Oil and Gas Accounting and Disclosure Rules Revised under SEC Release 33-8995

Oil & Gas AccountingLast Friday, the AICPA released a discussion draft of the audit and accounting guide for Entities with Oil and Gas  Producing Activities. While not authoritative  it is anticipated to reflect the current standards being revised by both the Financial Accounting Standards Board which sets US GAAP, and the International Accounting Standards Board, all of which is being done in response to SEC Release 33-8995.

While the changes are too voluminous and complex to even summarize here, I’ve included links and welcome questions,comments to this post or phone calls to discuss the implications.

The definitions in Rule 4-10 have been significantly changed. The pricing mechanism for reserves has been defined as a twelve month average. The definition of what is and is not considered ‘oil and gas’ has been clarified to include bitumen and other saleable hydrocarbon resources (geothermal has been excluded); the definitions of ‘proved’ ‘unproved’, ‘developed’ and ‘undeveloped’ reserves has been amended and clarified; and the disclosure requirements under Regulation S-K has been expanded.

Additionally, the disclosure requirements within the financials and for the K’s and Q’s  have been expanded and clarified including the disclosure requirements for MD & A. The SEC continues to coordinate with the FASB and the IASB who continue to develop their standards for the oil and gas entities. Given the SEC has come to the party first, it’s hard to imagine the other standard setting bodies will do anything but comply.

Foreign filers using Form 20-F will be subject to the same disclosure as opposed to the previous disclosure requirements summarized under Appendix A. Canadian filers, however, will not be subject to the new disclosure rules given that the requirements under the Multi-Jurisdictional Disclosure System (MJDS) using form 40-F are already consistent.

Now some good news. The implementation date  for registrations filed and for annual reports on Forms 10-K and 20-F is for fiscal years ending on or  after January 1, 2010. While the implementation is mandatory, “a company may not apply the new rules to disclosures in quarterly reports prior to the first annual report in which the revised disclosures are required”.  Implementation may  be deferred as discussions between the SEC, FASB and IASB go forward.

Risky Business for Directors – How's your ERM?

Risky Business for DirectorsNot so many years ago, being elected to the Board of Directors of some companies essentially required you to act as a figurehead. Lunch in an expensive restaurant once a month, an annual retreat to a vacation resort to discuss corporate ‘strategy’ and a small stipend were all that was required in trade for the collective experience and informal leadership. That’s all changed with the increased exposure to liability now faced by corporate governance.  With the current state of our business environment, that exposure is greater this year than ever.

In an on-line article Executives Anticipate Rise in Fraud nearly two thirds of the executives polled anticipate an increase in fraud and misappropriation this year. In conjunction with auditors anticipating that nearly 25% of all firms may not be going concerns; the myriad of new regulatory requirements related to governance; and the corporate challenges fomented by a floundering economy this may not be a desirable year to be a Director. The current hot topic seems to be enterprise risk management.

While a long time focus of management, ERM has often been given little attention by the board. Recently, COSO published a document highlighting four critical areas that contribute to effective board oversight. It can be downloaded at www.coso.org.

As public company auditors and consultants we have observed the importance of an integrated approach to governance between the board and management. We regularly participate in joint meetings as frequently as allowed (we don’t charge for meetings with management and the board), for our own self-interest. Our best clients have the strongest most engaged boards. Boards of Directors are invaluable resources.  Take full advantage.

E & Y Calls for More Regulation (More Cost)

In a speech at the Commonwealth Club in San Francisco recently, EY CEO James Turley called for more regulation of audit firms.  His premise that audit quality has improved as a result of SOX and the PCAOB while ‘possibly’ accurate (and I’m not conceding that) is irrelevant.  Foremost I don’t believe that quality has improved for quality firms.   I can’t speak for EY.  Perhaps they are better for it.  The SEC and the  PCAOB for all intents and purposes  initially  adopted the accounting and internal control standards that were already promulgated by the profession.  Adding another layer of regulation sufficed only in adding additional cost to public companies.  And now Mr. Turley wants to expand that further.  Why?

