[Special Report on the External Quality Control Review of the Audit Divisions, Minerals Management Service]
[From the U.S. Government Printing Office, www.gpo.gov]
Report No. 98-I-398
Title: Special Report on the External Quality Control Review of the
Audit Divisions, Minerals Management Service
Date: April 2, 1998
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U.S. Department of the Interior
Office of Inspector General
SPECIAL REPORT
EXTERNAL QUALITY CONTROL REVIEW OF THE AUDIT DIVISIONS,
MINERALS MANAGEMENT SERVICE
REPORT NO. 98-I-398
APRIL 1998
MEMORANDUM
TO: The Secretary
FROM: Robert J. Williams
Acting Inspector General
SUBJECT SUMMARY: Final Special Report for Your Information -
"External Quality Control Review of the Audit
Divisions, Minerals Management Service" (No. 98-I-398)
Attached for your information is a copy of the subject final
special report. The Minerals Management Service requested this
review to be in compliance with the "Government Auditing
Standards," issued by the Comptroller General of the United
States, which requires organizations conducting audits in
accordance with these standards to undergo an external quality
control review every 3 years.
This is the second report we are issuing on the Service's Audit
Divisions. The first report contained the results of our audit
of the Service's work regarding alleged underpricing of
California crude oil. Because the Service's work on the
underpricing of California crude oil was conducted under
different controls, including methodology and performance
procedures, the conclusions in that report do not relate to the
Service's audit work covered by our external quality control
review.
Based on our review of the 19 audits, we concluded that the audit
work performed by the Audit Divisions was generally in
compliance with the "Standards" and the Service's Audit
Procedures Manual. Specifically, the audits were conducted in a
professional manner; audit conclusions were adequately supported
by the working papers; and, with few exceptions, auditors were
current in their continuing education requirements. Although we
found minor weaknesses in the areas of compliance with laws and
regulations, internal quality controls, audit supervision,
timeliness of report products, and working paper quality, we
also found that the validity of each audit finding and
conclusion was not adversely affected. The report contained no
recommendations.
If you have any questions concerning this matter, please contact
me at (202) 208-5745.
Attachment
SPECIAL REPORT
Memorandum
To: Associate Director for Royalty Management,
Minerals Management Service
From: Robert J. Williams
Acting Inspector General
Subject: Special Report on the External Quality Control Review of
the Audit Divisions, Minerals Management Service (No. 98-I-398)
INTRODUCTION
This report presents the results of our external quality control
review of the Audit Divisions of the Minerals Management
Service. The Service requested this review to be in compliance
with the "Government Auditing Standards," issued by the
Comptroller General of the United States, which requires
organizations conducting audits in accordance with these
standards to undergo an external quality control review every 3
years.
This is the second report we are issuing on the Service's Audit
Divisions. The first report contained the results of our audit
of the Minerals Management Service's work regarding alleged
underpricing of California crude oil. Because the Service's work
on the underpricing of California crude oil was conducted under
different controls, including methodology and performance
procedures, the conclusions in that report do not relate to the
Service's audit work covered by our external quality control
review.
BACKGROUND
The Minerals Management Service is responsible for managing
royalties relating to minerals produced from most Federal and
Indian lands. Specifically, the Service collects about $4.4
billion annually in rents, royalties, and other payments;
maintains necessary accounting records; prepares royalty
liability determinations; and conducts audits of royalty
payments to ensure that royalties received represent fair and
equitable value. To help accomplish its responsibilities, the
Service has established financial and production accounting
verification systems, compliance and enforcement programs, and
an overall audit strategy.
The Audit Divisions are responsible for conducting audits of
royalty payors to ensure that the correct amount of royalties is
reported and received. The Divisions are guided by a 5-year
audit strategy and an audit plan that is updated annually. The
strategy provides for a wide range of audits that cover specific
companies and special issues or projects such as processing
allowances pertaining to gas plants, production allocations
specified by unit agreements, contract settlements, and royalty
payments made from individual Indian leases. These audits are
performed by residency teams permanently stationed at the 11
largest royalty payor companies (see Appendix 1) and by mobile
teams that visit smaller companies selected for review.
