Common Audit Issues

Hosting Federal Audits

September 8, 2011

Common Audit Issues Format of Review:1. Describe common audit issue2. Recommended handling3. Review panel suggested improvements4. Review industry panel questions5. ONRR/State/Tribal panel response6. Related follow-up questions from

attendees

Common Audit Issue #1 Issue - Unrealistic deadlines for amount of

information being requested.• Simplistic view of industry’s accounting

systems/processes• Increase in compliance reviews and audit

requests.

Common Audit Issue #1 How to handle:1. Request extensions2. Commit to completing part of request and

get agreement on completion date for the remainder of the request

3. If not enough time is given to pull data for opening conference, you will most likely need extensions for new data requests

Common Audit Issue #1 Suggested ONRR Improvements• Provide minimum of 60 work days from

receipt of engagement letter to opening conference.

• Provide minimum of 30 work days for compliance reviews.

• These should be standard across ONRR.

Common Audit Issue #1 Industry Questions:• Who/how is it determined to review

sample months versus every month in an audit or compliance review?

• What is the purpose of a compliance review and how does it differ from an audit?

Audit Issue #1 - ResponseDetermine whether to review sample months or ALL months in an audit or compliance review

• Sample months - selected to fulfill the audit objectives• Adequately assess the reliability of data• Provide an assurance of reasonable reporting

Purpose of a compliance review; how it differs from an audit

• Compliance reviews - typically cover one or two years; full or limited scope

• Automated processes (CPT) - checks for reasonableness; all months examined

• Variances – request & compare to source documents (i.e. contracts, statements, etc.)

Common Audit Issue #2 Issue – It appears the ONRR is not

communicating with others on audit, compliance review and data request efforts which causes duplication of work for companies

Common Audit Issue #2 How to handle:• Attempt to push back on compliance review

and say the property is being addressed in an audit.

Common Audit Issue #2 Suggested ONRR Improvements• Minimize duplication of efforts on

compliance reviews and audits.• When audit is begun, notify data mining and

compliance review groups, and state federal auditors.

• Build audit log.

Common Audit Issue #2 Industry Questions:• What is current practice for coordinating

audit assignments between the ONRR and States/Indian agencies?

• What is currently being done to make sure there isn’t any duplication of efforts on audits?

Audit Issue #2 - Response Coordinating audit assignments - ONRR & the State/Tribal delegations

• Coordination is continually being improved

– Annual ACM, State and Tribal joint work plan sessions– Compare plans to eliminate duplication– Coordinate who is auditing/reviewing the same companies

Eliminate duplication and explain roles of offices• Working with Financial Management

– Eliminate duplication of volume comparisons– Expand use of ACM’s information management system for

use in other compliance initiatives

Common Audit Issue #3 Issue – ONRR/States are going straight

from audit work to Orders.

Common Audit Issue #3 How to handle:• Document all issues and provide all the

supporting documentation to the audit position/findings in the Orders.

Common Audit Issue #3Suggested ONRR Improvements• Return to sending audit issue/preliminary

determination letters on audit findings.

Common Audit Issue #3Industry Questions:• Explain why and what occurrences takes

place that ONRR chooses to go straight to an Order.

• Is it consistently followed throughout ONRR teams/offices?

Audit Issue #3 - ResponseWhy ONRR chooses to go straight to an Order• Issue is identified; but the company's formal position is

unknown• Variance can not be clearly defined to the elemental level• Issue letter - will be sent for confirmation of the company's

position• Unresolved issues between ONRR and the reporter• Unlikely to gain anything by generating an issue letter; Order

is sent• Statute of limitations – (Federal ONLY) ONRR must send

Order

Consistency throughout ONRR teams/Offices• Situational to the audit or review; professional judgment

Common Audit Issue #4 Issue – Some auditors are inexperienced

with accounting concepts and industry practices which can make communications difficult/time-consuming.

