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

The Importance of Auditing Revenues and Financial Assurances

The revenues that governments derive from natural resources are significant and are used to finance valuable social programs, services, and infrastructure. When governments are not collecting all revenues they are entitled to, it may diminish their ability to pay for existing programs, to repay debts, and to create new initiatives. Financial and performance auditors can play a key role in ensuring governments receive all the revenues from their natural resources they are entitled to.

There are many situations that can result in a government not receiving all the revenues it should from the extraction of minerals. For example, this can happen in the following situations:

  • The right to operate is granted to companies that are financially unstable (higher risk of unfunded liabilities for site remediation).
  • The list of operating companies has not been updated and is incomplete (risk of unreported extraction).
  • Companies’ declarations of production volumes are understated.
  • Companies’ declarations of production value are understated.
  • Claims for allowable expenditures (which reduce amounts payable) are overstated.
  • Producers use tax avoidance practices to reduce amounts otherwise owed to governments.
  • Companies resort to fraud or corruption of officials.
  • Unclear or misunderstood legislation and regulations result in incomplete payments.
  • Audits of royalty payments (conducted by the revenue collection authority) are not completed within the time allowed by regulation, making adjustments to royalty payments and additional revenue collection impossible.
  • Royalty rates are out of date and do not reflect changing market values of extracted resources or changing government policy objectives.

To ensure that they receive all the mining revenues they are entitled to, governments need to establish clear rules for industry and put in place controls to ensure that the rules are being followed. These controls are of particular importance in the natural resource sector because governments tend to rely heavily on data provided by industry to determine what sums are to be paid for the extraction of public resources. For this reason, the Audit Methodology part of this Practice Guide emphasizes the audit of controls.

Controls are also useful to protect government from liabilities associated with the remediation of mines. For example, governments can take the following steps to reduce their exposure to future liabilities.

  • Establish documented standards on how site remediation cost estimates should be conducted.
  • Have access to sufficient expertise to review cost estimates provided by operating companies.
  • Periodically visit operational sites and update remediation cost estimates in accordance with current circumstances (such as site condition, operational plans, new technologies, and new regulatory requirements).

By auditing the management of financial assurances for site remediation, performance auditors can help governments to better protect taxpayers against future environmental liabilities.

Through their annual financial audits of a government’s public accounts, financial auditors also play an important role. This role can be particularly important with respect to mining when natural resources revenues, financial assurances, and environmental liabilities for site remediation are material for the public accounts. Performance auditors can develop their knowledge of business and identify risk areas, gaining insight from the prior analysis and audit work performed by financial auditors. Collaboration between performance and financial auditors can lead to more efficient and better-targeted performance audits.

In many audit offices, the auditors conducting performance audits will have a financial audit background and may be the same auditors who conduct the annual audits. However, in other offices, performance auditors will have more diversified backgrounds. In such circumstances, it can be beneficial for an office to create a mining group where financial and performance auditors can regularly meet and share their knowledge and experiences with each other.

The INTOSAI Working Group on the Audit of Extractive Industries

In recent years, the INTOSAI (International Organization of Supreme Audit Institutions) community has paid increasing attention to audits of extractive industries. This interest has led to the creation of a Working Group on the Audit of Extractive Industries (WGEI), which held its first meeting in Kampala, Uganda, in 2014. The WGEI aims to provide a range of capacity-building and networking activities within and beyond the INTOSAI community. For more information on the Working Group and its activities, visit http://www.wgei.org/.