Cost Recovery Audits

Cost Recovery Audits

We perform Cost Recovery Audits for the following types of agreements/fiscal regimes:

• Production Sharing Agreements (PSAs)
• Production Sharing Contracts (PSCs)
• Concession Agreements
• Joint Venture Agreements

Through our audits, we assist our clients:

• Ensure that foreign companies and their domestic partners have satisfied operational, commercial, financial, tax and reporting obligations to all regulatory authorities as stipulated in the agreements.
• All reported cost recovery expenditures meet all the Agreement’s governing terms and conditions to qualify as “allowable cost recovery expenditures” and the claimed values are supported by “adequate, auditable, and empirical evidence.”
• The companies maintain adequate records in accordance with the terms and conditions of the Agreement, which generally requires accounting records to comply with the generally accepted accounting practices utilized by the experienced operators in the industry.
• All exports and internal sales of products have been conducted in accordance with the terms and condition of the Agreement, any sale and lifting agreements, and/or have been conducted at the stipulated sale prices and/or sales prices, which have been determined through actual arm’s length transactions.
• All production statistics and sales proceeds have been accurately calculated, properly recorded in the Cost Recovery records, properly apportioned between the Government and the company, and properly reflected in all Cost Recovery Statements and Reports.

We unlock more value by:

• Identifying discrepancies in expenses
• Investigating and detecting root causes of errors
• Recovering overpayments, credits and rebates
• Improving contract compliance and processes
• Uncover financial statement fraud and manipulations
• Preventing future leakages and fraud

Why our clients need cost recovery audits:

Transfer pricing
Sixty percent (60{74093e997a94404d09a75468a36d2155a2685a9e74d25e39d2139ba07413b6c7}) of global trade is transfer pricing between the parent company and subsidiaries/branch offices/joint ventures/related parties. Africa loses $160 billion annually to transfer mispricing. The Big Four accounting firms (EY, KPMG, Deloitte and PWC) have 900 specialized accountants helping multinational companies avoid paying royalties, profits and taxes on income generated in the extractive industry. In comparison, the US Internal Revenue Service has a meager 500 accountants with expertise in transfer pricing issues, and Kenya barely has three accountants. Since most of the accounting lies in big accounting firms that are working for these multinationals, many governments and their international partners are turning to small to midsized accounting firms with specialization to avoid conflict of interest.

Exploration and Development Cost Recovery (cost oil)
Depending on the accounting method, the accuracy of records, and the extent of government oversight, exploration and development costs can be manipulated to the extent that it will take years for the company to recover its total cost before the government can receive payments in taxes, profits, royalties or all three.

Further manifest disregard of applicable procedure, fraud, or willful misconduct on the part of multinationals can cost governments in poor countries millions of lost in revenue and income.

Operations: Allocation of Common Cost (profit oil)
Allocation of common overhead costs can be a challenge in even small operations, but various accounting methods can be used to deprive a government of taxes, profits sharing, and royalties with intentional or improper allocation of common costs. This can become an accounting nightmare for governments with minimal resources and expertise to examine the allocation of common costs.

Ineffective/Nonexistent Oversight/Financial Reporting
International partners provide support to assist host governments to negotiate PSCs/PSAs/Concessions/ Joint Ventures. However, the missing link that costs millions of dollars in lost revenue is the lack of oversight and a robust financial reporting regime that ensures strong internal controls and continual performance in line with the agreements. Weak oversight results from a national oil company conniving with the foreign oil companies, nonexistent/very week regulatory regimes, or just pure lack of competent work force with the requisite skills, qualifications, and experience.

Our Cost Recovery Audit Team

• Transfer pricing specialists
• Tax lawyers
• Cost accountants
• Chartered accountants
• Certified Public Accountants
• Certified Fraud Examiners
• Procurement and contracts experts
• A partner who specializes in Natural Resources/Risk Management
• A partner with expertise in cost recovery audits in oil and gas