[Final Report, Audit of Oversight Performed by the Minerals Management  Service of Non-Federal Auditors]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 2003-I-0061

Title: Final Report, Audit of Oversight Performed by the Minerals
       Management  Service of Non-Federal Auditors



Date:  August 22, 2003

**********DISCLAIMER********** 
This file contains an ASCII representation of an OIG report. No attempt has been made to display 
graphic images or illustrations. Some tables may be included, but may not resemble those in the 
printed version. A printed copy of this report may be obtained by referring to the PDF file or by 
calling the Office of Inspector General, Division of Acquisition and Management Operations at 
(202) 219-3841. 
******************************




									     August 22, 2003


Memorandum

To:		Assistant Secretary for Land and Minerals Management
		
From:		Anne L. Richards
		Regional Audit Manager

Subject:	Final Report, Audit of Oversight Performed by the Minerals Management 
Service of Non-Federal Auditors (No. 2003-I-0061)

	The attached report presents the results of our review of the Minerals 
Management Serviceï¿½s (MMS) oversight of non-federal auditors.  Our objective was to 
determine whether MMSï¿½ oversight of royalty audits conducted by non-federal auditors 
is effective to ensure compliance with the Government Auditing Standards (Standards).  
We concluded that MMSï¿½ oversight was reasonably effective to ensure states and tribes 
complied with the Standards.

	We did, however, find weaknesses that MMS needs to correct.  We noted that (1) 
some cooperative agreements contained outdated provisions, (2) audits of Jicarilla tribal 
leases were not covered by internal quality control reviews, and (3) neither the MMSï¿½ 
internal quality control reviews nor the state peer review processes had a formal follow-
up process.

	In the May 12, 2003 response to the draft report, the Assistant Secretary and the 
MMS Director agreed with the findings and recommendations in the report.  However, 
the response did not provide sufficient information for us to consider all the 
recommendations resolved and implemented.  Accordingly, we are requesting that MMS 
provide us with the information indicated in Appendix 4.  We would appreciate your 
written response to this report by October 1, 2003.

	The legislation, as amended, creating the Office of Inspector General requires that 
we report to Congress semiannually on all audit reports issued, actions taken to 
implement our audit recommendations, and recommendations that have not been 
implemented.  Therefore, this report will be added to the next semiannual report.

	We appreciate the cooperation provided by the MMS staff during our audit.  If 
you have any questions regarding this report, please call me at (303) 236-9243.

Attachment


CONTENTS


Page

Background		1

Objective		2
	
Scope and Methodology		3
	
Results of Audit		5
	1.	Cooperative Agreement Provisions Were
		Outdated		7
	2.	Audits of Jicarilla Leases Are Not Reviewed		8
	3.	Followup Process Is Not Formalized		9
	4.	Suggestions for Improvement		10
	
Other Matters		11

Appendices
1.	Cooperative Audit Agreements With State
	and Indian Tribal Governments		12
	2.	MMS Response and OIG Reply		13
	3.	MMS Response to Draft Audit Report		14
	4.	Status of Recommendations		20
	





BACKGROUND



*	Companies pay a percentage (called a ï¿½royaltyï¿½) of the value 
of minerals produced from Federal and Indian lands.  The 
Federal and state governments share the royalties from 
Federal leases while the Indian tribes and individual Indians 
retain all royalties from leases on their land.

*	MMS conducts audits of and contracts with state and tribal 
audit organizations to conduct audits of companies to verify 
that royalties have been correctly paid.  MMS has executed 
cooperative agreements with 10 state and 8 tribal audit 
organizations (Appendix 1) to perform royalty audits of 
Federal and Indian leases located within their state or tribal 
boundaries.

*	MMS has oversight responsibility to ensure that states and 
tribes perform quality audits and satisfy the terms of the 
cooperative agreements.













OBJECTIVE



*	Determine whether MMSï¿½ oversight of royalty audits 
conducted by non-federal auditors is effective to ensure 
compliance with the Government Auditing Standards.
























	SCOPE AND METHODOLOGY



*	Our audit addressed MMSï¿½ oversight of royalty audits 
performed by state and tribal auditors under authority of the 
Federal Oil and Gas Royalty Management Act of 1982, 
sections 202 and 205 as amended, for audits conducted in 
1999 through 2002.