Common Audit Issue #4 How to handle:• Take more time explaining and putting

together documentation, walk through one month and all the calculations.

• Point them to the Payor handbook.• Suggest they speak with a knowledgeable

ONRR person.

Common Audit Issue #4Suggested ONRR Improvements• Provide more ONRR training on overlaps,

pressure base conversion, pool pricing, how the OGOR relates to the 2014, dual accounting, allowable transportation costs, and lease use.

• Have auditor provide more information upfront as to what they are attempting to do.

Common Audit Issue #4Industry Questions:• Can compliance review data requests

contain the auditor’s supervisor name and contact information?

Audit Issue #4 – ResponseData requests• Compliance Review

– Types of information required (different names for same document)

– Auditor’s name & contact information– Audit supervisor’s name & contact information– Enables further communication & clarification as needed– This applies whether formal or informal

• Audit Engagement– Audit supervisor's name and number is provided to the

company

Common Audit Issue #5 Issue – No closure notice is provided when

the compliance reviews/audits are completed. Sometimes we hear back a year or more later asking questions.

Often companies provide responses to audit findings but don’t receive confirmation that the information was received.

Common Audit Issue #5 How to handle:• Ask for time to pull the documents to review

and respond.• Possibly ask the ONRR to close the original

compliance review and issue a new one.• Send letter response and documents in an

email with an email read receipt and delivery notice, and send via UPS/FED EX.

Common Audit Issue #5Suggested ONRR Improvements• Provide closure notice when compliance

reviews/audits/data requests are completed.• Send confirmation notices when information

has been received.

Common Audit Issue #5Industry Questions:• Explain the compliance review and audit timelines to

complete within the ONRR.• Is there a process in place to notify a company that

the review is complete?• Has the ONRR considered publishing listing of open

audits and/or audit closures?• What is ONRR’s communication policy on

communicating to companies after they have responded to audit findings and/or issue letters?

Audit Issue #5 - ResponseCompliance review and audit engagement - timeframes

• Audit - may take anywhere from 6 months to several years • Reviews - typically completed within ONE year

– Issues - may extend the review• due to variances• additional information is needed

No formal process to notify the company of review completion

Audits - conducted IAW Government Auditing Standards (2007 Rev.)

• Requires an engagement letter• Conclude with an audit report

Audit Issue #5 – Response (cont)Publishing a list of open engagements and/or audit closures

• ONRR/ACM does notify all companies that will undergo a compliance review; properties are identified later

• No plans to publishing any additional information

ONRR's communication policy and timelines regarding audit findings and/or audit issue letters

• Timely review of the company’s response• May accept the response to the findings & close the audit• Or, may develop an enforcement document

– Provides responses to the company’s comments

Common Audit Issue #6 Issue – When addressing audit issues, the

auditor is unable to provide additional information claiming they can’t because of “confidentiality or proprietary information.”

Recent examples include “plant factors” and the unbundling of transportation and/or processing rates.

Common Audit Issue #6How to handle:• Explain industry does not have “plant

factors” as we use the actual ngl information for the plant and lease.

• Provide the auditor copies of the meter and/or plant statement.

Common Audit Issue #6Suggested ONRR Improvements• If industry is to be held liable in compliance

reviews and/or audits, the necessary information to enable the company to validate the claim needs to be made available.

Common Audit Issue #6Industry Questions:• Who at the ONRR is responsible for the

“plant factors” and how often are they updated?

• Why isn’t the basis for the unbundling of the transportation/processing rates provided with the audit findings?

Audit Issue #6 - Response“Plant factors" • Calculated by ONRR auditors and analysts

– Based on plant processing statements (companies & processors)

• Off-shore - updated yearly• On-shore - updates vary

Basis for the unbundling of the transportation/processing rates • Regulations & valuation precedents as a basis for unbundling

rates• Devon methodology - general methodology that’s system-

specific• Considered proprietary data

Common Audit Issue #7Issue – The BLM, BOEMRE and the ONRR

are not always on the same page, thus, the OGOR and the 2014’s may not match as the BLM/BOEMRE haven’t updated their systems.

