Goolsarran criticises report on audit of US$7.3b oil expenses
-says it has no `basic structure’
Former Auditor General Anand Goolsarran has expressed strong reservations over how the crucial audit of US$7.3b in expenses claimed by ExxonMobil and its partners has been conducted.
In the first part of a review of the audit report by Ramdihal & Haynes Inc., Eclisar Financial, and Vitality Accounting & Consultancy Inc in yesterday’s Stabroek News, Goolsarran raised doubts about the methodologies employed by the firm.
The auditing of the expenses is vital as any claims that could be disallowed as inappropriate would result in more profit for Guyana.
The audit contract was entered into on 25 May 2022 and was to last for four months, with a start date of 29 June 2022. The assignment covered the period 2018 to 2020, and the total recoverable costs claimed by ExxonMobil and partner was estimated at US$7.3 billion.
Goolsarran said that he had stated elsewhere that, considering the amount of audit work involved in the verification of the recoverable costs, the period allocated for the audit was inadequate.
A preliminary report was released on 5 September 2022, and after several rounds of discussions, the report was finally issued on 11 September 2023.
“Despite our decades of experience writing audit and other reports as well as reviewing drafts reports, we find it extremely difficult going through this report to identify the findings and recommendations contained therein. Specifically, the report lacked basic structure. There is no table of contents to guide readers through the report; no executive summary; no list of abbreviations; no definition of the technical terms used; and no sections dealing with the terms of reference for the assignment, the scope and methodology used, the auditing standards that were followed in the conduct of the audit, and findings, conclusions, and recommendations, among others. In the circumstances, one had to through the meticulous and tedious task of sifting through the entire report to ascertain what were the findings and recommendations”, he lamented.
Adverting to the overall conclusion of the auditors, he said that the report identified amounts totalling US$7.435 billion as “Gross Recoverable Costs” for the period 2018 to 2020. However, there were two items: “Gross Exemptions” – US$64.790 billion, and “Gross Exemptions Granted” – US$10.319 billion, the nature of which as well as their impact on the recoverable costs have not been explained, he said.
Addressing Appendix A of the report, Goolsarran said that most of the contents in this appendix are descriptive in nature and do not reflect actual findings.
“In relation to ExxonMobil’s main subsidiary, Esso Exploration and Production Guyana Ltd. (EEPGL) where all the recoverable costs are recorded, the auditors stated EEPGL’s accounting procedures were ‘extremely tedious, requiring intensive concentration and diligence to understand’. There were more than 180 cost objects (or cost centres), with five levels of sub-categorisation to ascertain the eventual charge or allocation.
The auditors have stated the obvious, and it is for the audit team and its team leader to decide on the audit approach needed to be able to draw conclusions about the completeness, accuracy and validity of the amounts shown in the Cost Recovery Statement. In this regard, the International Standards on Auditing provide detailed guidance as to how the audit should be conducted. There was, however, no mention of the use of these Standards”, Goolsarran said.
Additionally, considering the number of transactions that had to be reviewed, he said that a logical approach would have been to use the risk-based approach to auditing.
“This essentially involves identifying the major risks of the Cost Recovery Statement being overstated, the probability of occurrence, and the related impact. Having done so, the focus of audit examination should be on risks assessed to have medium and high probability of occurrence and the related impact is considered significant. However, as we went through the report, we found no evidence that this approach was adopted”, Goolsarran said.
He noted that under labour, the auditors referred to EEPGL’s practice of charging an additional percentage for Exxon’s affiliated employees working outside Guyana but temporarily assigned to Stabroek-specific projects.
“EEPGL explained that a `profit margin’ was charged at percentage rates based on the affiliate’s home country tax laws and were therefore recoverable as a `transfer pricing’ mechanism. The auditors stated that they believed that these costs were not recoverable. However, they did not quantify the amount involved”, Goolsarran said.
As regards Benchmarking and Contracts, after a review of the detailed procedures as well as an examination of 149 out of 332 contracts, Goolsarran noted that the auditors concluded that: (i) EEPGL has a robust vendor contract bidding processes in place to ensure the vendors undertake their work ‘at competitive rates with adequate technical capabilities, with a prioritization on local Guyana suppliers’; and (ii) EEPGL had ‘extensive processes in place to ensure prices paid were competitive and in accordance with contract terms, resulting in valid and proper charges to the Cost Recovery Statement’.