*	MMS did not accumulate data on the total number of audits 
conducted by the states and tribes during this period, so we 
could not determine the total universe of audits under review.

*	To accomplish our objectives, we:

?	Gained an understanding of MMSï¿½ oversight process.
?	Obtained an understanding of the peer reviews conducted 
by the states and tribes of each other.  A peer review is a 
review by an independent, external auditor to determine 
whether an audit organization has complied with required 
audit standards.
?	Obtained an understanding of the internal quality control 
systems of states and tribes and the quality control reviews 
conducted by MMS of the states and tribes.


	SCOPE AND METHODOLOGY
(Continued)



?	Interviewed MMS officials and contacted three state and 
two tribal audit organizations to learn how their peer 
reviews, internal quality control systems, and quality 
control reviews are designed and function.
?	Reviewed relevant documentation regarding planning and 
performance of peer reviews and quality control reviews.  
However, we did not review working papers from 
individual audits because we were evaluating MMSï¿½ 
overall process and not conducting a quality review of 
audit work conducted by the states and tribes.
*	We conducted our work from July through September 2002 
in accordance with the Government Auditing Standards.















RESULTS OF AUDIT


*	MMSï¿½ oversight was reasonably effective to ensure that 
states and tribes complied with the Government Auditing 
Standards.  Specifically, MMS:
?	Determined that states and tribes on a regular and effective 
basis complied with audit contracts and monitored statesï¿½ 
and tribesï¿½ audit performance, including reviews of annual 
work plans and budgets.  
?	Consistently conducted internal reviews of states and 
tribes.
?	Performed reasonably complete internal reviews of states 
and tribes.
*	MMS is correcting some of the internal quality control 
system weaknesses, in response to our recent audit of its 
audit offices, that affect its oversight of states and tribes. 
?	The quality review checklist is being revised to include 
assessments of:
*	Due professional care 
*	Audit planning and reporting
*	Supervisory review




RESULTS OF AUDIT
(Continued)


?	A formal follow-up process is being established to verify 
that identified weaknesses receive appropriate and timely 
corrective action.
*	MMS needs to correct the following weaknesses.
?	Outdated provisions in some cooperative agreements.
?	Lack of internal quality control reviews in audits of 
Jicarilla tribal leases.
?	Lack of a formal follow-up process for the MMSï¿½ internal 
quality control reviews and for the state peer reviews.
*	MMS should consider the other opportunities for 
improvement identified by our audit.














	1.  COOPERATIVE AGREEMENT
	PROVISIONS WERE OUTDATED



*	The agreements with states and tribes were not always 
updated for current auditing standards and policies.
?	Four out of eight agreements were not modified to include 
compliance with a Departmental directive to permanently 
retain Indian trust data.
?	Two agreements referenced outdated versions of the 
Government Auditing Standards.
Recommendation
MMS should ensure that the agreements reflect current auditing 
standards and policies.













	2.  AUDITS OF JICARILLA 
	LEASES ARE NOT REVIEWED



*	The MMS audit team assigned to the Jicarilla cooperative 
agreement did not undergo regular internal quality control 
reviews.
?	Unlike the other agreements, which require the state or 
tribe to conduct the audits, the Jicarilla cooperative 
agreement stipulates that a tribal official will only monitor 
and assist an MMS audit team.
?	MMS has not included audits of Jicarilla leases in its 
routine schedule of internal reviews that it conducts of its 
own auditors.
?	Government Auditing Standards (Section 3.31 to 3.32) 
require an appropriate internal quality control system to be 
in place.  The system should be designed to ensure that all 
MMS audit teams follow adequate audit policies and 
procedures (Presidentï¿½s Council on Integrity and 
Efficiency Guide, Appendix I, Internal Quality Control 
System).
Recommendation
MMS should include audit work conducted by its Jicarilla 
audit team in its internal quality control process.






	3.  FOLLOW-UP PROCESS IS 
	NOT FORMALIZED



*	States and tribes properly scheduled and performed peer 
reviews, but there was no formal follow-up process 
established.
*	Similarly, MMSï¿½ internal reviews of states and tribes did not 
have a formal and timely follow-up process to ensure that 
identified weaknesses were corrected.
?	MMS stated that it has initiated an interim follow-up 
process.  However, the new process has not been 
documented and does not provide for the reviewed state or 
tribal audit group to prepare a written action plan to 
address reported deficiencies. 
Recommendations
?	MMS should ensure that the reviewed office, in 
response to each peer review and internal review 
containing findings, prepare a formal action plan 
(written, with reasonable deadlines and responsible 
officials identified).
?	MMS should schedule internal reviews to evaluate 
implementation of the action plans, when appropriate.




