GAO: MMS STILL LAX IN ROYALTY COLLECTION PROCESS

The U.S. General Accounting Office says the Minerals Management Service's royalty collection process is still weak.

MMS collects about $4 billion/year from oil and gas producers and other royalty payers holding mineral leases on federal and Indian land.

GAO, a congressional watchdog agency, noted MMS developed a strategy in 1988 that would systematically target for audit more than 90% of all federal and Indian royalties and make the audit cycle more current.

But GAO said while the strategy is a substantial improvement, it is inadequate because the amount of royalties audited is very small, and the judgmental samples are not representative of all payers and leases.

As a result, MMS cannot determine with any degree of confidence things such as the level of compliance by payers or the size of possible under-payment.

GAO said MMS's audit strategy is systematic in that the payers are stratified by the amount of royalties paid, and MMS tries to select leases that are diverse in their conditions and locations. But the samples don't represent all payers and leases.

"Since all payers and leases do not stand the same chance of being selected for audit, problems identified in the lease samples cannot be used to estimate either the level of compliance or the magnitude of underpayment for all leases," GAO said.

RESTRUCTURED ACCOUNTING

GAO said if an MMS review finds problems the agency deems to be systemic, it can order a payer to correct the problem through "restructured accounting."

Under that procedure, payers are required to correct the systemic problems and compute additional royalties due from system error for all of the affected leases-not only the sample leases reviewed by MMS but other leases with similar characteristics.

MMS auditors then review the corrections for accuracy. As a result, the process of restructured accounting can sometimes expand the number of leases and royalty payments reviewed.

GAO said, "MMS' use of restructured accounting increases the scope of audit coverage. However, payers are challenging MMS' restructured accounting requirement through MMS' and Interior's administrative appeals process and the courts."

Of the nearly 500 restructured accounting directives MMS issued to payers in during fiscal years 1987-91, more than over 45% have been challenged by payers.

GAO said, "Four payers (ARCO, Chevron U.S.A, Phillips, and Public Service Co. of Oklahoma) have challenged MMS' restructured accounting requirement in court, and as of Oct. 1, 1992, the issue had not been completely decided.

"According to MMS, if the courts find in favor of the payers, the scope and effectiveness of MMS' strategy for auditing royalty payers may be greatly reduced, as MMS may lose its primary procedure to ensure royalty collection."

GAO said a related decision May 7, 1992, by the 10th Circuit Court of Appeals in a case brought by Phillips and ARCO supports the position that MMS has the authority to require payers to correct repeated royalty payments caused by systemic deficiencies.

"Although restructured accounting was not the primary issue in this decision, it may have an impact on upcoming court decisions in which restructured accounting is a major issue," GAO said.

"Of the six suits filed by the four companies, three are under the jurisdiction of the 10th circuit. MMS is confident its authority to require restructured accounting will be upheld by the courts."

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