The Audit Divisions consist of a headquarters office in
Washington, D.C., and compliance divisions located in Lakewood,
Colorado, and Dallas and Houston, Texas. The Dallas Compliance
Division also has compliance offices located in Oklahoma City
and Tulsa, Oklahoma. The Audit Divisions have a total of
approximately 190 auditors.
OBJECTIVE AND SCOPE
The objective of our review was to provide reasonable assurance
that audit work of the Audit Divisions was performed in
accordance with the "Government Auditing Standards" and with
policies and procedures contained in the Service's Audit
Procedures Manual. To accomplish the objective, we judgmentally
selected for review 19 audits, consisting of 6 audits each from
the Lakewood and the Houston Compliance Divisions and 7 audits
from the Dallas Compliance Division. The sample for the Dallas
Compliance Division included two audits from the Oklahoma City
Compliance Office and one audit from the Tulsa Compliance
Office. Our sample was taken from summary lists prepared by the
Service and reportedly represented all audits performed by the
Service for the October 1, 1995, through May 1, 1997 period (see
Appendix 2). Our review did not include any other work performed
by the Audit Divisions during this time period and did not
evaluate the economy or efficiency of the Audit Divisions
operations. In addition, we did not evaluate the adequacy of the
Audit Divisions overall audit strategy. The audits reviewed
represented a cross section of audit activities, audit teams,
and supervisory officials. We examined audit reports and other
audit report products such as issue letters (formal
notifications of royalty underpayments), orders to perform
(demands for companies to recompute additional royalties owed),
orders to pay additional royalties, and audit closure letters;
the supporting working paper files; and employee training
records.
The review was performed at the Service's Royalty Management
Program offices in Lakewood and at Compliance Division offices
in Lakewood, Dallas, and Houston. We also visited the Service's
audit residency offices located at Chevron Oil Company in
Concord, California, and Texaco, Incorporated, in Houston. Our
review was made in accordance with the discussion draft titled
"Guide for Conducting External Quality Control Reviews of the
Audit Operations of Offices of Inspector General," dated
December 1996, and issued by the President's Council on
Integrity and Efficiency. This draft discussion guide provides
the standards and detailed guidance for conducting external
quality control reviews required by the quality control standard
in the "Government Auditing Standards."
PRIOR REVIEW
The last external quality control review of the Audit Divisions
was conducted by the Office of Inspector General in February and
March 1991. The resultant May 1991 report concluded that, with
only minor weaknesses in the areas of individual job planning,
legal and regulatory requirements, internal controls, audit
evidence, supervision, and reporting, the Royalty Compliance
Division (which became the Audit Divisions in a 1992
reorganization) was in compliance with the "Government Auditing
Standards." The report contained no recommendations.
During our current review, we noted that the Service was not
timely with its request for an external quality control review,
as the prior review was completed about 5 years before the
Service requested the current review. Accordingly, we believe
that the Service should ensure that it complies with the
requirement (Paragraph 3.33) of the "Government Auditing
Standards" by undergoing an external quality control review at
least once every 3 years.
DISCUSSION
Based on our review of the 19 audits, we concluded that the audit
work performed by the Audit Divisions was generally in
compliance with the "Government Auditing Standards" and the
Service's Audit Procedures Manual. Specifically, the audits were
conducted in a professional manner; audit conclusions were
adequately supported by the working papers; and, with few
exceptions, auditors were current in their continuing education
requirements. Although we found minor weaknesses in the areas of
compliance with laws and regulations, internal quality controls,
audit supervision, timeliness of report products, and working
paper quality, we also found that the validity of each audit
finding and conclusion was not adversely affected, as described
in the following paragraphs.
