Financial Acconting Standard 143 "Accounting for Asset Retirement Obligations", has created confusion for many companies. FAS 143 and a later interpretation Financial Interpretation No. 47, "Accounting for Contingent Asset Retirement Obligations", have presented accounting challenges. FAS 143/FIN 47 specifically discuss how the standard applies to oil and gas companies. Two exploration and production companies and one limited partnership have reported material weaknesses identified by their finanacial auditing firms. The entities are Petroleum Development Corporation, Ultra Petroleum, and PDC 2005-B Limited Partnership.
A "material weakness" under the Sarbanes-Oxley Act is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
For example, Petroleum Development Corporation stated in its 10K the following:
The Company did not have effective policies and procedures, or personnel with sufficient technical expertise, to ensure that its accounting for asset retirement obligations complied with generally accepted accounting principles. Specifically, the Company's policies and procedures regarding the estimate of the fair value of the asset retirement obligations were not designed effectively to ensure that it was estimated in accordance with FAS No. 143, Asset Retirement Obligations. This deficiency results in more than a remote likelihood that a material misstatement of the Company's annual or interim consolidated financial statements would not be prevented or detected.
Oil and gas exploration and production companies should consider the SEC reports that discuss these weaknesses and determine whether the company is taking adequate steps to address FAS 143 and FIN 47. Another relevant post on this blog discusses the SEC case against Ashland for alleged inadequate internal controls for assessing and reporting environmental liabilities.
