Presentation By Andy Botchwey

Justification of a Joint Venture Audit of Operator Activities by Non-operators

Allows Partners to have a more detailed understanding of the Operators operations and allocation methodologies.

• The Operator manages the producing field on its own behalf and those of the non-operating partners. The design of key controls are agreed by all parties to the venture, however compliance and operational effectiveness of such controls can only be ascertained the by non-operators through periodic independent review of the operations of the operator.

• Billing statements from operators show how much is allocated to each JV partner without the basis of allocation. An audit will afford non operators the chance to question any arbitrary allocation method.

Controls over Authorisation for Expenditure (AFE’s)

Although AFE’s are essential part of well planning, the cost estimate is often the most difficult to obtain with any degree of reliability. There is therefore a high probability that AFE’s would be over expended. Cumulative Audit Knowledge and Experience (CAKE) would enable a non-operator to question the basis of AFE’s and over expenditures if any.

Controls over the Use of Cash Calls and Joint Venture Bank Accounts

A JV audit would provide answers to the following questions;

• What is the operator doing with unutilised cash over long periods?

• Do other partners including the operator pay their cash calls on time?

• Would it be prudent to put excess cash into high yielding call accounts that would earn interest for the Joint Venture?

• Does the operator do bank reconciliation for the JV account

• ETC

Procurement and Relationship with Third Party Contractors

Procurement and third party contractors poses a particular risk to all the joint venture partners. An audit affords the opportunity to non-operators to review the operator’s design of controls and their operating effectiveness of controls in the area of sub-contractor and procurement process management.

To review at detail levels the significant decisions taken by the operator without recourse to all parties to the Joint JV.

Due to the importance of time in the industry operators in certain circumstances are justifiably forced to take decisions with regards to operational issues without recourse to the other parties to the JV. Such decisions may latter be ratified by all the partners. An audit affords the opportunity to the non-operators to review all such instances at a detail level to enable then comment or recommend better suggestions to remedy latter but similar situations.

Ensure the Operator is acting in accordance with the Joint Operating Agreement and other relevant Agreements

Operators are required to comply with specific provisions that are intended to protect the interests of non-operators. An audit is one suitable time for such provisions to be reviewed.

JV audits tend to go to a lower level and provide a more detailed examination of the accounts than statutory audits.  

• Statutory Audits focus compliance with International Financial Reporting standards and other obligations imposed by on quoted companies by the SEC.

• JV Audits on the other hand is to provide comfort to management and shareholders that the company is getting value for money in the venture. For this reason JV Audits tend to be more detailed in nature.

Intangible benefit 

As the operator knows that the audit rights will be taken up by the non-operators, they do ensure that strong controls are designed and rightly implemented in order to avoid adverse and unfavourable audit findings coming against them.

Operating Costs increasing Significantly

 

Regardless of whether increases in operating cost are commensurate with production or not, non-operators tend to exercise their audit rights when operating costs goes up significantly.

Other Non-Operators Have Concerns 

If one non-operator have concerns with some aspects of the operator’s activities and reports, it will be prudent for the other non-operators to collaborate and compare notes and where necessary an audit should be initiated.

Other reasons

According to leading global Joint Venture Audit Specialist firms “even where operator is employing good practise and is fit to be operator there are still key areas of notable exposure like:

• Allocation errors

• Error on invoices on from vendors

• Incorrect charges to the venture

• Lack of reconciliation

• Operator over charging overheads to venture

• Poor AFE control ”