9 Reasons Oil and Gas Companies are Good Targets for Unclaimed Property Audits and What to Do About It

June 24, 2016

There’s a lot of talk in the unclaimed property industry about increased audits across all industries. However, some industries still are being targeted more often than others. Oil and gas is one such industry. Below are primary reasons for this, along with solutions to mitigate potential financial damage from high assessments.

  1. Complexity of the industry. It’s more likely holders in oil and gas will misunderstand and/or mismanage the complex unclaimed property process. Auditors are more likely to uncover reasons to justify penalties, interest and overdue assessments. Assessments are likely to be larger than in industries where there is less complexity.

    Mitigation: Create systems and controls to correctly account for all unclaimed property. Review them at least annually and work with expert unclaimed property specialists in this area to ensure compliance with all statutes. Make sure records accurately reflect the true nature of unclaimed amounts.

  2. Large transactions. The industry tends to involve larger total dollar amounts. Auditors can get higher assessments for the same amount of effort.

    Mitigation: Keep good records and follow all mitigation steps listed here to minimize assessments in general. Order a professional oil and gas pre-audit assessment to identify potential risks in any future audit.

  3. High volume of payments. In oil and gas, new properties continually are discovered. Payments for old properties are divided into smaller, more numerous payments among co-owners. The greater the number of payments, the more difficult it is to keep clean, updated records. When mistakes are made, auditors can assess penalties.

    Mitigation: Establish appropriate procedures and control measures, with proper documentation—especially for properties you’ve deemed unreportable. In an audit, defending what you have chosen NOT to report is more urgent than defending what you have reported.

  4. Longer lookback periods. Many oil and gas properties have existed for several generations. This means any old unreported amounts can add up to large assessments. It’s even worse if past records are missing and an auditor extrapolates past amounts due using current payments.

    Mitigation: Come into compliance as soon as possible. Sign Voluntary Disclosure Agreements to limit initial assessments.

  5. Suspense accounts. In this industry, mineral proceeds and other amounts are held in suspense accounts during the regular course of business. There’s a question whether or not these amounts should be reported. Rules vary by state, aren’t always understood correctly, and can change any time. If rules aren’t followed as understood by auditors, they can assess penalties.

    Mitigation: Consult with unclaimed property specialists to determine applicable rules for suspended amounts and ensure accurate coding. Resolve suspended payments as soon as possible to reduce suspense volume. Work with external experts during an audit to support fair assessments.

  6. Many property types/codes. There are many codes to consider when reporting property in oil and gas, and holders are more likely to apply them incorrectly than in other industries. Codes sometimes vary by state and periodically change.

    Mitigation: Use a professional service that makes a business of keeping up with all statutes and applying them properly.

  7. Frequent mergers and acquisitions. In the oil and gas industry, mergers and acquisitions are common. Unclaimed property liabilities are sometimes overlooked in new companies, which opens the door to penalties, interest and past-due payments for the new owners.

    Mitigation: Make unclaimed property analysis an official part of the acquisition and merger process.

  8. Current pay rules. Once a single mineral payment becomes dormant and subject to reporting, some states have rules that require immediate reporting and remittance of all subsequent payments. “Current pay” rules increase the amount of unclaimed property states can collect with minimal additional effort.

    Mitigation: Find owners early, before payments become dormant. Make sure you are legally required to report subsequent payments.

  9. New “unknown address” claims. Some states with high oil and gas production are attempting to claim “unknown address” property based on well location, rather than state of incorporation.

    Mitigation: Seek counsel from experienced professionals to ensure you are not putting your company at risk in one state or the other.

For Oil and Gas Unclaimed Property: Be Prepared

The reporting of abandoned and unclaimed property for oil and gas companies involves many complex nuances. Not only can understanding and dealing with these challenges result in a large amount of work for holder personnel, it can greatly increase the potential for financial risk under audit. Be sure your team is prepared, and communicate with others in the industry who can share best practices.

Categories: Audit & Consulting
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