Royalty Compliance:

Improvements Made in Interior's Audit Strategy, But More Are Needed

RCED-93-3: Published: Oct 29, 1992. Publicly Released: Dec 4, 1992.

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Pursuant to a congressional request, GAO reviewed the Department of the Interior's Minerals Management Service's (MMS) auditing of royalty payors, and provided information on: (1) communication and coordination with delegated state and tribal auditors; (2) funding allocations to state and tribal auditors; (3) contracting-out plans for audits of individual Indian leases; and (4) MMS audits' internal controls.

GAO found that: (1) MMS did not develop a comprehensive audit strategy until 1988 because it concentrated on time-constrained nondiscretionary work, which it substantially completed in 1987; (2) the 1988 MMS audit strategy targeted over 90 percent of all royalties, and accelerated the completion of previous years' audits to make the audit cycle more current; (3) under the strategy, MMS reviewed each selected payor's financial and reporting systems for compliance, and then sampled leases and monthly reports for production and royalty payments; (4) if MMS found systemic problems, it required payors to correct the problems and compute additional royalties due on all comparable leases, which MMS auditors would then review for adequacy; (5) the strategy did not ensure compliance because the amount of actual royalties audited was significantly smaller than what was targeted, and the samples were not representative of all payors and leases; (6) many payors challenged the restructuring accounting requirement; and (7) MMS revised its strategy to increase audit effectiveness and improve estimates, and issued an action plan in 1991 to ensure compliance by balancing and integrating field and automated system audits. GAO also found that: (1) MMS has improved communication and coordination with state and tribal audit programs, but some problems remain; (2) MMS allocated funding to state and tribal programs through an inequitable formula, and funding levels were not sufficient or stable for the planned work loads; (3) MMS contracted with a private firm to assist with royalty audits, but it has yet to decide if it will continue using contract auditors; and (4) MMS and the state and tribal audit offices have internal control procedures to ensure the propriety and accuracy of audits.

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