AN OVERVIEW OF THE FEDERAL MINERAL ROYALTY AUDIT PROCESS

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Book 1
(Feb 2004)
CHAPTER 6A
AN OVERVIEW OF THE FEDERAL MINERAL ROYALTY AUDIT PROCESS
F. David Loomis
Mineral Audit Section
Department of Revenue - State of Colorado
Denver, Colorado
TABLE OF CONTENTS

Introduction

How are royalty payors selected for audits?

Who performs the audits?

What is the Federal and Indian lease Audit Strategy?

How is the Audit Strategy Implemented?

How are audits coordinated?

What is the Audit Process?

How does the Auditor conduct the Audit?

What happens after an audit is completed?

What is done to insure consistency among auditors?

AN OVERVIEW OF FEDERAL MINERAL ROYALTY AUDIT PROCESS

I. INTRODUCTION

Since the inception of the United States Department of the Interior's Minerals Management Service (MMS) in 1982, various forms of audit activities have been performed of companies submitting royalty payments for mineral lease production on Federal, Indian, and Outer Continental Shelf leases. The purpose of the audits has been to ensure compliance with applicable federal and Indian lease terms, regulations, policies, and laws governing the reporting and payment of revenues derived from the production and sales of oil, gas, and other minerals.

The purpose of this paper is to present and explain the audit process with particular emphasis on:

• How it is decided who will be audited?

• How are the audits conducted?

• What can a company do to prepare for and facilitate an audit?

• What are some of the current audit issues?

The presentation of the audit process and clarification of company responsibilities during the entire audit process will improve the efficiency and accomplishment of audit goals and objectives.

II. HOW ARE COMPANIES SELECTED FOR AUDIT?

A. Who Performs the Federal Lease Audits?

The authority for conducting royalty audits is legislatively mandated by the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA) as modified by the Federal Oil and Gas Royalty Simplification Act of 1996 (FOGRSFA), and Public Law 102-154 (Appropriations Act for 1992).

The Findings and Purpose of FOGRMA states that Congress finds that -

(1) the system of accounting with respect to royalties and other payments due and owing on oil and gas produced from Federal and Indian leases is archaic and inadequate;

(2) it is essential that the Secretary initiate procedures to improve methods of accounting for such royalties and payments.

It is the purpose of this Act -

(1) to clarify, reaffirm, expand, and define the authorities and responsibilities of the Secretary of the Interior to implement and maintain a royalty management system for oil and gas leases on Federal lands, Indian Lands, and the Outer Continental Shelf;

(2) to require the development of enforcement practices that ensure the prompt and proper collection and disbursement of oil and gas revenues owed to the United States and Indian lessors and those inuring to the benefit of States.

The Duties of the Secretary portion of the Act states:

(1) the Secretary shall establish a comprehensive inspection, collection and fiscal and production accounting and auditing system;

(2) the Secretary shall audit and reconcile, to the extent practical, all current and past lease accounts for all leases of oil or gas and take appropriate actions to make additional collections or refunds as warranted.

The Cooperative Agreements portion of the Act states:

(1) Sec. 202.(a) The Secretary is authorized to enter into a cooperative agreement or agreements with any State or Indian tribe to share oil or gas royalty management information, to carry out inspection, auditing, investigation or enforcement (not including the collection of royalties, civil or criminal penalties or other payments) activities under this Act in cooperation with the Secretary.

The Delegation to States portion of the Act states:

(1) Sec 205.(a) Upon written request of any State, the Secretary is authorized...