Goolsarran said that it is established accounting practice for expenditure of a capital nature not to be charged to final expenditure in the year they incur. Instead, it should be spread over the life of the asset.
“The auditors, however, noted that expenditure incurred on the new Ogle Office Complex construction, Duke Street office improvements, and Shorebase expansions did not follow this practice, in that, the entire expenditure was reflected as recoverable costs in the year in which they were incurred. The auditors expressed their disagreement with this treatment and stated that ‘allocation of costs should follow operational usage, regardless of the size of the different operations…By charging 100% of the construction costs as incurred, the Contractor is essentially having the Government of Guyana fund the construction of EEPGL’s expansive Ogle office complex; that does not align with usage for Petroleum Operations’. Again, the auditors did not quantify the amount involved in the apparent overcharge”, Goolsarran said.
Regarding taxation, Goolsarran said that the auditors noted that several thirdparty vendors included Value Added Tax (VAT) on their invoices, and those amounts were paid by Exxon’s subsidiaries and included in the Cost Recovery Statement. This, the auditors said, was despite the fact that the PSA provides for the exemption from such tax. EEPGL explained to the auditors that the Guyana Revenue Authority (GRA) was yet to issue exemption letters for all vendors. In the absence of such letters, many vendors charged VAT on their invoices. The auditors expressed their belief that the VAT amounts should be excluded from the Cost Recovery Statements and that this was a matter that should be resolved between the GRA and the Contractor, however Goolsarran said that they did not quantify the amount involved.
“In relation to Stock Verification and Inventory Site Visit, the auditors stated that there was no physical verification of inventory by the various oil blocks. One presumes that the auditors were referring to Exxon’s subsidiaries internal accounting procedures. They also indicated that the audit team could not have carried out such a verification based on the selection of a sample of items, except for one item. This was because the inventory listing was as of 31 December 2020 whereas the exercise was carried out on 25 October 2022. It is unclear whether there was an updated listing that the auditors could have used in their verification exercise. In any event, it is reasonable to assume that most of the items in stock as of 31 December 2020 would have been issued out to production. Therefore, the focus should have been on the materials issued during the period 2018 to 2020, the value of which would have been reflected in the Cost Recovery Statement”, Goolsarran observed.
In addition, he said that the auditors stated that the documentation and process of transferring materials out of inventory could not be examined, but gave no reasons why this was so.
“This is a major shortcoming of the audit since the value of materials issued from inventory to production over the period 2018 to 2020 would have constituted a significant portion of the total amount shown in the Cost Recovery Statement”, he said. Goolsarran is to continue his assessment in future columns in this newspaper.
IHS Markit
The first audit of pre contract expenses by British firm IHS Markit is still to be released and has created a flashpoint over US$214.4m in expenses which were deemed non-recoverable. It would mean that Guyana is entitled to a further US$107.2m but this matter is still to be finalized.
Almost three years ago, the government received the final report by IHS Markit of the first audit of expenses claimed by ExxonMobil and its partners for the period 1999 to 2017. This covered the exploration phase leading all the way up to 2015 when the first major oil find was made and just a little past the conclusion of the Production Sharing Agreement (PSA) of 2016.
This first audit was important for many reasons, the primary one among which was that it provided the first reading of whether Guyana could trust the oil companies when they claimed expenses. This PSA allows oil companies to take up to 75% of oil revenues each year for expenses. If they improperly claimed any part of those expenses it meant that they would be depriving the people of Guyana of profits.
Among the major findings in the audit report was that 12.8% of the US$1.67b expenses claimed by ExxonMobil and its partners could be disputed by the Guyana Government. The percentage that can be queried translates to US$214.4m – roughly US$13 dollars out of every US$100 allocated as expenses.
The government has still not published the final IHS Markit report and ExxonMobil and company have not handed over the US$107.2m owed to the people of this country.
ExxonMobil was subsequently found to have been engaged in an illicit process with the head of the Petroleum Unit of the Ministry of Natural Resources to cut the questionable US$214.4m in expenses to US$3m. This engagement was interdicted after queries were made by Stabroek News.