Dear Editor,
We read the March 25, 2024 installment of your weekly Accountability Watch by Anand Goolsarran, titled “The audit report on Exxon’s post-contract costs”, and found several inaccuracies and incorrect statements which we would like to address here. Mr. Goolsarran is referring to the 2018 through 2020 Stabroek Cost Recovery Account audit (“audit”) conducted by VHE Consulting (“VHE”), with Martindale Consultants, Inc. (“Martindale”) and Squire Patton Boggs (UK) LLP (“Patton Boggs) as subcontractors. Mr. Goolsarran’s comments suggest two things:
1. Mr. Goolsarran may not have reviewed the entire audit report; he may have only parts of it. The entire audit report package must be read together to understand the concept, the process, and the results. Having only parts, or choosing to focus on only parts, will necessarily lead to many of the incorrect assumptions and conclusions that Mr. Goolsarran draws, which then create unintentional or intentional disingenuous statements and false and misleading conclusions for others to read.
2. Mr. Goolsarran is likely familiar with and built a career in internal and financial audits but may not be familiar with cost recovery or contract compliance audits. His comments suggest he is not. The audits are completely different, with different expertise, training, processes, and procedures required. There are many organizations promulgating standards for financial and internal audits, but those organizations are not involved with cost recovery or contract compliance audits. In the U.S., the Council of Petroleum Accountants Societies (COPAS) is the authoritative source for contract compliance and cost recovery audits and Martindale personnel have been members and leaders of COPAS for decades. In the international arena, the Association of Energy Negotiators (AIEN) publishes the model for accounting procedure used as the base for the Stabroek agreement. Two of the Martindale staff on the audit are AIEN members and have audited against the AIEN form many times. The VHE audit team used COPAS and AIEN standards and procedures in conducting the Stabroek audit. To keep the comments organized we cite the article’s text, followed by the VHE team’s my response.
We 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. Whatever time was “allocated” to the audit notwithstanding, the VHE audit team began working with EEPGL personnel shortly after the Order for the Commencement of Services was issued by the GoG on June 27, 2022, to get accounting records, contracts, and explanations of EEPGL’s accounting practices and allocation methodologies. The dialogue continued and the data provided by EEPGL was analyzed by the VHE team for several months, with fieldwork commencing on October 3, 2022, and concluding on November 11, 2022. This almost five-month period from July through mid-November period was adequate time for this experienced audit team to understand and evaluate EEPGL’s accounting for Stabroek and other Guyana operations. In addition, Mr. Goolsaran asserted that a 12 person team was not sufficient to undertake this audit. The VHE team wishes to inform Mr. Goolsaran that a 12 member team is not the same as 12 Full-time Equivalents. In fact, if you calculate the number of hours expended by the VHE team during the five month period, it is equivalent to more than 12 persons.
A preliminary report was released on 5 September 2022, and after several rounds of discussions, the report was finally issued on 11 September 2023. The dates are incorrect. The draft report was issued to the GoG on December 5, 2022. The VHE team and the GoG, along with EEPGL, discussed many of the exceptions in the report. A final report was issued on September 11, 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.
We do not understand Mr. Goolsarran’s statement. The report contains 51 extremely detailed exceptions, with all but three providing specific amounts that should be credited to the Stabroek Cost Recovery Account. Each exception conclusively includes references to specific charges, references to applicable contractual language, and includes calculations of amounts to be credited to the Cost Recovery Account. There is a numerical summary of the exceptions as well as a summary which breaks out the exceptions into categories “Costs Not Recoverable,” “Payroll Issues,” “Allocation of Capital Costs,” “Coding and Allocation Errors,” and “Miscellaneous.” Based on Mr. Goolsarran’s statement, it is possible he does not have the complete report.