Compliance With Laws and Regulations
The working paper files for the 19 audits that we reviewed did
not indicate that the Service had conducted a risk assessment to
aid in detecting significant illegal acts. The "Government
Auditing Standards" (Paragraph 6.28) states that a risk
assessment should be performed so that specific audit procedures
can be designed to provide reasonable assurance of detecting
significant illegal acts. Because the royalty payment process
for Federal and Indian mineral leases is complex and frequently
involves large monetary amounts, we believe that auditors should
be more cognizant of their responsibility to detect fraud and
other illegal acts.
Internal Quality Controls
The Service established an internal quality control system, as
required by the "Government Auditing Standards" (Paragraph
3.31), which we believe provided reasonable assurance that the
Service's Audit Procedures Manual was complied with and that
audits were generally conducted in accordance with the
"Government Auditing Standards." However, we also concluded that
the system could be strengthened as follows:
- Internal Quality Control Review Program. We found that the
internal quality control review program which the Service
initiated in 1996 generally operated efficiently and
effectively. The program ensured that individual audit offices
were evaluated on a regular and uniform basis, the internal
reviews were completed timely, weaknesses identified in the
internal review reports were balanced with noteworthy
accomplishments of the offices, and appropriate officials were
briefed on the results of the internal reviews. However, as
currently designed, the internal quality control review program
does not include tests for:
-- Compliance with the general standards covering staff
qualifications, independence, and due professional care. The
"Government Auditing Standards" (Paragraph 3.32) requires that
an internal quality control review program be designed to
evaluate compliance with all applicable standards. Accordingly,
the scope of the program should be expanded to include testing
of the general standards.
-- Determining whether a risk assessment for compliance with laws
and regulations was performed, as required by the fieldwork
standards of the "Government Auditing Standards" (Paragraph
6.28). Accordingly, the program should include this step to
verify that the auditors assessed the risks that significant
illegal acts could occur and, as necessary, that the auditors
designed and performed procedures to provide reasonable
assurance of detecting significant illegal acts, as discussed in
the prior section ("Compliance With Laws and Regulations").
- Other Quality Control Matters. During our review, two issues
that related to ensuring the accuracy of report products were
disclosed as follows:
-- Five of the 19 audits reviewed did not have an independent
verification of computations. Although neither the "Government
Auditing Standards" nor the Audit Procedures Manual specifically
requires an independent verification, this procedure helps to
satisfy the "Government Auditing Standards" requirement
(Paragraph 7.50) that findings should be presented accurately in
reports.
-- The Audit Divisions were considering a significant policy
change concerning the referencing process for final audit report
products. Specifically, report referencing may become an
optional rather than a mandatory procedure. In our opinion, the
referencing process is an important tool that helps ensure the
accuracy and overall quality of the report product. Accordingly,
we strongly encourage the Audit Divisions to reconsider this
policy change and to continue the existing requirements for
report referencing.
Audit Supervision
We found that all audits were supervised but that the supervision
was not always accomplished in a timely manner. The "Government
Auditing Standards" (Paragraph 6.64) states that working papers
should contain evidence of supervisory review of the work
performed. Further, the Audit Procedures Manual (Section 7.6)
requires supervisors to review the working papers "after
segments of the work are completed." However, for 12 of the 19
audits, the supervisory review of many working papers ranged
from 3 to more than 12 months after the documents had been
prepared. Additionally, for 5 of the 12 audits, the report
product was issued, even though working papers had no indication
that a supervisory review had been performed. The "Government
Auditing Standards" (Paragraphs 6.22 and 6.23) requires staff to
be properly supervised. Timely supervision of the working papers
will reduce the risk that undetected errors or unsound
conclusions could be included in the Service's report products.
Timeliness of Report Products
We found that report products for 2 of the 19 audits could have
been issued more timely. Specifically, two orders to pay
additional royalties relating to an audit of an oil company were
issued at least 6 months after the draft orders had been
prepared, and an order to pay additional royalties relating to
the audit of a second oil company was issued about 2 years after
the underpayments were identified. The "Government Auditing
Standards" (Paragraph 7.6) states that reports should be issued
"to make the information available for timely use."
