August 2006 Newsletter

Information Available on Texas CPAs

The Texas State Board of Public Accountancy gathers a variety of information on every CPA licensed in the state of Texas. In accordance with the Public Information Act, much of this information is published on the Board’s website at https://www.tsbpa.state.tx.us/srcmain.htm however, further disclosure, such as date of birth, may be made in response to written requests at enforcement@tsbpa.state.tx.us. While the public may view final disciplinary actions taken by the Board, information regarding any pending disciplinary action is not available to the public.

Missing Documents

After two prior awards of sanctions against the defendant for discovery problems, the pleadings of that defendant were stricken following the hearing on the most recent motion for sanctions. On the facts, a steel scrap dealer was sued by a manufacturer of steel because railcars of scrap removed by the dealer were claimed by the manufacturer to be neither reported nor paid.

A lengthy discovery effort resulted in the acknowledgement by the dealer that while on the one hand the railcars were removed and no payment made, on the other hand those railcars contained truckloads of scrap for which the dealer had paid the manufacturer. The dealer claimed these truckloads were weighed and paid but instead of leaving the plant, the trucks made a “u-turn” and were then reloaded to railcars. A CPA wrote a report detailing the support for the defendant’s contention. The defendant had testified repeatedly the trucks had not gone to their customers and the bills of lading did not exist.

Records of truck shipments were incomplete and it was not certain where the trucks went; whether to a customer of the dealer via truck or back into the plant. If it were the former then the defendant’s explanation would be disproved. Over 600 truckloads were involved in allegedly loading almost 200 railcars.

Thanks to the persistent efforts of Sean Gorman and Chris Lacy of LeBoeuf, Lamb, Greene and MacRae, a customer of the dealer was located and their records of purchases from the dealer were obtained. These records included bills of lading for the alleged “u-turn” trucks providing sufficient data for us to prove that over 500 of the 600+ shipments alleged to have made the u-turn and loaded railcars in fact went to a customer of the dealer.

This case emphasizes the importance of locating third-party records to corroborate claims by a party when records are missing.

Excellent computer forensic testimony by William Odom at the last sanctions hearing addressed whether electronic source data was produced.

A copy of the court’s order can be found on our website at http://www.jacompton.com/html/articles/index.html (entitled Jindal Enterprises).

Oil & Gas Lease Operating Expenses

A recently affirmed arbitration award may be valuable to non-operators that are charged for salt water disposal, operator overhead, material transfers and contingent fee audits. The arbitration award, which was made a matter of public record when attached to a brief by the defendant during appeal, can be found on our website at http://www.jacompton.com/html/articles/index.html (entitled San Juan Basin Royalty Trust). The arbitration arose from a net profits interest that incorporated elements of the typical COPAS operating agreement in relation to the items in dispute. The non-operator regularly audited the operator’s lease operating expenses because they represented deductions under the net profits interest, noted exceptions and ultimately demanded arbitration of unresolved audit exceptions.

Salt Water Disposal

The issue as to salt water disposal would be of particular interest to non-operators charged for operator-owned salt water disposal wells. Under COPAS, the calculation for operator-owned facilities being charged to non-operators looks at costs of actual operation or the prevailing market rates for the service. In this case, the operator took the position the prevailing market rate for salt water disposal was not the rate charged by commercial salt water disposal facilities some miles distant but instead that rate plus the avoided cost of third-party transportation to such a commercial facility. Transportation costs actually incurred to transport salt water to the operator-owned facilities were billed separately and not disputed by the non-operator. The arbitrator decided the commercial rate, absent avoided transportation costs, was applicable.

Operator Overhead

As field office personnel were relocated to the district office (not located on the producing property) while retaining their field duties, the operator sought to recover a portion of the district office overhead on a square footage basis as a direct, field expense based upon the idea that a portion of district office overhead now represented virtually a field office. The operator made this charge to the extent the field-level personnel now occupied the district office, not the field office. The non-operator agreed the personnel charges may be direct costs when such individuals are located on the producing property, but disagreed with the allocation to direct cost of off-site district office rent, utilities, etc. The arbitrator decided all district office overhead was contained in the agreed overhead charge and was not allocable to direct cost regardless of occupancy by field-level personnel.

Material Transfers

Governing COPAS accounting procedures call for material transfers to be priced at current market prices. COPAS standards allow for an index (CEPS) or average historical cost as the mechanism to price material transferred by the operator for use on the well site if such measures are reflective of market costs. While the operator argued for the use of CEPS, the non-operator produced evidence the costs in question were better correlated to the average historical cost of the operator for the material. The arbitrator agreed the average historical cost better measured the cost of the transfers and ordered its use.

Contingent Fee Audit

The payment of a large contingent fee to a tax consultant/accountant who identified severance tax refunds was determined to be part of the overhead of the operator by the arbitrator who cited authority in COPAS for the inclusion of accounting and tax services in overhead.

Other Notes

The operator chose its employees as experts while the non-operator utilized our firm as experts. In addition to providing the arbitrator with competent evidence and analysis, we identified substantial additional monies due to the non-operator on a prior settlement with the government made by the operator. We congratulate the success of Ben Shepherd, Mike Malone, Guy Lipe and their colleagues at Vinson & Elkins.

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