CHAPTER 17 MINERALS MANAGEMENT SERVICE ROYALTY MANAGEMENT PROGRAM AUDIT PROGRAM

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Vol. 2
(Jan 1992)
CHAPTER 17
MINERALS MANAGEMENT SERVICE ROYALTY MANAGEMENT PROGRAM AUDIT PROGRAM
Sam Wilson
Minerals Management Service
Denver, Colorado

TABLE OF CONTENTS

SYNOPSIS

Page

I. BACKGROUND

II. DEFINITION AND PURPOSE OF AUDITS

III. AUDIT TYPES

IV. AUDIT PROCESS

V. AUDIT STRATEGY

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I. BACKGROUND

The Secretary of the Interior (Secretary) is authorized by the terms of Federal and Indian mineral leases and by the provisions of Federal law to conduct audits of revenues from Federal and Indian mineral leases.¹ Most of the Secretary's audit authority has been delegated to, and is exercised by the Minerals Management Service (MMS). The Department of the Interior's Inspector General also has conducted audits of Federal and Indian mineral lessees. Both States and Indian tribes too have conducted audits pursuant to delegations of authority or cooperative agreements. See, for example, sections 202 and 205 of FOGRMA, 30 U.S.C. 1732 and 1735, which authorize such agreements for Federal and Indian oil and gas leases.

For many years various audit activities have been undertaken for revenues from mineral leases on Federal or Indian lands and the Outer Continental Shelf (OCS). These audits covered the verification of revenues (rentals, royalties, advance royalties, minimum royalties, bonuses, or net profit shares) related to the leasing, production, or sale of oil, gas, or other minerals such as coal, uranium, sodium, and phosphate. Through experience in conducting these audits, it was determined that at times companies selected for audit did not understand the audit process and their responsibilities related to required recordkeeping, auditors' access to information, the audit enforcement process, audit completion and records release, administrative appeals, and civil penalties. These misunderstandings resulted in difficulties for auditors obtaining information necessary for the audit and delays in audit completion. Clarification of the audit process and company requirements during audits should improve the efficiency of audits and the accomplishment of audit goals and objectives.

The purpose of this paper is to discuss and/or explain the existing and proposed requirements of companies or persons (record holders or auditees) who establish and maintain records for Federal and Indian mineral leases that must be examined during audits to determine compliance with laws, lease terms, regulations, or orders. This paper also explains the audit process utilized for mineral revenue audits. It is MMS's intention to establish, to the extent possible, the same audit process and company requirements for audits of mineral revenues from all types of minerals production (oil, gas, coal, sodium, and other minerals).

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II. DEFINITION AND PURPOSE OF AUDITS

The following describes the procedures for the initiation, conduct, and closure of audits relating to the scope, nature, and extent of compliance with statutes, regulations, lease and contract provisions and orders pertaining to the payment and reporting of mineral revenues (rentals, royalties, advance royalties, minimum royalties, bonuses, and net profit shares) due to the United States, Indian tribes, and Indian allottees.

An audit is a procedure for verifying, for a prescribed time period, whether financial reports and production reports and related items, such as elements, accounts, or funds, are fairly presented; whether financial information is presented in accordance with established or stated criteria; and whether the auditee has adhered to specific financial compliance requirements, including but not limited to those specified in lease terms, mineral leasing laws, regulations of the Department of the Interior (Department), orders, and other applicable laws and regulations. An audit includes reviews of internal controls, systems, compliance and substantive testing.

An audit includes an examination of the financial accounting and lease-related records of the auditee. Audits will be conducted in accordance with Government Auditing Standards² issued by the Comptroller General of the United States. Audits also may include, but not be limited to, examination of:

Financial information, e.g., statement of revenues and expenses, statement of cash receipts and disbursements, statement of fixed assets, general ledger, chart of accounts, accounts receivable ledger, and settlement agreements;

Reports and schedules on financial matters, such as expenditures for specific programs or services;

Contracts, e.g., contract pricing, amounts billed, amounts due on termination claims, compliance with contract terms;

Internal control systems and structure over accounting, financial reporting, and transaction processing;

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Financial and production reporting and accounting systems, including internal and annual audit reports; and

Relationships with affiliated persons (including, but not limited to, ownership and/or control, consideration and other transactions in addition to contract proceeds which may affect the calculation of royalties).

Activities that do not involve the verification of data reported to actual source documents are not audits. These include, but are not limited to, refund request reviews, reconciliations of lease or Royalty-In-Kind accounts, desk reviews, requests for royalty value determinations, review of company submittals to support transportation or processing allowances submitted pursuant to 30 CFR Part 206, and exception processing.

The MMS conducts other activities which some people may consider to be audits but do not meet the criteria for an audit. For example, MMS may receive a refund request from a lessee for an OCS lease. In the course of reviewing that refund request, MMS may examine production information for the relevant lease or even ask the requestor to provide additional data. Another illustration would be a "desk review" where MMS, perhaps in response to an inquiry, may review information in its files related to production and sales from a lease. The MMS also may ask the lessee or operator for some data. At the conclusion of the review, MMS may ask the lessee to amend its royalty reports. These types of activities are not "audits" because they do not involve the detailed testing and verification to source documents of the related production or sales from the lease being reviewed. Therefore, transactions may later be subjected to an audit to verify that the information the lessee provided was accurate.

Again, mineral revenues from Federal or Indian leases must be accounted for and calculated pursuant to Federal laws, lease terms, regulations, and orders. Audits of mineral revenues determine the accuracy of reports and payments associated with mineral leases and production.

III. AUDIT TYPES

Audits are either company audits or limited scope audits.

A company audit is a comprehensive examination that includes the broad range of compliance review activities to ensure that all Federal and Indian mineral revenue obligations of a company for a specified time period are accurately reported and paid. Company audits may include a review of parent companies, subsidiaries, and other affiliates, as appropriate.

Most audit effort is directed to "company audits" of the companies accounting for the largest share of mineral revenues. Company audits are comprehensive reviews of internal controls and the systems used to account for production and revenues, including royalties, rentals, and...