Working Paper Quality
The supporting audit working papers were generally prepared in
accordance with the Audit Procedures Manual (Section 7).
However, some of the working papers and files for 13 of the 19
audits did not have one or more of the following items: the
required source, purpose, and conclusion; a table of contents;
indexing (specifically, page numbers); adequate cross-indexing
to the supporting working papers; the preparer's name; and a
heading describing the working paper contents. Also, some
records were not permanently attached to the files. In our
opinion, these deficiencies did not adversely impact the overall
quality of the audit working papers. However, we believe that
the quality of working papers could be improved with more timely
supervisory reviews.
A response to this report is not required. However, if you have
any questions regarding this report, please call Mr. Alan Klein,
Director of Performance Audits, at (303) 236-9243.
We appreciate the assistance of Minerals Management Service
officials in the conduct of our review. AUDIT
RESIDENCY OFFICES MINERALS MANAGEMENT SERVICE
Office Location Company Name
Dallas Compliance Division Dallas, Texas Mobil
Dallas, Texas ARCO
Ponca City, Oklahoma Conoco
Tulsa, Oklahoma Amoco
Bartlesville, Oklahoma Phillips
Houston Compliance Division Houston, Texas
Exxon
Houston, Texas Shell
Houston, Texas Texaco
Houston, Texas Unocal
Lakewood Compliance Division Concord, California
Chevron
Findlay, Ohio Marathon AUDIT SAMPLE
SELECTION
Office Company Case Location Name Number
Type of Audit
Dallas Compliance Division
Dallas ARCO 9340001 Residency* Dallas
Thriftway 5-40222 Company** Dallas Sunwest
Petroleum 9540229 Special issue*** Dallas Meridian
9240205 Special issue Oklahoma City Jenex Petroleum
9665511 Special issue Oklahoma City Merrico 6
-65507.000 Company (TriPower Resources) through .006
Tulsa Yates 5-40215.005, Special issues
.011, and .014
Houston Compliance Division
Houston Badger Oil 9520008 Company
and special issue Houston CNG Producing 9320081
Special issue Houston Enron Oil & Gas 8820055
Special issue Houston UMC Petroleum 9420030 Special
issue Houston Shell 2-22708.017 Residency
and .022 Houston Texaco 3-20069 Residency
*Residency audits are comprehensive royalty reviews of the 11
largest royalty payor companies that are conducted by audit
staff stationed at the companies (see Appendix 1).
**Company audits are comprehensive royalty reviews of the next
largest 115 royalty payors, as well as randomly selected smaller
companies, that are conducted by mobile audit teams.
***Special issues cover a variety of royalty verification
activities, including audits of gas processing plants, the
companies' royalty accounting systems, lease inspections
performed by the Bureau of Land Management, individual leases,
contract settlements, and royalty settlements. These audits are
conducted by mobile audit teams.
Office Company Case Location Name Number
Type of Audit
Lakewood Compliance Division
Lakewood Chevron 3-30001.033 Residency
6-30503.000 6-30501.022 5-30238.000
Lakewood Axem Resources 3-30094 Special issue
Lakewood Energy Minerals 4-30057 Special issue Lakewood
Questar 3-30004 Company Lakewood Mayo Foundation
5-30212 Company Lakewood Pan Canadian Petroleum 5-30206
Special issue
ILLEGAL OR WASTEFUL ACTIVITIES SHOULD BE REPORTED TO THE OFFICE OF
INSPECTOR GENERAL BY:
Sending written documents to:
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Calling:
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Caribbean Region
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Office of Inspector General
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Calling:
(703) 235-9221
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Office of Inspector General
North Pacific Region
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Suite 807, PDN Building
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Calling:
(700) 550-7428 or
COMM 9-011-671-472-7279