair costs.	For predictive maintenance, monitor the number of breakdowns prevented and the associated cost savings from reduced repairs.
Drone Inspections: Analyse the use of drones for remote vessel inspections, reducing crew exposure to safety risks and improving inspection efficiency.	For drone inspections, track the reduction in inspection time and the number of safety incidents avoided.
Automated Container Terminals: Assess the impact of automated terminals on container loading and unloading times, leading to faster turnaround times and improved port productivity	For automated container terminals, measure the increase in container throughput and the reduction in port dwell time.
Augmented Reality (AR) for Cargo Handling: Evaluate the effectiveness of AR technology in assisting crews with cargo stowage and retrieval, minimizing human error and improving cargo handling efficiency.	For AR-assisted cargo handling, monitor the decrease in cargo damage and the improvement in loading/unloading times.
Real-time Cargo Tracking: Audit the implementation of real-time cargo tracking systems, allowing for better shipment visibility, improved inventory management, and reduced risk of theft.	For real-time cargo tracking, track the increase in customer satisfaction due to improved shipment visibility and the reduction in lost or stolen cargo.
Chatbots for Customer Service: Analyse the effectiveness of chatbots for handling customer inquiries about shipment status, freeing up human agents for more complex issues.	For chatbots in customer service, measure the percentage of inquiries handled by the chatbot and the customer satisfaction rating for chatbot interactions.
Cybersecurity	Metric
Data encryption is critical to any digital transformation initiative	For all initiatives, ensure proper data encryption protocols are in place to protect sensitive information.
Connectivity protected with firewall and cybersecurity threats	For shipboard internet connectivity, assess the effectiveness of firewalls and intrusion detection systems in preventing cyberattacks.
Policies governing cyber threats	Develop a clear cybersecurity policy outlining acceptable use of technology and crew training on identifying and mitigating cyber threats.
Regular IT penetration testing	Conduct regular penetration testing of IT systems used in digital transformation initiatives to identify vulnerabilities before attackers exploit them.
Multifactor authentications	Implement multi-factor authentication for crew access to critical systems and data.
Training programs	Develop comprehensive training programs for crew members on new technologies, ensuring they understand how to use them effectively and troubleshoot basic issues.
Communication channels	Establish clear communication channels to address crew concerns about job security or skill gaps due to digital transformation.

2. How can internal auditors stay abreast of changes in global trade policies and their implications for shipping companies?

Internal auditors should be vigilant and enthusiastic about all the changes in Global trade policies. Auditors can use the following portals to monitor and research about these changes:

Track Regulatory Bodies

• Follow the World Trade Organization (WTO) website for updates on upcoming trade negotiations and dispute settlements
• Follow developments in free trade agreements (FTAs) between countries, as they can lead to changes in import duties and potentially increase trade volumes on certain routes
• Monitor announcements from regional trade blocs like the European Union (EU) or the North American Free Trade Agreement (NAFTA) for potential changes impacting shipping routes
• Subscribe to newsletters from the International Maritime Organization (IMO) to stay informed about new regulations affecting shipping operations globally. Track upcoming IMO (International Maritime Organization) regulations on sulfur emissions (e.g., IMO 2020) and their impact on fuel choices and compliance costs for shipping companies
• Track changes in customs regulations that may impact processing times and documentation requirements for imported goods
• Monitor updates on environmental regulations related to waste disposal or ballast water treatment in specific regions
• Monitor the implementation of the EU's Import Control System (ICS2) ICS2 system, which standardizes import controls across the EU. Understand the new documentation requirements and potential delays this might cause for shipments entering the European market
• Track how new Chinese regulations for cross-border e-commerce might impact customs clearance procedures for smaller packages, potentially leading to longer processing times and impacting delivery schedules
• Monitor the EU's PRF Directive impact on waste disposal costs for ships in EU ports
• Track stricter ballast water discharge regulations in specific regions and their impact on shipping route planning

Industry Insights

• Utilize reports from the Baltic and International Maritime Council (BIMCO) on the impact of trade tensions between specific countries on freight rates and shipping routes
• Analyze research from shipping consultancies like Drewry Maritime Services or Clarksons Platou Securities on the potential impact of trade policies on specific cargo types
• Review industry publications like "Lloyd's List" or "Maritime Executive" for news articles and expert opinions on the implications of trade policy changes for the shipping industry

Trade Publications & News

• Subscribe to trade publications like "The Journal of Commerce" or "FreightWaves" for news on international trade developments and their potential impact on logistics
• Follow news sources specializing in maritime logistics, such as "Maritime Logistics Professional" or "Supply Chain Dive," to stay informed about current events and how they might affect shipping companies
• Utilize industry news aggregators like "Ship & Bunker" or "Splash247" for a comprehensive overview of current maritime news and trade policy updates
• Monitor trade sanctions or restrictions imposed by specific countries, as these can disrupt established shipping routes and affect freight rates
• Stay informed about political instability in regions with major shipping lanes, which can lead to piracy threats or port disruptions

 

3. What best practices should internal auditors follow when auditing global shipping operations?

I would say there are no single but multidimensional best practices in auditing any shipping company. Here are a few best practices that auditors can utilize to follow while auditing:

Focus on Risk-Based Audits

Bunkering (Fuel Procurement): Audit bunkering practices to identify potential supplier price manipulation or collusion between port authorities and fuel providers

Bunkering (Price adjustments): Analyze bunkering practices to identify potential tactics that could lead to excessive costs for the company. This includes investigating Price Optimization Strategies, Benchmarking and Market Analysis, Supplier Evaluations, etc

Chartering: Focus on chartering agreements for leased vessels, ensuring proper contract terms are in place regarding maintenance responsibilities, fuel consumption guarantees, and dispute resolution mechanisms

Cargo Claims: Scrutinize the process for handling cargo claims to prevent fraudulent claims and ensure proper documentation and recovery of costs for damaged or lost cargo

Exceptional costs reviews: Review the recovery, cost recording and reporting mechanism of exceptional costs in supply chain management.

