10. Begin working on your schedules well in advance of the audit. And remember, if you have questions, your auditor is just a phone call or email away. 

 9. Keep track of issues you struggled with during the year and communicate those to your auditor. It will help the auditor key in on important areas at the beginning of the audit and prevent surprises down the road. 

 8. Get the confirmations back to the auditors quickly! The more time there is to send these out the better chance we have of getting them back. Every confirmation that’s not returned creates more work for everyone. 

7. Communicate your schedule to the auditors. We understand that your normal responsibilities don’t go away during the audit, and we’ll do everything we can to work around your schedule. 

 6. Post all adjustments to your trial balance before you provide it to the auditor. 

 5. Those schedules we talked about earlier – make sure they tie to the final trial balance you just provided to the auditor. 

 4. Make requested documentation easy to access and provide it to the auditors as soon as possible. 

 3. Be available! Set aside some time on your calendar to answer questions and prepare information requested during the audit. 

 2. Maintain good processes and controls. The more checks & balances you have, the less likely it is that your auditors will find errors. 

 1. Don’t do anything fraudulent or misleading during the year (always a plus). 

The key to success is communication and preparedness. If you apply these steps you should see a reduction in the amount of friction an audit can cause.

Fraud is a hot topic. If you don’t think so ask someone who used to work for Enron or invested in Madoff’s investment company - they might change your mind. Because of instances like these, people often think of fraud in large terms, and the mention of the word carries a lot of weight. But fraud can occur in all sizes and forms.

Who is likely to commit fraud? Most people use what is commonly known as the fraud triangle to identify areas where one can commit fraud. The three criteria are Pressure/Incentive, Opportunity, and Rationalization.

The pressure/incentive trait is common with performance based jobs where there is motivation for employees to record false sales to meet sales/performance quotas or up their commission, or other incentive pay.

Opportunity rears its ugly head when an individual has too much control over one key process in a business. Let’s say a cashier at a bank did not have to reconcile the cash drawer at the end of the day. The “opportunity” is there for cash to be stolen without any knowledge of it being gone.

A big one in today’s economy is rationalization. This is commonly referred to as the “I deserve this” mentality. An individual develops a frame of mind where they can justify their actions and commit the fraud even though it is outside their typical ethical guidelines. For example, the company is generating large revenue streams, but an employee needs money to pay for his kid’s summer baseball league; this employee could find themselves thinking “They won’t miss this money, and I can’t say no to my child.”

Now let’s not confuse fraud with honest mistakes, errors, or plain ignorance; there is a difference. Fraud is defined as “intentional” deception…intentional being the key word.

Stay tuned as we post methods to identify and address fraud and help you to minimize the risk of fraud in your business.

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.

• Do you account for oil and gas properties under the full cost method?  You may not be allowed to under IFRS.
• Is your accounting staff sufficient to understand the changes and the impact on your business, and if not, how do I accomplish this? You may be able to hire an accounting firm to consult and evaluate your current accounting compared to IFRS.
• When will this possible conversion be required? By most reports, the switch to IFRS could be as early as 2013.

International standards would have a significant affect particularly on oil and gas companies.

Under current International Financial Reporting Standards (IFRS), oil and gas companies would need to make drastic changes in their accounting methods. In their current form, IFRS does not have specific standards for any individual industries. Based on the conceptual framework, the current standards would not allow full cost accounting for oil and gas properties. The framework allows capitalization of assets when you are able to predict the probable future economic benefits as a consequence of the investment, which may be difficult in exploration when you consider the amount of unproved assets.

The International Accounting Standards Board (IASB) is currently working on a project to better address the complexities of oil and gas. The project is also addressing issues of fair value reporting of reserves on the balance sheet. This project may address the asset issue, but ultimately not address issues such as joint ownership arrangements, which are also integral to oil and gas property accounting.

Check back for periodic updates.

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.

Example:

The asset and liability are recorded at $25,675 at the spud date. The accretion expense and related liability are recorded monthly for the life of the well. Salvage value of the asset is also not allowed to be netted for purposes of determining estimated costs.

See accounting statement for illustrative examples of calculating the asset retirement obligation.  More on settling AROs to come.

Asset retirement obligations (ARO) will certainly be settled at a value that is less than or exceeds the book value of the liability at the date of settlement. Standards are not conclusive on the treatment of this difference.  The options are as follows:

• Resulting gain or loss is shown on the income statement as settlement gain (loss).
• Resulting difference is recorded against accumulated dd&a with no income statement affect.

Disclosure of the method of recording these differences is key to transparency of the financial statements.  Standards do require that amounts paid for settlement should be shown as an operating cash flow.

Under current practice, business combinations are accounted for under a cost-accumulation approach, which focuses on the costs paid to acquire the business.  The new standard uses a fair value approach based on marketplace information and exit prices to value assets and liabilities of the acquired business.  In addition, the new standard revises the guidance on accounting for contingencies, restructuring costs, and transaction costs among others.

The new method of recognition could lead to very different results in reporting business combinations:

• actual gain might be recorded on purchase
• subsequent adjustments due to changes in fair value flow through the income statement
• recognition of goodwill attributable to the noncontrolling interest
• retroactive recording of adjustments made during the measurement period to the transaction date

If you have questions on a transaction, let us know.  How will the new rules change the way you consider business combinations?  Give us your thoughts in a comment.