Common Audit Issue #7How to handle:• Note that you have done all that you could

and wait until their systems get in sync.

Common Audit Issue #7Suggested ONRR Improvements• ONRR & BLM/BOEMRE need to improve

the communications between their systems.

Common Audit Issue #7Industry Questions:• Are discussions taking place to address

the gaps between the two agencies and/or systems?

Audit Issue #7 - ResponseGaps between the agencies & systems• ONRR/BOEMRE and BLM share data as much as possible• Royalty Policy Committee - numerous recommendations to

improve data sharing across the agencies including: – BLM and BIA lease information in electronic format– Production Coordination Committee

• Headed by the Deputy Asst. Secretary for Land and Minerals

• Meets quarterly

• Memorandum of Understanding between BLM, BIA, ONRR, etc.

• ONRR Strategic Initiative – Identify data sharing across the agencies– Automate the exchange between agencies

Common Audit Issue #8Issue – Overall consistency among the

various types of ONRR audit staffs. Includes resident auditors, compliance reviews, RIK requests, states auditing on behalf of the ONRR, and regional audit staff.

Common Audit Issue #8How to handle:• Deal with it as best you can by pushing

back• Escalate within the ONRR,• Ask the requesting ONRR staff to check

with their management as to proper procedure

Common Audit Issue #8Suggested ONRR Improvements• Require consistency among all ONRR audit

staff regardless of which staff is performing the work.

Common Audit Issue #8Industry Questions:• Do all types of ONRR audit staff receive the

same training?

Audit Issue #8 - ResponseONRR audit/compliance staff training

• ONRR, State and Tribal auditors/analysts – 80 hours of continuing education over rolling 2

year periods

• Three year training plan for all auditors/analysts– Classes range from beginning to advanced– Topics include auditing and valuation

• ONRR also takes advantage of training sponsored by many universities and professional associations

Common Audit Issue #9Issue – Occasionally, the ONRR will

request a company that is paying royalties on takes or entitlements, to change to a method that is not in compliance with the regulations.

• Also, rather than pursuing the additional royalties from the company that underpaid them they will make us pay for royalties we are not liable for.

Common Audit Issue #9How to handle:• Push back to the auditor.

Common Audit Issue #9Suggested ONRR Improvements• Auditors need to pursue royalties from the

company that underpaid them and/or is not in compliance with the regulations before coming after another company with an interest in the property.

Common Audit Issue #9Industry Questions:• How should a company that is in

compliance with the regulations handle these situations?

Audit Issue #9 - ResponseTakes vs. Entitlements - Companies in compliance with the regulations may be requested to pay additional royalties

• Reporting problems – Unitized or communitized production (mixed - fee or state)– Different royalty rates

• Lessee of Indian and Federal acreage– May designate payment responsibility to others– ONRR seeks resolution from lessees and designees for

any underpayments per Federal regulations• Auditee assistance

– Can identify the responsible party to resolve issues more quick

• Lessee or designee needs to internally validate if the lease's entitlement has been met each month

Common Audit Issue #10Issue – In the initial planning stage, auditors

request that we provide them a lease/agreement universe of all properties in a given state.

Common Audit Issue #10How to handle:• Request more time to assemble information.• Provide information for wells where you are

the payor.

Common Audit Issue #10Suggested ONRR Improvements• This information is expected to be provided

within three weeks from the date of the audit engagement letter.

• At least 60 days need to be allowed for requests of this magnitude.

Common Audit Issue #10Industry Questions:• Shouldn’t the auditors be trained to do this

themselves?

Audit Issue #10 - ResponseRequests for the ENTIRE universe of properties along with all the operator, purchaser, ownership, etc. Can this be obtained elsewhere?