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: Mr. Goolsarran is confusing this Stabroek Cost Recovery audit with traditional financial or internal audits with which he is familiar. This audit is not a financial or internal audit; it is a compliance review of EEPGL’s charges and credits booked into the Stabroek Cost Recovery Account. The format of VHE’s report is, in fact, the most common format used in these types of audits across the industry. It is a straightforward report intended for the GoG’s and EEPGL’s use in addressing the issues raised. There is no need for a table of contents, list of abbreviations, or definitions of technical terms, or the other items Mr. Goolsarran lists.
In the circumstances, one had to go through the meticulous and tedious task of sifting through the entire report to ascertain what were the findings and recommendations: This statement makes a reader wonder if Mr. Goolsarran had an opportunity to review the full and actual audit report. As mentioned, there are numerical and category lists of each of the 51 exceptions, followed by those exceptions. A quick perusal of the lists educates readers as to the exact nature of every exception and the category listing groups similar exceptions to give a perspective of the issues raised.
The report identified amounts totaling 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: VHE does not know the nature of Mr. Goolsarran’s comment.
Most of the contents in this appendix are descriptive in nature and do not reflect actual findings: Mr. Goolsarran is correct that Appendix A is descriptive; that is its very purpose. The 51 exceptions preceding Appendix A are the details. The introduction to Appendix A states “this Appendix provides additional and more detailed information, explanations, and examples of certain types of costs or concepts based on what was learned during audit fieldwork.”
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: The VHE-led audit team did exactly and precisely what Mr. Goolsarran suggests: they developed an audit approach and detailed plan that would allow the team, and the GoG to understand EEPGL’s accounting for the Cost Recovery Statement and identify items which should be excluded. Martindale, as part of the VHE team, has for more than 42 years performed thousands of contract compliance reviews and developed detailed plans and procedures for conducting effective and targeted audits. Again, Mr. Goolsarran confuses this contract compliance audit with the financial or internal audits with which he is familiar where the “International Standards on Auditing” may be the guidelines for conducting those types of audits.
Additionally, considering the number of transactions that had to be reviewed, a logical approach would have been to use the risk-based approach to auditing: We can assure Mr. Goolsarran that a risk-based approach was used. Exposure and risk areas were identified through months of planning, discussions with GoG and EEPGL personnel, VHE’s Guyana-specific knowledge, review of applicable contracts and analysis of transactions, and Martindale’s more than 42 years of conducting contract compliance audits in the U.S. and internationally in more than ten countries.
…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: We do not know what Mr. Goolsarran read; the VHE team’s report, Appendix A, and other explanations submitted to the GoG convey exactly what the exposures were and how the VHE team approached examination of each exposure area.
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: Mr. Goolsarran must not have read the audit report in its entirety. Exception 41 is a three-page exception specifically addressing this issue and was quantified for affiliate overcharges from four countries;
Again, the auditors did not quantify the amount involved in the apparent overcharge: This comment pertained to EEPGL’s accounting for costs of the Duke Street office upgrade and construction of its new Ogle office. Mr. Goolsarran must not have read the audit report. He is referred to Exception 3 (Ogle office), Exception 10 (Shorebase Expansion), Exception 11 (Vehicles), and Exception 13 (Duke Street Renovations) for specific quantified exceptions addressing EEPGL’s incorrect accounting for substantial capital costs.
Regarding taxation, the auditors noted that several third-party 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…. 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. The auditors did not quantify the amount involved: Yet again, Mr. Goolsarran failed to read the audit report. Exception 21 quantifies the amount of VAT EEPGL posted to the Stabroek Recovery Statement.
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 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: Two VHE team members inventoried all EEPGL’s storage facilities in Guyana and reconciled the physical materials to what EEPGL showed on its inventory records, using sound audit methods and procedures based on sampling that considered materiality and risk. Almost all drilling operations in 2018 through 2020 were on Stabroek wells, so the chance of Stabroek-purchased material used on another Guyana operations was negligible.
Sincerely,
Alex Graham
Communications Consultant
Tagman Media
for VHE Consulting Team
