In a previous post, I discussed several issues surrounding joint interest auditing and the joint interest accounting in question. Here are some initial steps once you have considered the necessity of a joint interest audit:

• Review your joint interest agreement and the accounting procedure.  While many of the agreements are standard, ensure you are aware of the audit provisions and other pertinent facts such as the allowed overhead allocation method. The more complexities in the agreement, the more likely there could be errors.
• Consider the size of the interest and amounts at stake.  A joint interest audit will likely produce some results for all wells, but only certain wells would be worth the cost.
• Contact other nonoperating joint owners to share the costs.  Unfortunately for the initiator of the joint audit, you don’t receive all the reward for being diligent on your investment. When an error is found in a joint interest audit, the error is corrected and all affected parties receive remedy even if they didn’t help foot the bill for the audit. This should not necessarily prevent you from pursuing the audit assuming you followed the previous two steps.
• Utilize a professional. The individuals who perform a joint interest audit need to have appropriate training and experience resolving the issues typically uncovered in an audit. Many of the large oil and gas companies have a joint interest audit department and conduct most, if not all, of the procedures themselves. If you do not have those resources or lack the expereince to perform a joint interest audit, engaging an independent auditor may be appropriate. 
• Consider the timing of the audit. Attempting a joint interest audit during the first three months of the year may lead to higher fees, less cooperative staff at the operator, and less timely completion of the audit. When beginning the audit process under any timing, you should prepare for an extended timeline due to the various communications between the auditor and the operator from initial testing all the way down the road to multiple discussions over the reported findings before resolution. 
• Open up communications with other nonoperators and the professional performing the audit. You should consult with the other nonoperators, whether they are participating in the audit or not, about specific concerns related to their joint interest billings. You should communicate their concerns and your own to the professional when engaging them to perform the audit. 

We enjoy partnering with our oil and gas clients in all facets of their business needs. We would be happy to discuss joint interest audits or other accounting services with you.

In the environment of oil and gas operations where the revenue and expense decks keep growing, how do you know if the operator is giving you your fair share? Joint operating agreements generally have an audit provision. Whether or not you should invest in the cost of a joint interest audit depends on several factors including:

• Do I have a large interest in this well?
• Do the joint interest billings look unusual or not provide detail?
• Are the costs well over budgeted or reasonable amounts?
• Are there several wells in the same area that have similar names but different ownership percentages?
• Are there carried interest provisions in the agreement?
• Is the overhead based on actual costs rather than an agreed upon rate?

The number of transactions processed by the operator can lead to data entry or allocation errors. While many of the occurrences mentioned could happen within normal operations, they could also be erroneous charges or calculations.

The scope of a joint interest audit can include expenditure testing, payout recalculation for carried interests, revenue allocation, overhead charge analysis, review of classification of expenditures as direct costs versus overhead, and more.

You may not have the resources to provide the time necessary to perform and follow-up on a joint interest audit. A consultant can be hired to perform these services for you. While you incur the cost of a joint interest audit, the returns often exceed the cost.

Feel free to contact us if you would be interested in pursuing a joint interest audit or have any questions concerning the audit process.