OT19595 - PRT: Appendices

Appendix 12: A Guide to Accounting Systems Reviews

The following paper was sent to UKOITC, OTAC and Brindex and formed the basis of a discussion with Industry on 30 June 2001 on Energy Group's response to the NAO's recommendations in so far as they related to reviews of accounting systems.

Risk Assessment of Accounting Systems

The OTO has been concerned for sometime that its compliance processes were not fully identifying and managing the risks arising in relation to PRT from companies' accounting systems. The increased focus on risk assessment approaches across the Department and the assumption of responsibility for Royalty administration had caused the OTO to start addressing the issue before the National Audit Office commented in its December 2000 Report on the consequences of a lack of structure and standardisation.

Expenditure claims are not supported by audited and certified accounts; they are usually submitted before any auditing process. In order to allow such claims the OTO has to be confident that the accounting system, and any related tax software package and/or manual intervention will produce correct figures for claims. Similar considerations apply to PRT returns.

In the past reliance has been placed on First Claims Audits (FCAs) and subsequent reviews to obtain this assurance. FCAs usually only took place when a company became an operator for the first time and could take a number of years to complete. There was provision for a subsequent re-audit when an operator changed its accounting system, but this did not always happen. A modified process, the First Claim Check was used when a company, already an operator, became an operator in another field. This provided an opportunity for an up-date on the company’s accounting system. The usefulness of this check was reduced with the abolition of PRT for new fields as there were fewer opportunities for bringing in this process.

In 1992 Continuous Compliance Review was introduced with the overall aim of updating the information provided in a FCA. In practice this has not been successful as a means of fully updating knowledge of accounting systems, although it has been useful in providing some information and assurance on particular accounting aspects and issues.

Some degree of accounting assurance was taken from the PRT/Accounts reconciliation process - linking claims to audited accounts - but this gave little or no assurance on internal issues such as cost allocations between fields.

A more frequent event than the arrival of new operators on the UKCS or existing operators becoming operators in other taxable fields, has been the acquisition by companies of new accounting systems. Companies have usually advised the OTO of new systems and have often given presentations. While these presentations have been useful and welcomed by OTO Inspectors, they have often been at a high level and have not replicated the information needed on accounting systems as reflected in the FCA.

Risk Assessment

The Department has in the last few years increasingly focused on a risk assessment approach to compliance. This applies equally for CT, PRT and royalties. The December 2000 NAO Report on PRT refers to this and endorsed the approach in the Press Release which accompanied it.

For PRT accounting systems are areas of particular risk. To a significant extent the correctness of a return or claim depends on the inputting and processing of data. Reassurance in relation to risks can only be obtained by sufficiently detailed knowledge of the system. Assurance cannot always be taken from a company audit or from joint venture audits as the concerns addressed by these processes would not necessarily match those of a PRT Inspector.

We consider it an essential part of our risk assessment process to have adequate up-to-date knowledge of the system. In most cases some of this information is already held. Where it is not held we will be taking steps to ensure that it is acquired. We recognise the need for a consistent approach across our customer base. Our aim is to have a similar level of information on file for all companies in so far as that objective is commensurate with perceived risk.

What Information?

The OTO needs the following information:

1. details of how a system works from production of raw data through to completed returns and claims;
2. details of how the accounting system (or subsequent manual intervention) deals with specific PRT technical issues and concerns.

We need (a) and (b) in sufficient detail to form a view on the areas of risk within an accounting system.

We have prepared “A Guide to Accounting Systems Reviews”. This outlines the information we need for both the system review process and the “Specific Topics for Review” on which we need information and assurance. “A Guide to Accounting Systems Reviews” is attached as Appendix for convenience.]

Occasions for seeking information:

1. When a company becomes an operator of a PRT field for the first time we would expect to carry out an extensive review on the lines of a first claims audit but updated as per the “Guide to Accounting Systems Reviews”.
2. When a company changes its accounting system we would similarly expect to update all the information.
3. General update. A considerable period of time may have elapsed since the first claims audit. Questions raised under the Continuous Compliance Review process may not have provided a comprehensive update. In this situation we would need to ask the company to provide relevant information.
4. When a specific topic has been selected for an in depth review as part of the risk assessment and where particular concerns arise as a result of an error in a return or claim.

