Vice President of Audit
Oil and gas audits can mean many things within the oil and gas industry. Martindale’s audit group specializes in revenue audits, royalty audits, joint interest or joint venture audits.
Audits are typically prompted by a question or anomalies identified in revenues, expenditures, or reporting that needs clarity. While an operator may answer high-level questions during the normal business process, an audit is the contractual mechanism for a non-operator or royalty owner to get questions answered or accounting issues resolved.
For operators, an audit can feel disruptive, but understanding why audits occur, the industry standard process, and how best to prepare, can minimize disruption and result in improved relations between an operator and non-operator. At Martindale Consultants, we have seen the full spectrum and are the experts in the industry, whether you are a non-operator and are interested in performing an audit or an operator needing to prepare for an audit.
While every audit has its own circumstances and objectives, most are triggered by a few common factors. These are the issues that typically catch the attention of non-operators, partners, investors, or regulatory bodies.
Revenue is the heartbeat of any oil and gas operation, and it is the most scrutinized element. Depending on the operations, it can also be extremely complex and complicated. Audits often occur when partners see irregularities in production volumes, pricing, severance taxes, unexpected deductions, or revenue allocations.
Even small discrepancies in statements or timing differences can raise concerns or have a material impact on accounting. When patterns look inconsistent, do not match expectations, or reporting is unclear; audits tend to follow.
Non-operators watch their joint interest billings (share of costs) closely. When expenditures exceed AFEs or estimates, rise unexpectedly, categories seem misclassified, or charges appear outside normal operating patterns, partners may initiate a joint-interest audit to help understand and validate the costs charged.
These audits ensure that only contractually allowable costs are billed and are properly documented.
Documentation is essential in understanding expenses and revenues and how they relate to oil and gas operations. An operator is required to adequately support all charges to the Joint Account and must also document how revenues are paid within the terms of the governing agreements. Many times, an audit is the only way to evaluate an operator’s documentation. Therefore, lack of information on joint interest billings or revenue remittances, or unclear accounting, commonly leads to audits. A lack of documentation brings costs or revenues in question, whether or not they are legitimate, and could signal deeper organizational issues, which prompts auditors to take a closer look.
Operators must follow the terms outlined in JOAs, including COPAS accounting procedures, lease agreements, state regulations, and other contractual obligations. While lack of information or clarity may raise questions, an audit is the mechanism to determine if the contract is being followed. As older agreements remain in effect and operations change, they become more difficult to account for. Often, the issue comes down to interpretation, but it is still one of the most common triggers.
Sometimes, audits are triggered simply because something does not look right, and the non-operator or royalty owner has difficulties getting adequate answers or information from the operator. There may be unusual charges on the joint interest billings or unexpected pricing on a remittance.
These anomalies often lead non-operators or royalty owners to perform an audit and may also allow auditors to target their review based on concerns.
Acquisitions, mergers, and change in operatorship are common in today’s oil and gas industry. When assets change hands or a new operator takes over, a change in accounting may occur, which presents a risk for incorrect accounting; an audit helps validate costs and revenues are accurate and within the terms of the contract through the transition process.
Some audits are not triggered by issues at all. The oil and gas industry is unique in that a large portion of a company’s expenses and revenues are controlled by another party. Many oil and gas companies, especially larger organizations, have regular review cycles every few years to evaluate and mitigate risk with non-operated assets.
Even when everything is running smoothly, operators should expect these audits as a normal part of working in the industry.
Common issues are identified in oil and gas audits. These include:
If an operator does face an audit, preparation is the key to a smooth and successful audit. These steps help operators stay ahead.
Every invoice, journal entry, applicable contract, and allocation support should be organized and easy to trace. Digital systems and consistent documentation practices significantly reduce audit burden and can ease the workload to support an audit.
Reviewing internal accounting procedures and processes regularly ensures alignment with the governing contracts and industry-standard COPAS publications. A modern accounting system also includes adequate control of environments and supports transparency and accuracy.
Internal audits can catch issues long before partners identify them and help an operator prepare questions that arise during an audit. They help an operator evaluate audit risk and allow for an operator to be proactive in identifying and correcting issues.
Many audits begin when partners do not understand what they are being billed for or how they are being paid. Clear, accurate, and easy-to-read statements build confidence and reduce unnecessary audit requests. Many times, detailed information on statements will provide a non-operator or royalty owner the level of comfort that may avoid an entire audit.
Non-operators and royalty owners often request audits because they want clarity. Open communication, especially about cost changes or operational challenges, can prevent misunderstandings that lead to audits.
External audit consultants can identify exposure, minimize errors, and ensure compliance. With decades of experience in oil and gas accounting and the audit process, Martindale Consultants helps operators strengthen their systems and avoid costly audit findings.
COPAS publishes documents that lay out the audit process and expectation regarding documentation. An operator should be familiar with these and let them drive the audit process to avoid answering unnecessary questions or deviating from the audit process.
No operator or non-operator ever enjoys going through the audit process, but it is an important business function within the industry.
Martindale Consultants supports oil and gas companies through:
Whether you are preparing for an upcoming audit or building processes to avoid future issues, Martindale Consultants is here to help. Learn more about our audit services at marticons.com/services/audit.
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