As a result, the FASB has deferred the effective date of FIN 48 to annual financial statements for fiscal years beginning after December 15, 2008.  The deferral applies to most nonpublic entities with certain exceptions.

If an entity elects to defer adoption of the Interpretation, the entity must disclose its election, as well as its accounting policy for evaluating uncertain tax positions for each set of financial statements were the deferral applies.

One of the new requirements is the use of a 12-month average price in estimating reserves and for full cost accounting purposes, except where prices are defined by contractual agreement. The average is calculated as the unweighted average of the price on the first day of each month within the 12-month reporting period.

Other changes relate to the definitions of proved, developed, and undeveloped reserves, as well as the disclosure of probable and possible reserves, as defined.

Public companies must adopt the new reporting requirements for fiscal years ending on or after December 31, 2009. For private companies, the SEC has stated its intention to coordinate with the FASB align their accounting standards with the new public company rules. As a result, early adoption is not permitted to allow time for the FASB to make the appropriate revisions.

Under successful efforts accounting, a company only capitalizes exploration, acquisition, and development costs that directly result in proved reserves. Exploration costs and costs of unsuccessful projects are expensed as incurred.

Full Cost accounting requires a company to capitalize all costs related to the exploration, acquisition, and development of oil and gas reserves. The full cost method allows a company to capitalize these expenditures into a cost center and amortize those costs as the reserves are produced. A “ceiling” is established for these costs centers to ensure that these costs are recoverable through production. Because the primary component of the ceiling calculation is discounted future net revenues at year-end prices, impairment expenses will increase as oil and gas prices decrease.

Full cost accounting results in much larger cost centers, therefore DD&A and impairment expenses will be greater than for companies that utilize the successful efforts method. However, successful efforts companies will record significant exploration expenses as these costs are incurred.

Changing from one method to another would be a change in accounting principle and require a restatement of the prior year financial statements, which becomes more and more difficult the longer a company has owned its properties.  A conversion would require a substantial amount of resources, especially from full cost to successful efforts because of the detail involved. A change of this type should be carefully considered in light of the facts and circumstances specific to your company.

Corruption is when someone manipulates a business transaction for their personal gain. Kickbacks are a perfect example of corruption.

Billing is the category in this report that describes instances when the billing system is manipulated for personal gain. For example, submitting invoices from a fictitious vendor for payment or submitting invoices for personal expenses for payment.

Skimming is more common in companies with a lot of cash transactions. When a convenience store clerk accepts the cash payment but does not record the sale, the clerk is skimming.

Expense reimbursements refer to the practice of submitting fictitious or inflated business expenses for reimbursement.

You have probably heard of most of these schemes, however the challenge is developing controls to prevent and detect them. Need an assessment of your operational controls? Contact me.

Common indicators of fraud are employees living beyond their means or experiencing financial difficulties.

Take a look around your office, do you see anybody that fit this description? Keep your ears and eyes open and establish a whistleblower policy providing procedures of investigation and protection.