CHAPTER 15 FEDERAL AND INDIAN ROYALTY AUDITS

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management II
(Feb 1998)
CHAPTER 15
FEDERAL AND INDIAN ROYALTY AUDITS
F. David Loomis
Mineral Audit Section, Department of Revenue
State of Colorado
Denver, Colorado
William L. Stone
Exxon Company, U.S.A.
Houston, Texas
Gary L. Johnson
Dallas Area Compliance Office
Minerals Management Service
Dallas, Texas

TABLE OF CONTENTS

SYNOPSIS

I. Introduction

II. How Is It Decided Who To Audit?

A. What is the authority for conducting audits?

B. How is the audit strategy developed?

C. How is the audit strategy implemented?

III. How Are Audits Conducted?

A. What does the auditor do?

B. What happens after an audit?

C. What improvements can you expect in the audit process?

IV. What Can You Do To Prepare For And Support An Audit?

A. What preplanning activities can be done?

B. What should be addressed at the entrance conference?

C. What are some of the current audit issues?

V. What's New In Auditing?

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I. INTRODUCTION

For many years various audit activities have been undertaken on revenues from mineral leases on Federal, Indian, and Outer Continental Shelf lands. These audits have covered the verification of revenues related to the leasing, production, or sale of oil, gas, and other minerals. Through years of experience in conducting and undergoing such audits it has been determined that at times companies selected for audit did not fully understand the audit process and their responsibilities related to the process. On the other hand, from a company perspective, the audit process as designed and regulated, sometimes breaks down and should be periodically examined for improvements and efficiencies that will benefit both the auditors and those being audited. Misunderstandings about the process and what is expected result in difficulties for both the auditors and the companies and cause inefficiencies and delays during the course of an audit.

The purpose of this paper is to discuss and/or explain the audit process with particular focus on:

• How is it decided who to audit?

• How are audits conducted?

• What should a company do to prepare for and support an audit?

• What's new in auditing?

Clarification of the audit process and company responsibilities during audits should improve the efficiency and accomplishment of audit goals and objectives.

II. HOW IS IT DECIDED WHO TO AUDIT?

A. What is the authority for conducting audits?

The authority for conducting royalty audits is legislatively mandated by the Federal Oil and Gas Royalty Management Act of 1982.

The Findings and Purpose portion of the Act states:

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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.

This legal mandate is accomplished by the MMS, and the States and Indian Tribes with delegated audit authority, who develop and execute an audit strategy that is designed to provide an acceptable level of audit coverage for Federal and Indian mineral royalties to ensure compliance with lease terms and regulations.

B. How is the audit strategy developed?

MMS's audit strategy consists primarily of company based audits that focus on maximizing royalty revenue audit coverage. The audit strategy development begins with an analysis of historical royalty payments made by payors. We analyze these payments by product (oil, gas, coal, etc.); by lease type (outer continental shelf, onshore Federal, and Indian tribal or allotted); and by payor composition for each product and lease type. Next, we determine desired levels of audit revenue coverage by product and lease type. Finally, we determine the payor composition necessary to obtain the desired audit coverage levels. These payors are selected for audit and comprise the company audit portion of our audit strategy.

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The strategy also includes other types of audits to supplement company based audits. They include special issue audits selected by States, Indian Tribes, or MMS to address current or special emphasis royalty topics; randomly selected company audits to ensure that every payor has a change for audit selection; and referral audits from other agencies such as the Bureau of Land Management or the...