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Practice Guide to Auditing Mining Revenues and Financial Assurances for Site Remediation

Design of the Revenue Framework

As explained in the Concepts and Context part of this Practice Guide, governments can collect various revenues, including royalties, to ensure they are compensated for the extraction of natural resources on public lands.

While the decision to use one revenue framework over another is a political decision that auditors are not mandated to challenge, auditors can look at some elements of the decision-making processes. For example, were decisions based on sufficient information and analysis? They can also examine whether the revenue framework is periodically reviewed and improved. For example, is the framework too complicated, subject to interpretation, or not reaching its objectives? Auditors can also look at the processes in place to establish, communicate, and regularly update royalty rates for each extracted resource. The Practice Guide provides some guidance on auditing these areas.

Table 5 includes examples of knowledge of business questions that auditors can ask about the design of the revenue framework during the planning phase. (The list is not exhaustive.) Examples of related audit objectives and criteria are provided in later sections of the Practice Guide.

Auditors can also look at wider strategic planning questions, such as whether a government has taken appropriate measures to manage the impacts of resource revenues on the national economy in order to avoid what is often called the Dutch disease (a general decline of exports that results from an increase in value of the national currency caused by a sharp influx of foreign currency following the discovery of large mineral reserves). However, the Practice Guide does not include specific guidance on how to audit such wide-ranging strategic planning questions.

Table 5 – Design of the Revenue Framework: Examples of Knowledge of Business Questions


Knowledge of Business Questions

Establishing the revenue framework and setting rates

  • Which laws, regulations, and policies provide the framework for collecting revenues from the extraction of minerals? When were these documents last updated?
  • Have royalty rates and other fees been regulated for each type of extracted mineral? When were the rates last updated?
  • Are there clear objectives for the revenue framework? Do they align with current government priorities and policy objectives?
  • If recent changes were made to supporting legislation, have all changes been implemented?
  • Where relevant, does the framework include consideration of relevant Aboriginal land rights issues? Are there recent court decisions on Aboriginal land use and revenue sharing that should be reflected in the framework?
  • If the revenue framework includes exemptions, special deductions, or royalty credits, is there a clear, documented objective or rationale for these measures?
  • Has the impact of these exemptions and reductions on the projected revenue stream for the government been adequately considered?
  • Does the revenue framework’s design facilitate the audit of leaseholders’ self-declared royalties by providing government auditors with clear access to information rights?
  • Has independent assessment or verification of production levels and reported volumes been built into the framework?
  • Were stakeholder consultations held during the development of the revenue framework? What was their scope?
  • Were the fiscal impacts of the revenue framework fully assessed and documented?
  • Are there unique deductions provided to the private sector in calculating the amount of royalties owed to the government?
  • Was consideration given to implementation questions during the design of the revenue framework? (Would the proposed framework be easy to apply in practice? Were challenges expected?)
  • Was a dispute resolution mechanism established?

Clear rules and guidance

  • Are the rules established to calculate the revenues due to the government written clearly, without using ambiguous terms?
  • Is clear guidance provided to leaseholders on how to calculate royalties owed?
  • Is the guidance updated as necessary to reflect changes in applicable regulations and lessons learned from experience and audits?
  • Are changes communicated to leaseholders in a timely manner? When was the guidance last updated?
  • Is there up-to-date regulation on the measurement of production for different minerals (reflecting industry best practices)?

Framework reviews and rate updates

  • Is the revenue framework periodically reviewed?
  • Are royalty rates regularly reviewed, benchmarked, and updated?
  • Do royalty increases take into account multiple factors, including the competitiveness of the resource markets, the demand for specific resources, or the government’s social and economic goals?

Once auditors have obtained answers to their knowledge of business questions, they can better assess the risks related to the design of the revenue framework. (Performance auditors should consider that this information may have already been collected and documented by financial auditors as part of the planning of the audit of the Public Accounts where mining revenues are significant.)

Auditors should consider including the design of the revenue framework in their audit plan if their preliminary audit work indicates the following:

  • The legal framework that supports the revenue framework, or the revenue framework itself, has not been updated in a very long time and this has drawn criticism from the industry or other stakeholders.
  • The revenue framework has not been updated to take into account new types of extracted resources in a jurisdiction (diamonds, for example) or significant changes in market resource prices.
  • The revenue framework had been updated, but the guidance provided to the industry to calculate royalties or other payments does not reflect these changes.
  • The decisions leading to the revenue framework were poorly documented or there are indications that the decisions were not based on evidence and a sound analysis of available options.
  • The revenue framework is unnecessarily complex, or includes vague terms that are open to interpretation, which results in many implementation problems.
  • The revenue framework relies heavily on reporting by mining companies with limited or no provisions for independent review and audits.

This list of potential audit issues is indicative, not exhaustive. It is the responsibility of audit teams to review and analyze the information they collect in the planning phase in order to identify and assess significant risk areas. Only after conducting this work will auditors be able to decide whether to include the design of the revenue framework in their audit plan.