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 Crown lands or on the seabed.
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 oil 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
Sub-topic |
Knowledge of Business Questions |
---|---|
Establishing the revenue framework and setting rates |
|
Clear rules and guidance |
|
Framework reviews and rate updates |
|
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.
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 (natural gas from fracking, 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 oil and gas producers 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.