Depth of Review, etc

We would distinguish between initial reviews and in-depth reviews either of the system or of specific topics.

The initial review will be designed to give us a view of what risks, if any, are inherent in the processes which make up the accounting system as a whole. This review will almost certainly involve a Revenue team made up of PRT and Royalty Inspectors and computer trained audit people. [The Revenue has computer audit teams based in Birmingham and Edinburgh. They are able to provide assistance on systems, transaction and spreadsheet auditing.]

If at the initial assessment stage the conclusion is reached that there is little or no risk in the system's operation we would not proceed further into a deeper interrogation of the system. If on the other hand systemic risks are identified the Revenue team (including CAT auditors) will want to interrogate the system at a greater depth and will work with the company to eliminate the risks.

Information on specific topics is needed. Some of this may be collected as part of the initial review but the need for assurance on such topics may require interrogation of the accounting system irrespective of any general assurance already given

Apart from the situations mentioned above in-depth reviews may be triggered by enquiries on claims and returns or the discovery of errors.

Companies can expect the Revenue's approach to be commensurate with risks identified or perceived and in relation to actual returns and claims received.

Where part or all of the accounting function is outsourced any review of systems will need to include the contractor's system and the interface with the company's.

Errors

“Accounting System” for present purpose encompasses the range from inputting into the system through to submission of returns and claims. Any errors attributable in final presentation of claims and returns should be taken into account in considering errors within the "system".

PRT and Royalty

On accounting issues there is considerable overlap between PRT and royalty. While this overlap is not complete, risks identified for PRT may well be risks for Royalty and vice versa. From this point onwards it is expected that any assessment of risk in accounting systems will be common for both PRT and Royalty and we will be expecting Royalty Inspectors to contribute significantly to the process. It will be our aim in any separate examination of an accounting system to extend the assurance which we obtained for PRT to Royalty and vice versa. Companies should benefit as well from this approach as there will be less duplication of effort.

PRT, Royalty and CT

PRT and Royalty Sections will be co-ordinating with CT colleagues who are enquiring into such issues to ensure that duplication of enquiries is avoided and maximum assurance is obtained for the taxes and duty. Where concerns of the different sections are not the same there is still value in raising them together on the occasions when the relevant company staff and advisors are assembled.

Other Forms of Assurance

Some of our concerns about accounting systems will be shared by joint venture or other partners. For example, the way in which income or costs are allocated between a number of different fields. It is possible that in some cases OTO could obtain a degree of assurance from the results of such exercises, and so reduce the frequency or depth of our own reviews. Companies are therefore encouraged to pass on details of the checks undertaken by partners and their results.

Similar considerations apply to any assurance exercises undertaken by a company's internal or external auditors.

PRT/Accounts reconciliations

We are discussing elsewhere the merits of reconciliations. We consider they provide some assurance. The major risks they address are double claiming and recognition of income. We wish to continue with the process. Modified reconciliations have been agreed in the past. If companies do not provide full reconciliations we need too discuss with them alternative means of providing assurance on the main risks which reconciliations addressed. This could involve periodic visits by CAT auditors.

Non Operators

It will also be necessary to consider any risks arising in systems used by non-operators. The OTO will normally review systems relevant to particular aspects of a participator's returns and claims either when that particular aspect first arises or as part of the risk assessment process.

Time Scale

Where we do not hold the information we need we will set in motion the process of collecting it. Some of the information can be provided easily, some takes longer particularly where in depth reviews are involved. A necessary and early requirement is the initial review of risk in the system; it is necessary to have a critical level of knowledge to make an assessment of the risk. The need for further information required will be governed by the risk identified or perceived. We would not expect to collect this information all at once, just as in the normal course not all technical risks are challenged immediately.

Companies' timetables

Companies have on occasion taken the initiative to provide information - for example giving presentations on new accounting systems. Part of the purpose in issuing this paper, and the Guide, is to clarify the scope of information required so companies can take the opportunities offered by their own reviews and updates - or indeed any occasion when they are addressing significant accounting and reporting issues - to invite OTO involvement, thus avoiding the cost of revisiting the topics at later dates. We would welcome any initiatives by companies to provide the information and assurance we consider necessary.