Booking management audits: Booking management is critical to ensuring smooth planning and flow of cargo operations. Detailed reviews of all processes and activities assess and mitigate risks for businesses.

Schedule reliability reviews: On-time delivery is vital for customers; schedule reliability audits help businesses achieve these objectives.

Spare Parts Inventory Management: Focus on overseas subsidiaries with weaker oversight. Ensure spare parts inventories are properly managed to avoid stockouts that delay repairs or overstocking that leads to unnecessary carrying costs.

Waste Management: Audit waste disposal practices on board vessels and in ports, especially in regions with lax regulations, to identify potential illegal dumping of waste at sea or improper waste handling practices that could lead to environmental fines.

Cybersecurity Practices: Focus on overseas offices or subsidiaries that might have weaker cybersecurity protocols in place, making them more vulnerable to cyberattacks.

Sanctions Compliance: Audit trade activities to ensure strict adherence to international sanctions and embargoes to avoid hefty fines and reputational damage.

 

Standardization and Technology Leverage

• Develop standardized procedures for vessel safety inspections to ensure consistent application of safety protocols across the global fleet
• Utilize data analytics tools to identify unusual patterns in fuel consumption data, which could indicate potential inefficiencies or even fuel theft
• Implement standardized financial reporting formats across all subsidiaries to facilitate consolidated financial reporting and improve transparency
• Leverage data analytics to track maintenance history for vessels and equipment, allowing for preventive maintenance scheduling and optimization of spare parts inventory management
• Develop a centralized document management system to ensure easy access to critical documents and records across all global offices
• Utilize data analytics to monitor crew training completion rates and identify areas where additional training might be required to ensure crew competency across the global workforce

Local Expertise

• Partner with local auditors who understand the specific tax regulations in a particular country, ensuring compliance and minimizing the risk of tax penalties
• Collaborate with local experts on labour laws and employment practices to ensure the company adheres to local regulations regarding crew working hours, minimum wages, and benefits
• Partner with local environmental consultants to understand the waste disposal regulations in specific regions and ensure the company disposes of waste in an environmentally responsible manner
• Engage local auditors with expertise in maritime security to assess the piracy risk in specific regions and develop appropriate security protocols for vessels transiting those areas
• Partner with local legal counsel to navigate the complexities of contract law in different jurisdictions, ensuring the company's interests are protected in chartering agreements and other contracts
• Collaborate with local tax advisors to develop tax optimization strategies that comply with local regulations and minimize the company's overall tax burden

 

4. How can internal audits improve cost management practices in shipping companies?

Cost management is primarily a job of management, and auditors should avoid implementation due to the independence and objectivity demanded by professional standards. There are certain ways auditors can still contribute to the cost management practices remaining within the boundaries of IIA standards:

Cost Benchmarking and Waste Reduction

• Compare maintenance costs per vessel type against industry benchmarks to identify areas for improvement in maintenance practices or negotiation of service contracts
• Audit vessel insurance coverage to ensure the company gets the best possible rates and coverage for its specific risks
• Analyze catering and provisions costs for vessels, ensuring no wasteful practices or inefficiencies in onboard food consumption and procurement
• Review port fees across different ports and negotiate better rates with port authorities where possible
• Benchmark container packing efficiency against industry leaders to identify opportunities to optimize container utilization and reduce wasted space

Cost & Risk Optimization

Optimize Spare Parts Inventory: Analyse historical usage data and negotiate bulk discounts for critical spare parts, minimizing inventory holding costs and ensuring parts availability.

Fuel Efficiency Strategies: Review vessel performance data and identify opportunities for route optimization, speed adjustments, or adopting fuel-saving technologies to minimize fuel consumption costs.

Negotiate bulk discounts and analyze usage data for critical parts to Optimize Spare Parts Inventory.

Fuel Efficiency Strategies: Review data and identify opportunities for route optimization or fuel-saving technologies.

Reefer Container Maintenance: Audit practices to extend lifespan and reduce replacement costs.

Dry Docking Optimization: Analyze the cost-effectiveness of repairs vs. component replacements.

Terminal Handling Charges: Audit charges and negotiate lower fees based on efficient practices.

Container Detention and Demurrage: Identify causes for delays and recommend process improvements.

Route Profitability Analysis: Analyze data to identify under performing routes & suggest adjustments.

Container Utilization Analysis: Audit data to optimize packing and minimize wasted space.

Empty Container Repositioning Benchmarking: Compare costs and identify best practices for negotiation.

Sustainability Initiatives Review: Analyze cost-effectiveness and impact on fuel efficiency and regulations.

Process Optimization and Route Optimization

• Review cargo lashing and securing procedures to identify inefficiencies that lead to damaged cargo and costly replacements
• Analyze port turnaround times to identify bottlenecks in port operations and develop strategies for faster cargo loading and unloading
• Audit maintenance scheduling to ensure preventive maintenance is conducted efficiently and minimizes downtime for repairs

Contract Management and Negotiation

• Review time charter agreements to identify opportunities for renegotiating terms, such as port fees or demurrage charges, based on market conditions or changes in fuel prices
• Optimize Crew Recruitment Costs: Audit crew recruitment practices to identify potential savings through streamlined processes, leveraging technology, or exploring alternative recruitment agencies