Since my introduction to the profession in the 1970’s when we were attacked by Michigan Democratic Congressman John Dingell, we have fought for self regulation.  Obviously the SEC Practice Section of the AICPA (the forerunner to the Center for Audit Quality CAQ) failed miserably and here we are.  Based on his leadership, it appears the CAQ is on the same course.   One of the defining characteristics of any  profession is self regulation.  So we apparently have failed as a profession if you are to subscribe to Mr. Turley’s pleading or does he have another motive?

Economists define this propensity of larger firms ‘getting cozy’ with regulators in order to drive up costs and limit competition from smaller firms as ‘regulatory capture’.  Banks, drug companies, airlines – accounting firms?  Bigger isn’t better, but it certainly seems to be more expensive.

From my days as a young corporate bank officer for a mid-sized California bank in the early 1970’s, I recall having regulatory audits by Federal regulators, the State of California examiners, and the Federal Depositors Insurance Corporation (FDIC).  We also had our own internal audit department as did every other bank.  And as every other bank has had since then.  Total regulation.  It’s obviously worked well Mr. Turley.  In my professional lifetime a list of the most heavily regulated industries would include banks, airlines, railroads,  banks, banks, banks.   More regulation.  Yeah!  That’s the answer.

More recently we have two great examples of failures by  federal regulation in Madoff and Stanford.  I challenge you to name one economy with more regulation than we have had in the US that has been more successful.  Ever.  I can list dozens that failed with more regulation.

I disagree vehemently with Jim Turley.  Additional regulation if warranted should come from inside the profession – specifically the CAQ which Mr. Turley happens to be the sitting Chair of.  Do the job you signed on for with the CAQ Mr Turley.   That he wants to abdicate that responsibility is incredibly disturbing.  That he proposes to add additonal layers of cost – cost that he and his firm will derive revenue  directly from- is unconscionable.

Proactively Controlling Your Audit Fee

For many firms it is that time of year.  The annual invasion of that group of  mind numbing, routine interrupting, standards spouting unwelcome invaders – your independent auditors!  And they are expensive!  Reflectively they can make you want to trade their presence  for an unannounced three month visit from your cantankerous incontinent father-in-law who never speaks directly to you and who for fifteen years has  referred to you only  as “him / her”.  An article published in cfo.com, Auditor Angst, has some great points to not only help you survive, but to reduce the expense at the same time.  While the article primarily focuses on what the company can/should do there is obviously a lot the auditors can do as well. Continue reading “Proactively Controlling Your Audit Fee”

Uncle Sam Needs You!

Uncle Sam Needs YouIn 1966, the finger pointed directly at you from the fierce visage of a red white and blue top hatted bearded Uncle Sam on the recruiting poster.  I couldn’t look away in good conscience then and it is no less difficult now.  In an article posted on CFO.com titled Walker Makes Plea to CFO’s http://www.cfo.com/article.cfm/12448209/c_12447541 David Walker the former U.S. comptroller general asks CFO’s to help bail the country out of its’ current economic crisis and a $50 trillion deficit.  While, as with most of you, I’d be the first in line to offer my services, it won’t happen.  The first responsibility of every politician is to get re-elected.  Correspondingly as long as we have a system that allows for ‘pork’ trailers in legitimate bills, legislators unwilling to make the unpopular decision and lacking the intestinal fortitude to enforce a balanced budget, I’m not sure there is much we can do as advisors.  Because they just won’t listen!

The government bureaucratic system is not predicated on economic motivation from ‘self interest’ and individual benefit and correspondingly can’t be successful as a participant in a capitalistic economy. As Adam Smith, the father of modern economics, summarized in The Wealth of Nations – “I have never known much good done by those who affected to trade for the public good”.  If you haven’t read Free to Choose by Milton and Rose Friedman this would be a good time.  Here’s a great example found on the internet last week: Continue reading “Uncle Sam Needs You!”