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Implementing EITI: Audits Presented to the Extractive Industries Transparency Initiative Implementation Workshop David L. Goldwyn Goldwyn International Strategies February 3, 2005. Key Questions. What are the goals of the audit? What should be audited? Who pays and how much?

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Implementing EITI: Audits

Presented to the

Extractive Industries Transparency Initiative Implementation Workshop

David L. Goldwyn

Goldwyn International Strategies

February 3, 2005


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Key Questions

  • What are the goals of the audit?

  • What should be audited?

  • Who pays and how much?

  • How is the auditor selected?

  • How does a country manage conflicts?

  • How can access be guaranteed?

  • How can audit capacity be made sustainable?

  • Nigerian Example


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Goals of the Audit

  • Determined by country/stakeholders

  • Examples:

    • Public confidence in integrity of system (Nigeria)

    • Transparency of IOC/government operations

    • Educate/Create rational public expectations

    • International reputation/eligibility for assistance (Congo/Brazzaville, Angola)

    • Reduction of theft or corruption

  • Forensic audit

  • Reform or change directed audit


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What Should Be Audited?

  • Depends on goals

  • Revenue audit: all payments by all parties; follow entire chain of funds

  • Physical audit: account for resource from first extraction through fiscalization

  • Management audit: how does government create/destroy value of resource? How does government manage sector costs? How do IOCs manage costs?

  • Credibility depends on independent review of government and private entities


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Who Pays and How Much

  • Major constraint

    • Affects length of audit period, scope of audit, timing of deliverables

  • Comprehensive audits cost millions

  • World Bank Trust Fund: limited funds, high control by Bank

  • DFID: limited funds, more complex procurement procedures

  • USG (G-8): no formal process, expenditure focused

  • Self funding: fast, hallmark of government commitment, can be uncertain

  • Tension between sovereign decisions and demands of funders?


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How is the auditor selected?

  • Funder sets the rules

  • Stakeholder group should select

  • Start with World Bank procurement template

  • Weight technical capacity and price separately

  • Weight ability to work with local companies

  • Separate audits permit more competitive field

  • Conflict tolerance: Are “Chinese walls” sufficient?


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How Does Country Manage Conflicts?

  • Rule out auditors of operators

  • Require full disclosure of potential conflicts, assess seriousness in second phase

  • Break up audit to allow more than top four firms to compete


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How Can Access be Guaranteed?

  • Legislation

  • Executive Order

  • Public monitoring of audit process

  • Empowerment of auditor to make public reports (power of press)


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How Can Audit Capacity be Made Sustainable?

  • Create sustainable infrastructure

    • Reporting templates for government auditors

    • Information technology system that tracks funds and identifies discrepancies

  • Capacity building for government supervisors

  • Local independent audit capacity

    • Build in weight, but not requirement, for local company partner


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Nigerian Example

  • What are the goals of the audit?

    • Public confidence in integrity of entire system

    • Value for money

  • What should be audited?

    • Oil and gas

    • Upstream and downstream

    • Revenue flows, public and private management process, physical chain of control of resource

  • Scope of financial audit:

    • 5 year look back

    • all payments by all parties; aggregated and disaggregated

    • reconciliation with central bank

    • mapping of all flows

    • reporting templates


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Nigerian Example

  • Scope of Process Audit:

    • Benchmark public and private procurement against best practices

    • Benchmark NNPC crude marketing, acreage allocation, contract administration against best practices

  • Scope of Physical Audit:

    • All volumes reconciled with payments and taxes

    • Examine unaccounted oil streams

    • Assess technical and procedural improvements

    • Templates for future volume reconciliation


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Nigerian Example

  • Who pays and how much? Self-fundedso far

  • How is the auditor selected?

    • Technical and financial qualifications

    • Follow World Bank templates

    • Consultant advises NSWG, NSWG selects

  • How does a country manage conflicts? Allowed bids on 1-3 audits; balance reputation with independence

  • How can access be guaranteed? Public reports, pending legislation; NSWG monitoring; Presidential discretion and intervention

  • How can audit capacity be made sustainable? IT reform, EITI legislation, tailor bid to encourage local partners


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Conclusions

  • Must have independent international audit

  • Must commit to publication up front

  • Must cover NOC and IOC payments and practices to be credible

  • Transparency in sector management as important as revenue reconciliation

  • Must legislate funding, access, stakeholder composition to sustain

  • Communications strategy integral to efficacy


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