	SUGGESTIONS FOR 
	IMPROVEMENT



*	Based on our observations during the audit, we also believe 
that MMS can strengthen its oversight of states and tribes by:
?	Using MMS auditors to assist the smaller state/tribal audit 
organizations in performing independent referencing 
(verification of facts and conclusions in each audit report 
to supporting work papers) of report products.
?	Ensuring that state/tribal auditors are properly qualified 
and independent.  Each state/tribal audit group should 
annually certify that all auditors are current with their 
continuing education and are independent of their 
auditees.
?	Requiring that state and tribal audit reports clearly identify 
that the state or tribe is responsible for the audit work.  
?	Requiring that peer reviews cover all relevant steps 
contained in guidelines published by the Presidentï¿½s 
Council on Integrity and Efficiency (PCIE).
?	Adopting the PCIE recommendation of providing no 
advance notice of audit files selected for review.




	OTHER MATTERS 



*	During the course of our audit, several state and tribal 
organizations expressed concern over the overlap between 
MMSï¿½ oversight, as conducted through its internal review 
process of state and tribal audit groups, and the statesï¿½ and 
tribesï¿½ own internal quality control systems and the external 
peer reviews to which all audit groups are subjected.
We concluded that since these separate processes are all 
required by Government Auditing Standards one cannot be 
substituted for another.  As a result there is some overlap 
among the processes that cannot be avoided.


Appendix 1



COOPERATIVE AUDIT AGREEMENTS WITH 
STATE AND INDIAN TRIBAL GOVERNMENTS


State Governments
Tribal Governments

California


Blackfeet Nation
Colorado

Crow Indian Tribe
Louisiana

Jicarilla Apache Indian 
Tribe

Montana

Navajo Nation
New Mexico

Shoshone & Arapaho 
Tribes

North Dakota

Southern Ute Indian Tribe
Oklahoma

Ute Indian Tribe
Texas

Ute Mountain Ute Indian 
Tribe

Utah


Wyoming






Appendix 2



MMS RESPONSE AND OIG REPLY


     In the May 12, 2003 response (Appendix 3) to the draft report, the 
Assistant Secretary for Land and Minerals Management, and the 
Director, MMS, agreed with three of the four recommendations and with 
all five of the suggested improvements.

     Regarding recommendation 1 to ensure that agreements with states 
and tribes are updated timely, MMS stated that all 18 audit agreements 
were modified to require that auditors comply with the 1994 version of 
the Government Auditing Standards as amended in 1999.  This satisfied 
the recommendation, and we consider the recommendation resolved and 
implemented.  However, the General Accounting Office issued revised 
Government Auditing Standards in June 2003 , and we suggest that 
MMS update the audit agreements to reflect the new Standards.  

     Regarding recommendation 2 to include audit work conducted by 
MMSï¿½ Jicarilla audit team in its internal quality control process, MMS 
did not provide its concurrence or non-concurrence.  MMS stated that 
the audit team for Jicarilla tribal leases has been covered by the internal 
quality control review process.  We found, however, that the Jicarilla 
team was not, in fact, subjected to regular internal reviews.  Although 
the MMS response indicates concurrence with our recommendation, we 
request that MMS reaffirm that the Jicarilla team will be included in 
future internal reviews.
































STATUS OF RECOMMENDATIONS


Finding/
Recommendation
Reference



Status



Action Requested





1

Resolved and 
implemented.

No further action is needed.





2

Unresolved; 
additional 
information 
requested.

Please state concurrence or 
non-concurrence with the 
recommendation.  If 
concurrence is indicated, 
confirm that the Jicarilla 
tribal audit team will be 
included in future internal 
quality control reviews.  If 
non-concurrence is 
indicated, provide reasons 
for the non-concurrence.





3a and 3b

Resolved and 
implemented.

No further action is needed.


	
      
      
      
      
      
      
      



  According to the Government Auditing Standards (3.28), exercising due professional care ï¿½means using 
sound judgment  in establishing the scope, selecting the methodology, and choosing tests and procedures 
for the audit.ï¿½



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