• Part of the audit process includes validating the audit universe

• Federal and Indian royalty and minimum royalty obligations are met

• Only the company can provide information contained in their land records as to Federal and Indian ownership

• States and tribes may or may not have access to all of the data from ONRR’s system due to proprietary data restrictions

Common Audit Issue #11Issue – In dealing with audit issues, we

often are sent a pdf of the auditor’s findings and are not given a copy of the worksheets that has all the formulas involved in the calculations.

Common Audit Issue #11How to handle:• Request the worksheet and supporting

documentation in a format where you can see how their numbers were calculated.

Common Audit Issue #11Suggested ONRR Improvements• Include the worksheets and supporting

documents that support the audit findings with the initial finding in an electronic format.

Common Audit Issue #11Industry Questions:• Can these worksheets and supporting

documents be provided upfront in an electronic format?

Audit Issue #11 - ResponseWorksheets and supporting documents of the audit findingsCan this be provided upfront in an electronic format to enable the

company to see the formulas & calculations?

• PDF formats - secure sharing of ONRR information with a company

• Yes - sending electronic data to a company involves encryption and passwords to secure proprietary or Indian data

• Message Way – establish an account with the company– Allows for the exchange of data without the encryption

process

Common Audit Issue #12Issue – The ONRR is not using the MMS

Form-4444 in order to send audit and compliance correspondence and enforcement notices to the company’s designated contact.

Some ONRR personnel refuse to go to Form-4444 as they are wanting an immediate answer.

Common Audit Issue #12How to handle:• Continue to request they send their request

to the designated person.• There could be delays in responding

resulting from the ONRR and/or BLM not using the contact information on the Form-4444.

Common Audit Issue #12Suggested ONRR Improvements• Ensure Form-4444’s are processed timely

and properly within the ONRR. • Provide training to industry to ensure they

know how to file Forms-4444 correctly to ensure documents are sent to the correct person, and the importance of keeping the information up-to-date.

Common Audit Issue #12Industry Questions:• Explain if this information is updated in one

place within the ONRR system and whether everyone is trained to refer to it.

• Explain why we still get information going to the wrong contacts even though our contact information has been updated.

Audit Issue #12 - ResponseForm 4444 (designee address/contact information)

• Original forms are scanned into the Financial Management system – Auditors and analysts use the contact information based on

the most recent effective dates (when available)• Engagement letters for audits request the company confirm

the company contact for the audit

We still get information going to the wrong contacts even though our contact form has been updated

• ONRR is improving the use of the Form 4444 as an audit/review step and requesting the Form if one is not on file from a company

Common Audit Issue #13Issue – The ONRR/States use a

standardized “request for information” that requests a lot of information that is not used or needed.

Often, auditors request OGOR and 2014 historical data, sometimes after arriving on site.

Common Audit Issue #13How to handle:• Go line by line down the list of items being

requested to understand why or if the information is needed.

• Remind the auditors that they have the ability to easily obtain the 2014 and OGOR information on their own.

Common Audit Issue #13Suggested ONRR Improvements• Define specific documents needed and what

they will be used for.• Train auditors so they are aware of how to

access and run necessary reports.

Common Audit Issue #13Industry Questions:• Has the ONRR considered working with

industry representatives to understand all documents being requested on document requests?

• Is training provided to all Federal and state auditors so they can obtain the OGOR and Form 2014 information themselves?

Audit Issue #13 - ResponseONRR’s understanding of documents requested

• Audit & compliance personnel understand the requested documents

• Internal Controls - certain documents are requested to review internal controls and perform a risk assessment

• Audit procedures - modified as necessary for the level of risk associated with the company

• Auditors will request information to gain a more complete record of what was reported

Audit Issue #13 – Response (cont)Training for Federal, State & Tribal auditors

on OGORs and Form 2014

Yes – formal and on-the-job training

• Auditors may also request information from the company to gain a clearer, more complete picture